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UK Treasury proposes crypto regulations amendments to manage potential risks associated with stablecoin failures

While the Treasury recognized the importance of stablecoins, it also pointed out its potential to negatively impact financial stability in cases of systemic failures.

HM Treasury / Image by: :Wikimedia Commons

Thu, 02 Jun 2022, 10:51 am UTC

The collapse of the $60 billion Terra ecosystem is bound to create some impact to crypto regulations worldwide. Among the first to respond to the calamitous event is the Treasury of the United Kingdom, which proposed a new set of regulatory changes for the stablecoin industry to counter stablecoin failure risks.

Her Majesty's Treasury, also known as the Exchequer, published a new consultation paper Tuesday proposing regulatory changes for the country’s stablecoin industry. While the Treasury recognized the importance of stablecoins, it also pointed out its potential to negatively impact financial stability in cases of systemic failures, Cointelegraph reported.

Among the proposals made by the Treasury is the designation of the FMI SAR as the primary entity to address potential risks of systemic stablecoin failures. “In advance of any consideration on the need for a bespoke legal framework for systemic DSA firms, HM Treasury considers an amended Financial Market Infrastructure Special Administration Regime (FMI SAR) to be the most appropriate vehicle through which to address the risks posed by the possible failure of systemic DSA firms which are not banks. Banks are catered for by separate pre-established regimes,” the Treasury wrote.

While the Treasury recognizes the FMI SAR to be the most appropriate regime, it might not be capable of addressing the risks associated with stablecoin failures. To remedy this, it calls for an expansion of the FMI SAR’s mandate.

“Therefore, the government also intends to make suitable amendments to the FMI SAR as it applies to such DSA firms now brought into scope to ensure risks to financial stability can be addressed under the regime,” the Treasury added. “It is the government’s intention that the regime’s application to those currently within its scope will remain unchanged.”

The Exchequer also wants to assign greater powers to the Bank of England to direct administrators as well as introduce new regulations to support FMI SAR. “This will ensure that the Bank of England is able to respond flexibly to the specific circumstances of a firm’s failure so as to ensure the particular risk it presents to financial stability can be addressed,” the Treasury explained.

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