UK government steps in to mitigate damage from out-of-control stablecoins

On 12 May, the UST stablecoin lost 99% of its value despite all the safeguards that made it “safe”. 

Terra is tied algorithmically to the value of the dollar and this protected both it and the Luna token from any major fluctuations, yet something went wrong. 

The system showed the side of fragility and the currency collapsed, wiping out its value and causing monstrous damage, so much so that the event is remembered as one of the very few black swans of cryptocurrencies. 

The massive loss of investors led the judiciary around the world to question how to protect investors and the system itself (states, supranational structures, funds, etc.). 

The UK, following the recent debacle of the stablecoin Terra and its token Luna, is working to improve the protection of investors and the UK economy 

South Korea’s case at the moment is very heavy and worth talking about to understand the seriousness of the problem. 

Terraform Labs, the organization led by Do Kwon (founder of Terra Luna) is being investigated by the Seoul Southern District Prosecutor’s Office.

South Korean Justice Minister Dong-hoon Han has created an ad hoc investigation unit, the Joint Financial Crimes Investigation Team, to deal with this case. 

Less drastic, but just as firm, is the approach of the United Kingdom, which, while moving to protect investors and the financial system, has not filed a lawsuit but aims to anticipate where possible and avoid in practice problems arising from possible cryptocurrency crashes, in particular stablecoins. 

The UK Treasury is in the process of drafting a document that would give the UK Central Bank more powers to closely observe issuers of stablecoins. 

The document can be extended until 2 August and aims to improve existing regulations. 

In a note, the Treasury said:

“From the initial efforts to regulate certain types of stablecoins, events in the cryptocurrency markets have further highlighted the need for adequate regulation to help mitigate risks to consumers, market integrity and financial stability”.

The FMI SAR, Financial Market Infrastructure Special Administration Regime, will later evolve into the basic framework to deal with failed stablecoin projects and if any of these threaten financial stability, it can initiate the insolvency process. 

China also tightens the legal framework in dealing with cryptocurrencies 

China famously started from a very suspicious stance towards cryptocurrencies, to the point of having banned cryptocurrency trading within its borders. 

The Economic Daily, China’s pro-government newspaper, talking about the Terra fiasco, extolled the government’s strict cryptocurrency law.

Li Hualin in his article highlights the rising sun’s efforts in dodging the risks of investing in stablecoins. Zhou Maohua of China Everbright Bank stated how regulatory agencies will work on expanding existing regulations to protect the country and investors especially when it comes to stablecoins.