UK Treasury proposes regulations to protect stablecoin users

This year, the UK government has set itself the lofty goal of becoming a digital currency hub. It is now proposing regulations for the digital currency industry to help it achieve this goal.

One of these proposals has just been made by the British Treasury and targets stablecoins. In a consultation paper released this week, Her Majesty’s Treasury said it recognizes the potential of stablecoins to spur innovation, but noted that they pose a threat to financial stability in the event of systemic failure.

To combat this threat, the Treasury has made several policy recommendations. More importantly, it proposes to introduce an insolvency regime for stablecoin issuers.

The Treasury says the new rules would ensure the “continuity of services essential to the functioning of the economy and individuals’ access to their funds or assets”.

It will do this by allowing “administrators to consider the return of customer funds and private keys as well as continuity of service” in the event of a stablecoin’s collapse.

Another proposal put forward in the consultation paper is the appointment of the Financial Market Infrastructure Special Administration Scheme (FMI SAR) as the primary oversight body for digital settlement assets (DSAs). The body is in charge of stablecoin issuers, wallet providers, and third-party payment providers.

The Treasury has also proposed that the IMF-SAR’s mandate be expanded to ensure that it can properly oversee insolvency cases among DSA firms.

Significantly, the proposal comes after Treasury revealed it was investigating the crash of Terra’s algorithmic stablecoin, TerraUSD (UST). At the time, Bloomberg reported that the Treasury, the Financial Conduct Authority (FCA) and other international regulators were in the process of assessing the fallout from the UST.

Other regulations planned for digital assets in the UK

The Treasury proposal is just the latest set of regulations to come to the digital asset market. The country also has digital currency high on the agenda of parliament this year.

The UK parliament will debate two key pieces of legislation for digital assets, including the Financial Services and Markets Bill; and the Economic Crime and Corporate Transparency Bill. The former will help make the country a global leader in financial services by driving the adoption of digital assets.

The latter is a bit more controversial. The bill aims to crack down on the illicit use of digital currencies. One of its main elements is to give regulators the power to recover digital assets used in ransomware payments. Observers noted that it is unclear how the proposal will work.

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