UK government proposes additional safeguards against stablecoin failure risks

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

In its report, the Treasury highlighted the importance of stablecoins in innovation but also noted their ability to impact financial stability should systemic failures occur. Specifically, the Treasury called for:

1.  The appointment of the country's Financial Market Infrastructure Special Administration Regime (FMI SAR) as the primary entity to address the potential systemic failure of digital settlement asset (DSA) firms. DSAs include, but are not limited to, stablecoin issuers, wallet providers and third-party payment providers.
2. The expansion of the FMI SAR's mandate to include and oversee the timely return or transfer of customers' funds in the event of failure of a DSA firm.
3. The assignment of greater powers to the Bank of England to direct administrators and create regulations in support of the FMI SAR.
4. A requirement that the Bank of England consult with the nation's Financial Conduct Authority prior to seeking an administration order or directing administrators in the event of regulatory overlap.

Among other items, the Treasury cites the possibility of "a large numbers of individuals losing access to funds and assets they have chosen to hold as DSAs" as a critical factor for the proposed regulatory changes. By enlarging the FMI SAR's mandate, "it would allow administrators to take in to account the return of customer funds and private keys as well as continuity of service," the report says.

Related: SEC’s Hester Peirce says new stablecoin regs need to allow room for failure

The proposed regulations were tabled weeks after the implosion of stablecoin ecosystem Terra Luna, which wiped out nearly $60 billion in investors' capital. Anonymous attackers exploited structural design flaws within the (now) Terra Luna Classic token and TerraUSD stablecoin, resulting in a death spiral that depegged TerraUSD and sent its sister token to practically zero. As part of the consultation process, individuals and stakeholders have until August 2 to send their input regarding the proposed regulatory changes to the Treasury.