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In a recent article, Bloomberg reported that it was concerned about the recent collapse of the algorithmic stablecoin Terra UST. The UK government has proposed additional security measures to prevent serious damage to future financial stability from the collapse of the stablecoin.
In particular, the government wants to give more powers to the Bank of England so that it can control the management of failed stablecoin projects.
Amendments to legislation to eliminate risks associated with stablecoins
Today, May 31, the UK government published a document stating that the current legislation needs to be amended to cope with the risk of a potential collapse of another stablecoin.
This will include giving the country’s central bank the authority to oversee the administration of “bankrupt issuers of systemically important stablecoins.”
In addition, after the recent collapse of the Terra UST, regulators around the world are worried and now want to make sure that stablecoins backed by the US dollar do not threaten financial stability.
The proposal, which will be considered by the British Parliament, includes a call for proper regulation that would help cushion the blow from a potential collapse of the stablecoin on consumers, market integrity and financial stability. The recent collapse of the Terra UST wiped out $40 billion not only by the UST, but also by LUNA, the native Terra token that was relaunched after the hard fork. This action turned the failed Luna into a Luna Classic, leaving the original name for the newly minted coin.
Tighter regulation for stablecoins
The above-mentioned proposal states that the government needs to amend the FMI SAR (Special Financial Market Infrastructure Management Regime) to include any possible risks that may arise from failures of stablecoin issuers not registered as banks.
The FMI SAR will become the primary default framework for handling failed stablecoin projects. Thus, if the collapse of the stablecoin is assessed as a threat to financial stability, the project that released it will have access to special insolvency procedures. In addition, the amended legislation ensures that a failed project will make the interests of affected investors a priority.
It is worth noting that stablecoin projects that pose risks will operate under the supervision of the Bank of England, and smaller projects will be under the control of the FCA.
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