UK Treasury Proposing Stablecoin “Insolvency Regime”

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  • The UK Treasury has outlined a plan to deal with a Terra-like stablecoin collapse
  • The Bank of England would take the lead in managing any such collapse
  • Stablecoins that are systemically important will be covered by the new regime

The UK Treasury is proposing what it called an “insolvency regime” to manage the potential failure of major stablecoins following the collapse of Terra USD last month. Under the proposal, The Bank of England would take the lead in managing a collapse of a stablecoin of similar proportions to Terra USD, which has had huge ramifications in Korea, home of the project, with organisations and individuals alike massively affected.

Terra USD Collapse Has Prompted Treasury Action

Despite a Bank of England report stating in October last year that the risk posed by cryptocurrency markets to the UK’s levels of financial stability are “currently limited”, the Treasury has seen fit to claim that the failure of a systemic stablecoin could endanger the “continuity of services critical to the operation of the economy and access of individuals to their funds or assets”.

The concern over stablecoins stems from the fact that they are typically backed by traditional assets, with any collapse potentially opening up a black hole sucking in investors money, as was seen with Terra USD, which the Treasury referred to:

Events in cryptoasset markets have further highlighted the need for appropriate regulation to help mitigate consumer, market integrity and financial stability risks.

Regime Will Cover Systemically Important Stablecoins

The UK government has said it will consider whether a new legal framework is required to manage the collapse of stablecoins above a certain size – i.e. those that have grown to become important to the greater financial system. Such rules for stablecoins would “allow administrators to take into account the return of customer funds and private keys as well as continuity of service”.