UK Government Proposes Additional Safeguards Against Risk of Stablecoin Failure

In a new consultation paper published on Tuesday, the U.K. Treasury has proposed a new set of regulatory changes for the stablecoin industry.

In its report, the Treasury Department highlighted the importance of stablecoins in innovation, but also noted their ability to affect financial stability in the event of systemic failure. Specifically, the Treasury Department called on:

1. Authorizes the Financial Market Infrastructure Special Administration Regime (FMI SAR) as the lead entity to address potential systemic failures of digital settlement asset (DSA) firms. DSAs include, but are not limited to, stablecoin issuers, wallet providers, and third-party payment providers.
2. Expand FMI SAR's responsibilities to include and oversee the timely return or transfer of client funds in the event of DSA firm failure.
3. Giving the Bank of England greater powers to guide managers and develop regulations to support FMI SARs.
4. The Bank of England is required to consult the national Financial Conduct Authority before seeking an executive order or directing managers where there is regulatory overlap.

Among other things, Treasury cited the possibility that "substantial numbers of individuals will lose access to the funds and assets they choose to hold as DSAs" as a key factor in the proposed regulatory changes. By expanding the FMI SAR's mandate, "it will allow administrators to consider the return of client funds and private keys and the continuity of service," the report said.

The proposed regulations come weeks after the implosion of the stablecoin ecosystem Terra Luna, which wiped out nearly $60 billion in investor capital. Anonymous attackers exploited structural design flaws in the (now) Terra Luna Classic token and the TerraUSD stablecoin, causing a death spiral that depegged TerraUSD and brought its sister tokens to near zero. Individuals and stakeholders have until August 2 to submit their views on the proposed regulatory changes to Treasury as part of a consultation process.