Bank of England to take over collapsed stablecoin cryptocurrencies

The Treasury plans to recognise stablecoins as a legal form of payment

The Bank of England will take over collapsed “stablecoin” companies to prevent a cryptocurrency crash hitting financial stability, under Treasury plans.

Stablecoin issuers would be placed into special administration by the Bank to protect consumers if they fail, a Government consultation said on Tuesday.

The proposals would mean companies offering stablecoins, cryptocurrencies designed to hold their value, would fall under similar rules as banks and other systemic institutions.

The Treasury plans to recognise stablecoins as a legal form of payment under efforts to make Britain a “crypto hub”.

Stablecoins' backers say they offer potentially faster and more efficient payments than existing systems, but their rise has come under new scrutiny due to the collapse of Terra, a stablecoin designed to be linked to the dollar whose value collapsed in May.

The consultation proposed that the Bank would have the power to direct administrators for systemic “digital settlement asset” firms under the Financial Market Infrastructure Special Administration Regime.

This is more strict than the regime for payments companies, and requires administrators to pursue continued operations “ahead of the interests of its creditors” while giving the Bank of England “powers of direction and oversight over the administrator”.

The Treasury said that recent market jitters around stablecoins showed the need for strong regulation.

This month, TerraUSD, whose value was meant to be pegged to the dollar by an algorithm, collapsed to 2 cents amid a loss of confidence in its price mechanism. The rout led the price of Tether, the world’s biggest stablecoin, to waver, although it has since recovered.

“Since the initial commitment to regulate certain types of stablecoins, events in crypto asset markets have further highlighted the need for appropriate regulation to help mitigate consumer, market integrity and financial stability risks,” the consultation said.

The administration regime was set up after the 2008 financial crisis to ensure that failing companies deemed systemic would keep operating, instead of prioritising creditors as is typical in an administration.

Under the proposals for stablecoins, the Bank would have to consult with the FCA when appointing administrators.

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