UK proposes measures to guard against a stablecoin crash

Her Majesty’s Treasury has published for public consultation a document introducing additional safeguards against the collapse of stablecoins.

The department recommended granting the Bank of England authority to address potential systemic disruption in the operations of stablecoin issuers, digital-wallet providers and third-party payment systems.

“This will enable it [the Bank of England] to fulfil its statutory role in relation to financial stability,” the document says.

The Treasury emphasised the importance of ensuring “effective application of existing legal frameworks for risk management” in the event of a digital-asset issuer’s bankruptcy.

The consultation will run until 2 August, after which it will be considered by Parliament.

The initiative follows the collapse of the Terra ecosystem. On 8 May, the algorithmic stablecoin TerraUSD (UST) lost its peg to the US dollar.

On 10 May the asset’s price fell below $0.62. The decline continued on 11 May, after which the LUNA cryptocurrency, used to mint UST, collapsed to $0.3.

The market reacted to the UST collapse with a drop in the price of Bitcoin fell to around $26,700, roughly in line with late-2020 levels. On the same day, the stablecoin USDT briefly lost parity with the US dollar.

Earlier the Treasury announced plans to legalise stablecoins and to issue its own NFTs. This move aims to position the UK as a friendly jurisdiction for digital assets.

In mid-May the department ruled out legalising algorithmic stablecoins, as they “do not guarantee stability”.

Sarah Pritchard, the UK Financial Conduct Authority’s chief executive, urged that the TerraUSD collapse be taken into account when shaping the regulatory framework for the industry.

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