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The UK wants to avoid a problem like the recent TerraUSD collapse and is instituting a safeguard plan should stablecoins collapse.
The UK government is proposing a safeguard plan which seeks to deal with the possible failure of stablecoins in the country. The government considers this move necessary considering the dramatic and debilitating collapse of the controversial stablecoin UST. British regulators fear that the evolving crypto space, including stablecoins, can potentially wreak havoc on the broader financial tapestry if not properly checked.
Speaking on the plan, the UK government explained:
“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.”
In addition, the British government expounded on its proposed stablecoin risk-mitigating agenda, also saying:
“Since the initial commitment to regulate certain types of stablecoins, events in cryptoasset markets have further highlighted the need for appropriate regulation to help mitigate consumer, market integrity and financial stability risks.”
The country’s finance ministry moved towards adapting existing rules on Tuesday. This emergency proposal differs from the previously announced plans by the British government concerning the regulation of digital currencies under electronic payment governing laws.
UK Contingency Plan on Possible Failure of Stablecoins
The UK government believes that it is practical to create a safety net to absorb problems like this. According to the government, digital assets – including stablecoins, are steadily becoming “as systemically important as banks”. This means that they would require a similar kind of special assistance in the case that they crash. The British finance ministry hinted at the macro and microeconomic havoc a faulty digital asset system could cause. It specified that such problems would be bad for service providers as they would disrupt the services necessary for economic operations. On the customer’s end, the ministry said the problem will prevent normal access to funds.
Furthermore, the British government stated that existing rules for handling the failure of crypto-focused payment firms should be adapted. Part of this contingency plan requires transferring deposit accounts or crypto services to another provider if things go wrong. This would preempt panic and contagion in the markets if a stablecoin or digital currency collapses.
The Bank of England would serve as the lead regulatory enforcer for the proposed rules. The apex organization is already under consultation and will continue until August 2nd. Also, the British government expects banks, insurers, and mainstream payment companies to fully comply with all the stated rules. of the contingency plan.
Stablecoins are digital tokens pegged to the value of traditional assets such as the US dollar. While most stablecoins have backing provided by other financial instruments, the recently collapsed Terra USD did not. Instead, the stablecoin regulated its price using a series of algorithms that included a complex mix of codes.