Britain plans new safeguards for stablecoins that go bust following Terra collapse

The world’s largest stablecoin, Tether, saw over $10 billion in buybacks in May, fueling fears of a 2008-style “bank run”.

Justin Tallis | AFP via Getty Images

Britain wants to ensure that stablecoins don’t end up threatening the wider financial system after the collapse of the controversial Terra crypto project.

The government proposed on Tuesday to change existing rules to deal with the failure of stable companies that could pose “systemic” risk. The proposal is separate from previously announced plans to regulate stablecoins under laws governing electronic payments.

“Since the initial commitment to regulate certain types of stablecoins, events in the crypto-asset markets have further underscored the need for appropriate regulation to help mitigate risk to consumers, market integrity, and security. financial stability,” the government said in a consultation paper outlining its proposals.

“The government considers it important to ensure that existing legal frameworks can be applied effectively to manage the risks posed by the possible failure of systemic DSAs. [digital settlement asset] undertakings for the purposes of financial stability”.

Stablecoins are cryptocurrencies whose value is pegged to a traditional asset, most often the US dollar. TerraUSD, a so-called “algorithmic” stablecoin, was supposed to follow this arrangement using a mixture of code and partial support for bitcoin and other digital tokens. But it imploded earlier this month, taking with it an associated token called luna. Panic over the debacle wiped hundreds of billions of dollars from the entire crypto market.

This, in turn, has raised concerns among regulators, who worry about the risks stablecoins pose to the wider financial system. Tether, the world’s largest stablecoin, saw over $10 billion in redemptions in the weeks after Terra’s collapse, fueling fears of a 2008-style “bank run” with ripple effects in other financial markets. Although Tether claims its token is fully backed by assets held in reserve, critics remain skeptical and have called for a full audit.

The government is seeking to implement additional safeguards to existing legislation regarding the insolvency of companies operating key financial market infrastructures. Such a provision would take into account the return or transfer of private keys that protect user funds. The Bank of England would serve as the lead regulator to enforce the rules. A consultation on the proposal is currently underway and will end on August 2.

Glen Goodman, an independent crypto trader, said the proposal was “pretty dramatic”.

The government has “effectively accepted that some stablecoins may become as systemically important as banks and should therefore be treated as special cases and aided in the event of failure,” he said.

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