The collapse of TerraUSD (UST) and its sister token Luna Classic (LUNC) has created an urgency for governments across the globe to reign in the crypto market.
The U.K. has joined the league of countries trying to regulate the digital asset space and ramp up investor protection.
The British government wants to bring stablecoin issuers under the folds of existing legislation with certain amendments.
The consultation paper, published on May 31, said:
“… the government considers that it is important to ensure existing legal frameworks can be effectively applied to manage the risks posed by the possible failure of systemic DSA [digital settlement asset] firms for the purposes of financial stability.”
The government is in favor of applying the Financial Market Infrastructure Special Administration Regime (FMI SAR) to digital asset firms.
The FMI SAR was established to address the risks posed by the failure of payment systems recognized as systemic. The legislation will provide the Bank of England, the country’s central bank, with oversight over cryptocurrency firms.
The Bank of England will have the power to appoint an administrator to oversee insolvency arrangements of cryptocurrency firms that fail.
Currently, the FMI SAR imposes an objective on administrators to ensure continuity of services for firms that reach insolvency. But this is insufficient to ensure customer protection and financial stability if a stablecoin fails, like in the case of Terra. The consultation paper said:
“Continuity of service may not be sufficient to mitigate risks to financial stability arising from the failure of a systemic DSA firm, particularly where large numbers of individuals may lose access to funds and assets they have chosen to hold as DSAs.”
Therefore, the government wants to amend the FMI SAR to add an additional objective for administrators — to ensure the return or transfer of customer funds and custody assets. The Bank of England, as the lead regulator, will decide which objective takes precedence on a case-by-case basis.
In case of regulatory overlap between the central bank and the Financial Conduct Authority (FCA), especially concerning consumer protection, the Bank of England will be required to consult the FCA.
The consultation paper said that the amendments are proposed in light of stablecoins’ “potential to develop into a widespread means of payment.”
However, the consultation paper also noted that recent market events, referring to the Terra LUNA collapse earlier this month, have “highlighted the need for appropriate regulation to help mitigate consumer, market integrity and financial stability risks.”
The proposed amendments will be considered by the Parliament when time permits. The consultation period ends on August 2.
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