UK Treasury Formulates New Proposals to Limit Effect of Stablecoin Collapse

Under the influence of the collapse of Terra, the algorithmic stablecoin, this month, the UK Treasury proposed a new bankruptcy system to protect consumers’ assets.

Earlier this month, after a series of seemingly uncoordinated deposits and withdrawals damaged the algorithmic stablecoin, the stablecoin Terra had a notorious collapse. The UK put forward a new proposal to limit the impact of future stablecoin collapse.

In the new proposal, the UK Treasury will allocate the impact of maintaining business continuity and limiting the collapse of the stablecoin to the central bank, the Bank of England. This proposal was put forward after the queen announced the regulation of the stablecoin supported by reserves after her speech last month.

The Stablecoin

Unlike Bitcoin, which is not linked to anything, stablecoin is linked to the value of legal tender and relies on liquidity reserves, including cash and short-term government debt, to maintain its linkage with legal tender. Or, in the case of Terra, a software algorithm without guardrails. They are usually a channel into the cryptocurrency ecosystem, allowing people to buy other cryptocurrencies without leaving the digital asset ecosystem. Famous stable coins include the usdt issued by tether and the usdc issued by circle. According to coingecko, the market value of the stablecoin is close to US $160billion.

Recently, Terra has lost its peg to the US dollar because a series of large withdrawals and deposits have pushed the algorithm to create more and more sister tokens Luna, causing its price to soar. The broader cryptocurrency market shook passively because other digital assets plummeted after the Luna foundation guard sold Bitcoin on a large scale. The organization held Bitcoin to support Terra to stabilize the currency.

The close relationship between stablecoin and traditional assets has aroused the attention of global regulators, prompting people to pay more narrow attention to this niche in the broader digital asset market. “The event of encrypting the asset market further emphasizes the need for appropriate regulation to help reduce the integrity and financial stability of the consumer market,” the UK Treasury told the financial times on 31 May 2022.

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The Need to Follow the Supervision of  Shareholding

Government departments believe that the stablecoin must follow the supervision mechanism to mitigate potential risks. After the 2008 financial crisis, the Ministry of Finance called on major banks to formulate “living wills” or instructions for possible actions when institutions are in trouble.

Lenders need to maintain a minimum reserve to support their balance and prevent “bank run”, that is, the cash held by the bank is not enough to meet all their withdrawal requirements, leading to bank default.

The British government is also considering formulating a new law on the risk of the collapse of the stablecoin to payment services. Earlier, the government announced that it would adjust the existing e-money management law to adapt to the stablecoin. At the same time, the Ministry of Finance proposed to modify the bankruptcy rules of the payment network if an important stablecoin fails.

 

Stablecoin Holders Must be Compensated in Case of Bankruptcy

The current law governing payment networks is to ensure business continuity in the event of network failure. However, since people hold stablecoin, the law must also deal with the recovery of customers’ funds and the return of private keys in the event of network failure. The key is a long string of numbers, which is essentially the password for cryptocurrency transactions.

When customers open an account at a managed cryptocurrency exchange, they entrust the wallet key to the institution in exchange for a more traditional password.Last month, the chancellor of the exchequer, Rishi sunak, commissioned the Royal Mint to create an NFT as part of a broader push to make Britain the “global center” of cryptocurrency.