Treasury proposes insolvency regime to manage stablecoin failures

A form of cryptocurrency that is pegged or tied to that of another currency, commodity or financial instrument, the stablecoin market took a hit last month when the Terra blockchain was temporarily halted after the collapse of the stablecoin TerraUSD and Luna, which wiped out almost $45bn (£35.7bn) in market capitalisation within a week. 

The treasury’s consultation proposes an insolvency regime to manage the failure of major crypto stablecoins. The Bank of England would take the lead in managing the collapse of a stablecoin that had systemic importance to the financial system. 

Currently, there are two administrative frameworks that can be used to manage this process, namely the Financial Market Infrastructure Special Administration Regime (FMI SAR) or the Payment and E-Money Special Administration Regime (PESAR). 

The FMI SAR was established to address the risks of the possible failure of payment recognised as systemic where the government judged that disruption to or the discontinuity of such a system due to insolvency would not best serve the public interest given the potential impacts on financial stability.

PESAR, meanwhile, was developed to address the risks posed by the possible failure of payment and electronic money institutions, where the insolvency of such firms previously has resulted in lengthy delays in the return of customer funds. 

The government intends to legislate that, in the case of the collapse of a stablecoin business, it will generally use a FMI SAR but - in the event of an overlap - that both of the regimes would be used. 

The reason why it believes FMI SAR to be the most appropriate regime is primarily because it considers the Bank of England - rather than the Financial Conduct Authority - to be the lead regulator for this type of administration.

The introduction of a framework for the special administration regime has been deemed as important by the government as it believes the failure of a stablecoin business could have a wide range of financial stability as well as consumer protection impacts.