Terra Debacle: UK Government Seeks To Regulate Stablecoins

Following the death spiral involving the Terra LUNA/USD collapse that wiped off $40 billion worth of investors’ money, the UK government has released a Consultation Paper on stablecoins, to mitigate financial stability issues that may materialize should a firm that has reached systemic scale, fail.

In January 2021, the Treasury issued a consultation and call for evidence inviting views from stakeholders on the UK regulatory approach to crypto-assets and stablecoins.

Stablecoins capable of being used for payments

This set out the government’s judgment that there was a strong case for bringing stablecoins with the capacity to be used for payments into the UK regulatory perimeter for payments.

The government published its response to this consultation in April 2022 and confirmed its intention to bring forward legislation, when parliamentary time allows, that will be used to bring into the scope of established regulatory regimes for electronic money and payments certain cryptographically secured digital representation of monetary value that is used for the purpose of making payment transactions.

“This would be designed to bring stablecoin-based arrangements under the auspices of existing electronic money and payments regulatory regimes, which provide the Financial Conduct Authority (FCA) with powers to regulate and supervise firms engaged in relevant electronic money and payments activities,” the Consultation paper proposes.

Government recommends changing existing laws

The government recommends changing existing legislation to give the Bank of England power to appoint administrators to oversee insolvency arrangements with failed stablecoin issuers.

"Since the initial commitment to regulate certain types of stablecoins, events in crypto-asset markets have further highlighted the need for appropriate regulation to help mitigate consumer, market integrity, and financial stability risks," the UK Treasury proposed.

The deadline for feedback on the consolation is August 2.

UST/USD had earlier this month lost its peg with the US dollar and fell to as low as 7 cents in the weeks afterward, causing prices of its related luna (LUNA) tokens to drop nearly 100% and outflows of over $28bn from Terra-based decentralized finance (DeFi) apps.