The UK government has proposed new regulations and a safety mechanism for so-called stablecoins that would give the Bank of England power to underwrite certain currencies to safeguard users during a crisis. The need for such protections was highlighted last month, when the value of stablecoin TerraUSD collapsed.
However, industry experts are divided on whether the measures would have an impact on the cryptocurrency markets.
In a new consultation paper, HM Treasury highlights the need to manage the risks surrounding crypto-assets and the firms that operate them, particularly those that could impact financial stability. The Treasury first announced plans to regulate stablecoins in April and the new paper outlines how the Bank of England could step in to manage any future collapse of stablecoins.
“Since the initial commitment to regulate certain types of stablecoins, events in crypto-asset markets have further highlighted the need for appropriate regulation to help mitigate consumer, market integrity and financial stability risks,” the consultation paper explains.
Treasury officials say that as stablecoins play such an important role in the payment process they need extra protection, writing in the paper that “the failure of a systemic digital settlement asset firm could have a wide range of financial stability as well as consumer protection impacts. This could be both in terms of continuity of services critical to the operation of the economy and access of individuals to their funds or assets.”
In the paper, officials recommend updating existing banking legislation to bring so-called stablecoins and their providers under greater scrutiny. They will also consider whether specific regulations are needed for the winding down of failed stablecoins in order to protect investors. This could include extra powers for the Bank of England in the event of a financial crisis, allowing it to provide stability in stablecoin payments.
Stablecoins increasingly used as a “bank-like platform”
Stablecoins play a pivotal role in cryptocurrency markets. They are digital tokens backed by an equivalent amount of tangible asset, such as the US dollar or the pound, meaning they are not subject to the wild fluctuations in value of other cryptocurrencies such as Bitcoin.
They are often used as a half-way-house when purchasing a cryptocurrency; traders will buy the stablecoin with a fiat currency, then trade the stablecoin for the crypto, rather than buy crypto directly.
Increasingly stablecoins are being used for payments, and to generate yield in “bank-like platforms” within the crypto market, said Sam Volkering, a cryptocurrency investment advisor and founder Southbank Investment Research explained. He said you can earn 12% return on your investment from some stablecoins, whereas in traditional finance “you’d be lucky to find a bank account offering 1% interest”.
“It certainly appears like there’s a concerted effort to try and regulate stablecoins because they’re the closest thing to traditional banking and finance in the crypto market,” he explains. “That means the regulators probably have some reach and scope to bring those under their watchful eye. The US is moving that way, the UK obviously and Australia too is pushing more into it all particularly now under a new government.”
He told Tech Monitor regulation is inevitable whether the industry wants it or not, but suggested stablecoins aren’t the “be-all-and-end-all for crypto to function and flourish”, rather an innovation that extends traditional finance into crypto, describing them as the “evolution of the same fiat money system we’re all used to”.
Stablecoins came into the spotlight last month when the value TerraUSD collapsed. A so-called algorithmic stablecoin, its value was supposed to be pegged to $1 without the backing of assets, and its failure will have been noted by regulators around the world, says Volkering.
“The TerraUSD collapse is ammo for regulators, but in reality issues were well known for a while and its failure is more an effective market cleansing than any systemic risk," Volkering says. "It's not what you want to see and people sadly lost money, but failures sometimes need to happen to weed out the junk.
“Asset-backed stablecoins like Tether and Circle's USDC didn't have any issues with redemptions during all this. If anything it proves the strength of the likes of those larger robust networks. Regulation in stablecoins won't mean diddly squat for bitcoin or other real crypto.”
Volkering adds: "This is the regulators trying to impose themselves on a market they don't understand, don't have capacity to police and don't need to interfere with."
Global trend towards stablecoin regulation
Filippo Ucchino the co-founder and CEO of online trading platform Investingoal, disagrees. He says stablecoin regulation in the UK and elsewhere is a move towards wider adoption of cryptocurrencies across all levels and a "huge step in the right direction".
"To say that the integrity of stablecoins is fundamental for the stability of the financial system is to certify the value and importance of these instruments," he says. "It effectively means that the government considers stablecoins in the same way as banks and major financial institutions, which must be assisted in the event of bankruptcy."
The collapse of TerraUSD increased calls for greater regulation of stablecoins around the world, with US treasury secretary Janet Yellen calling for greater regulation and South Korea announcing plans to strengthen its existing stablecoin regulation.
Today is was revealed that a group of influential technologists has joined forces to take on the well-funded crypto lobby in the US in an attempt to convince lawmakers to crack down on the cryptocurrency industry.
The group, including Harvard lecturer Bruce Schneier and Google Cloud engineer Kelsey Hightower signed a letter urging politicians to resist pressure from financiers, lobbyists and digital asset industry leaders to create a "safe regulatory haven" in the US for what they call "risky digital financial instruments".