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The UK is planning new security measures for stack coins after the collapse of Terra

The world’s largest stable coin, tether, received more than $ 10 billion in redemptions in May, fueling fears of a 2008-style “bank run”.

Justin Tallis | AFP via Getty Images

The UK will ensure that stack coins do not end up threatening the broader financial system following the collapse of the controversial cryptocurrency project Terra.

The government on Tuesday proposed changing existing rules to deal with the error of stablecoin companies that could pose a “systemic”[ads1]; risk. The proposal is separate from previously announced plans to regulate stack coins under laws governing electronic payments.

“Since the initial commitment to regulate certain types of stack coins, events in the cryptocurrency markets have further highlighted the need for appropriate regulation to help reduce consumer risk, market integrity and financial stability,” the government said in a consultation paper presenting its proposals.

¬ęThe Government considers it important to ensure that existing legal frameworks can be used effectively to manage the risk of possible failure of systemic DSA [digital settlement asset] undertakings with a view to financial stability. “

Stablecoins are cryptocurrencies whose value is linked to a traditional asset, most often the US dollar. TerraUSD, a so-called “algorithmically” stable coin, was intended to follow this scheme using a mix of code and partial support from bitcoin and other digital tokens. But it imploded earlier this month and took with it an associated token called luna tumbling. Panic over the debacle has wiped out hundreds of billions of dollars from the entire crypto market.

This in turn has created concern for regulators, who are concerned about the risk that stable coins pose to the broader financial system. Tether, the world’s largest stable currency, received more than $ 10 billion in redemptions in the weeks following Terra’s collapse, fueling fears of a 2008-style “bank run” with spillover effects on other financial markets. Although Tether says the token is fully backed by assets held in reserve, critics remain unconvinced and have asked for a full revision.

The government is looking to implement further security measures to existing legislation regarding the insolvency of companies that operate key infrastructure for financial markets. Such a provision will take into account the return or transfer of the private keys that protect the users’ funds. The Bank of England will act as the lead regulator enforcing the rules. A hearing on the proposal is currently underway and will end on 2 August.

Glen Goodman, an independent crypto trader, said the proposal was “quite dramatic.”

The government has “effectively accepted that some stack coins can become as systemically important as banks and should therefore be treated as special cases and assisted if they fail,” he said.

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