Crypto Crash: The End of Stablecoins? Not for HM Treasury

May 20, 2022

For those who follow the activity of the cryptocurrency word in all its mercurial madness, you’ll have seen a dramatic shift in the mood music being played recently. Thanks to the dubbed “crypto crash” the once optimistic notes are sounding a little quieter and the minor key voices are swelling into the foreground.  

What has caused the crypto crash?

The primary reason for that is the recent attack on UST (an algorithmic stablecoin with a value linked to US Dollars but which isn’t backed up by dollar reserves in order to maintain its peg. Instead, UST uses its partner coin LUNA to maintain its value, with each UST token minted resulting in the equivalent of $1 of LUNA being removed from circulation, and vice versa). The attack successfully “broke the peg” so that rather than being worth $1, UST went down to $0.64, before bouncing back to ~$0.90 and, LUNA went from $90 down to $24 and, ultimately to $0 – a not so stable outcome.

The ramifications have been felt across the whole cryptocurrency landscape, with the value of cryptoassets falling dramatically. The market is now firmly of the view that crypto is in a bear market (or a “crypto winter” depending on your preferred phrasing).

Is the crypto bubble about to burst?

The world of stablecoins (and algo-stables in particular) have long been a source of debate within the crypto community and outside it. Questions have been raised about whether assets that otherwise have high degrees of volatility can ever successfully reduce that volatility, either by holding an equivalent amount of fiat currency or by algorithmically maintaining the peg.  On the latter, UST and LUNA were well on the way to proving doubters wrong until the attack.  

Within that context, it’s perhaps somewhat surprising to hear reports that HM Treasury now firmly intends to legalise stablecoins as a means of payment in the UK.  

This isn’t a new proposal of course. UK regulators have been tussling with crypto assets for years now by:

  1. Providing clear guidance on the regulatory categorisation of different token types in the UK;
  1. Bringing certain cryptoassets into the scope of the financial promotions regime; and
  1. Bringing some cryptoasset firms into the Money Laundering Regulations.

HMT also published a consultation in 2021 about how it might regulate stablecoins, which led to the more recent newsworthy developments that stablecoins will, indeed, be brought into UK payment regulations.

What that regime will look like remains to be seen, but here at SL we like to follow the breadcrumb trail to see what tasty treat lies at the end.    

What will crypto regulation look like for HM Treasury?

Here’s what we know so far:

  • Regulation shouldn’t be seen as a static, rigid thing (says John Glen, Economic Secretary to the Treasury). “Instead, we should be thinking in terms of regulatory ‘code’ … like computer code… which we refine and rewrite when we need to… tailored and proportionate, yes… but also nimble and tech-neutral… shaped by your input and advice… and with the Treasury and regulators, through the Cryptoassets Taskforce, working together to create a dynamic regulatory landscape which works for everyone.
  • Stablecoins that are in scope will fall within a bespoke regime, probably contained within the Electronic Money Regulations 2011 which will regulate stablecoin issuance, the provision of wallets and custody services.
  • Part 5 of the Banking Act 2009 will be extended to include stablecoin activities. That will allow the Bank of England to oversee certain systems for transferring stablecoins.
  • The Financial Services (Banking Reform) Act 2013 will be extended to include stablecoin-based payment systems so that they are subject to appropriate competition.
  • The regulations will go beyond just stablecoins and will include activities such as the trading of tokens like Bitcoin.
  • Disincentives for investment and fund managers investing in cryptoassets will be removed
  • It is plausible that Decentralised Autonomous Organisations (DAOs to you and me) will be recognised as having legal status.
  • A Cryptoasset Engagement Group will be set up to act as a high-level industry group to interact in a direct and open way with Treasury and regulators.  

The road won’t always be paved with gold. A lot of projects operating within the UK, or with sufficient nexus to the UK, will suddenly find themselves within the regulatory perimeter and will need to register with the FCA – a process that can be complex and doesn’t necessarily guarantee a positive result on the other end. (If you're eager to have a fighting chance, we can help make FCA authorisation as pain-free as possible.)

What it does mean, however, is that the UK will be one of the first jurisdictions to provide regulatory certainty as far as cryptoasset projects are concerned. And for those projects who do successfully set up in the UK, they’ll be able to operate under the halo of having been registered with the FCA, which will give investors and customers greater confidence in the project.

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