The Treasury wishes to provide the Financial Market Infrastructure Special Administration Regime the authority to supervise the safe recovery of client money in the case of a stablecoin failure
The new laws were introduced shortly after the collapse of the stablecoin network Terra Luna, which wiped away around $60 billion in investor funds. Anonymous attackers exploited fundamental design vulnerabilities in the (now) Terra Luna Classic token and TerraUSD stablecoin, causing in a death spiral that de-pegged TerraUSD and dropped the token's valuation to almost zero. As part of the consultation process, people and interested parties have until August 2 to provide their feedback on the proposed regulatory amendments to the Treasury.
In its assessment, the Treasury emphasised the significance of stablecoins for innovation while also noting their potential influence on financial stability in the event of systemic breakdowns. In particular, the Treasury requested:
Appointing the Financial Market Infrastructure Special Administration Regime (FMI SAR) as the key organisation responsible for addressing the possible systemic collapse of digital settlement asset (DSA) businesses. DSAs include stablecoin issuers, wallet providers, and third-party payment providers, among others.
Expanding the FMI SAR's authority to monitor the prompt refund or transfer of client monies in the case of a DSA firm's collapse.
Increasing the Bank of England's authority to instruct administrators and draught rules in favour of the FMI SAR.
In the case of regulatory overlap, requiring the Bank of England to engage with the Financial Conduct Authority before filing an administration order or ordering administrators.
The Treasury cites, among other factors, the potential of "a substantial number of persons losing access to cash and assets they have elected to keep in DSAs" as a key reason for the proposed regulatory reforms. The research states that expanding the FMI SAR's scope would enable administrators to consider the restoration of client monies and private keys as well as the continuation of service.