UK, South Korea to launch regulatory frameworks after UST Collapse

In early May, the crypto market suffered a sharp drawdown caused by the collapse of Terra’s algorithmic UST stablecoin. The event sparked debate about the safety of stablecoins, with regulators worldwide weighing in on the collapse.

Following the collapse of TerraUST (previously the third-largest stablecoin), the United Kingdom and the South Korean governments are now putting measures in place to prevent such catastrophe in the future. 

The United Kingdom addresses stablecoin issues

In a new consultation paper published yesterday, Her Majesty’s Treasury proposed using existing regulatory regimes to help reduce the risks associated with the potential collapse of stablecoins and other digital settlement assets. 

The three-part paper started by reiterating the U.K. government’s commitment to cryptocurrency innovation and its intention to recognise crypto stablecoins as a means of payment in law. 

However, to realise this vision, the paper argues that it is “necessary to ensure appropriate, and proportionate, tools are in place to mitigate the financial stability issues that may materialise should a firm that has reached systemic scale fail.”

The consultation paper makes a loose reference to the UST collapse, stating that “events in crypto-asset markets have further highlighted the need for appropriate regulation to help mitigate consumer, market integrity, and financial stability risks.”

The government’s proposed solution is to use existing regulatory regimes to protect consumers from payment firm insolvency of digital settlement assets. The existing rules, known as Special Administration Regimes (SARs), would give the Bank of England continued regulatory oversight over stablecoin issuers and verify that their payment infrastructure systems are robust.

They would also ensure that firms make decisions that are in the best interests of their customers and the British public. The report invites feedback on the proposal with a deadline of August 2.

South Korea to launch crypto regulatory body in June

According to a local media news agency, NewsPim, the nation has made the decision to put in place a Digital Asset Committee to act as a “control tower” for the industry, which will be launched as early as the last week of June. 

The Digital Asset Committee will supervise the space and set up guidelines on listings, unfair trading, disclosure systems, and investor protection issues.

Furthermore, to reduce the confusion in the market, the committee will work together with a joint body, composed of the top five local crypto exchanges (Upbit, Bithumb, Coinone, Cobit, and Gopax) to prevent a Terra-like tragedy from reoccurrence. 

Comments on the UST collapse

Following the recent crash of TerraUST, regulators globally have become worried and now want to make sure that stablecoins backed by the U.S. dollar do not jeopardise financial stability.

United States Treasury Secretary – Janet Yellen was the first to voice out when the debacle was still fresh. Testifying before the House of Representatives Financial Services Committee on May 12, Yellen brought up the issue of UST and USDT noting stablecoin issuers needed to be brought under existing financial regulations.

“We’ve just had over this last week with Terra and with Tether an illustration of the risks associated with stablecoins. We invented a good regulatory framework for dealing with this, and that is a federally insured depository institution.”

US Senator – Elizabeth Warren also raised concerns over the growing risk posed by stablecoins calling for a clampdown before it’s too late:

“Stablecoins have no regulators, no independent auditors, no guarantors, nothing. And they are propping up one of the shadiest parts of the crypto world-the place where consumers are least protected from getting scammed.” 

Janet Yellen cited a November joint report from the President’s working group on Financial Markets (PWG), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) which recommended that stablecoin issuers should be regulated under the same rules as banks.

“To address risks to stablecoin users and guard against stablecoin runs, legislation should require stablecoin issuers to be insured depository institutions, which are subject to appropriate supervision and regulation, at the depository institution and the holding company level,” the November 2021 report read.

Although blockchain technology has risen to rapid expansion and popularity, the space is still replete with problems. Apart from incidence of crypto frauds like rug pulls and exit scams, the total collapse of a blockchain ecosystem like Terra is also disturbing. 

It is estimated that millions of people lost investments and funds in LUNA and UST. Many of the world’s authorities and regulators now opine that the blockchain world can rid itself of these issues and become a safer space by implementing regulatory frameworks. 

While regulations can promote identity, one of the most critical problems it can help solve is accountability which is missing in the crypto world. If an umbrella regulatory body is launched, it will ultimately encourage players to act responsibly or face the consequences of their actions.