Terra implosion could shape UK stablecoin regulations

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The UK’s financial regulator is turning its attention to stablecoins after the $40 billion collapse of the Terra DeFi network, reports Bloomberg.

The Financial Conduct Authority (FCA) is set to begin working with Her Majesty’s Treasury to lay out the UK’s crypto regulation after chancellor Rishi Sunak promised to turn the nation into a crypto asset hub.

“[Stablecoins] will absolutely need to be taken into account,” said Sarah Pritchard, who oversees crypto as executive director for markets for the FCA (via Bloomberg).

“Innovation lasts if it works well, and clearly, we’ve seen the consequences and some of the issues that can arise,” she added.

At press time, TerraUSD is trading at less than a tenth of the intended $1 peg at $0.07 — down 10% today alone. Unlike stablecoins like Tether (USDT) and USD Coin (USDC) which are supposed to be backed by cash reserves, UST maintained its peg with an algorithm. Until it couldn’t.

Once the third-largest stablecoin by market capitalization, UST began to trade below its peg earlier this month. LUNA the cryptocurrency that backed the algorithmic token followed UST into the red. LUNA traded at over $100 in April but is now worth just over $0.0001.

Rishi wants stablecoins recognized, FCA to work out the details

In the US, regulators have repeated warnings that stablecoin collapse could result in a run on exchanges if investors lose faith. Last year, a report from President’s Working Group on Financial Markets lead by Treasury Secretary Janet Yellen suggested only banks should be able to issue stablecoins.

“Runs could spread contagiously from one stablecoin to another, or to other types of financial institutions that are believed to have a similar risk profile,” said the report.

This week, Securities and Exchange Commission (SEC) chair Gary Gensler reprised his prediction that most cryptocurrencies are headed in the same direction as UST and LUNA.

“I fear that in crypto… there’s going to be a lot of people hurt, and that will undermine some of the confidence in markets and trust in markets,” said Gensler on Wednesday (via Fortune).

In April, the UK chancellor pinned his pro-crypto flag to the mast, setting out a roadmap to crypto adoption and regulation under Her Majesty’s government. Specifically, Sunak declared an intention to recognize stablecoins as a means of payment in the UK.

Recent market movements and the collapse of the Terra DeFi ecosystem will give the FCA pause for thought as it now wrestles with how to deal with stablecoins.

“In the last week where we saw significant price movements, it brings that into the fore and it shows the importance of making sure that people understand that that is a risk of where they put their money,” Pritchard said.

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