In the wake of major stablecoin disruptions, policymakers in the U.K. are contemplating how to deal with the potential failure of a digital asset that has reached systemic status.
The HM Treasury launched a consultation setting out a proposed framework for managing the failure of systemic digital asset firms, including stablecoins, under a modified version of its existing regime for resolving traditional infrastructure firms.
The government in the U.K. has pledged to position the country at the forefront of the emerging cryptoasset sector by introducing regulation, including measures to facilitate the use of stablecoins in payments systems.
“Among other things, it is intended that this will create the conditions for issuers and service providers of stablecoins used as a means of payment to operate and grow safely in the U.K., driving consumer choice and efficiencies. However, the government also considers it necessary to ensure appropriate, and proportionate, tools are in place to mitigate the financial stability issues that may materialise should a firm that has reached systemic scale fail,” the Treasury said in a paper setting out its proposals.
Recent events, such as the stablecoins Terra and Tether losing their pegs, have also highlighted the need for regulation to help mitigate “consumer, market integrity and financial stability risks,” it noted.
The paper proposes to broaden the definition of a payment system to include digital assets, which would provide the Bank of England with powers to regulate systemically important payment systems and service providers in the crypto space — such as issuers of stablecoins, wallets or service providers.
“The failure of a systemic [digital settlement asset] firm could have a wide range of financial stability as well as consumer protection impacts,” it said, adding that further work will be needed to consider whether a specific legal framework also needs to be developed to help deal with the failure of these kinds of firms.
The paper noted that the Treasury will also be consulting on the regulatory perimeter for systemic payments firms generally.
The deadline for responses on the current consultation is Aug. 2.