Terra Collapse Sparks Stablecoin Regulation in the UK

A consultation paper suggests the Bank of England should oversee payment systems that “threaten the stability of the UK financial system”

article-image

Blockworks Exclusive Art by Axel Rangel

share

key takeaways

  • Proposal will give the Bank of England greater regulatory oversight over stablecoin issuers
  • Stablecoins are not yet an accepted form of payment in the UK, although proposals to legalize cryptocurrencies are in motion

UK regulators are concerned about the risks stablecoins pose to the wider financial system after the collapse of TerraUSD, an algorithmic stablecoin that lost its 1:1 peg to the US dollar earlier this month, plummeting to less than ten cents in under 24 hours.

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

The three-part paper suggests that the government will use existing regulations to ensure the Financial Conduct Authority (FCA) will have the ability to regulate electronic money and payments to protect consumers from payment firm insolvency.

It is also proposed that the Bank of England should be given regulatory oversight over any “systemically important” payment systems. “A payment system may be designated as systemic where deficiencies in its design or disruption to its operation may threaten the stability of the UK financial system or have significant consequences for businesses or other interests.”

In the case of Terra’s UST, it is uncertain whether any regulatory regime could have prevented its downfall, as it was a global and decentralized experiment in creating a stablecoin unbacked by either stable reserve assets or overcollateralization. All prior attempts to create a stablecoin maintained solely by algorithmic issuance and arbitrage incentives have failed.

Stablecoins are not yet an accepted form of payment in the UK, although proposals to legalize cryptocurrencies are in motion. Regulations around decentralized stablecoins will likely continue to pose a challenge to lawmakers.

The Treasury’s call for responses will close on August 2. 

UK regulators are not the only ones to address the concerns around the collapse of Terra. US Consumer Financial Protection Bureau Director Rohit Chopra told Bloomberg that the collapse of Terra illustrates that stablecoins may never be a substitute for the dollar. EU lawmakers are also looking to take bespoke legislative measures.


Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the Forward Guidance newsletter.

Get alpha directly in your inbox with the 0xResearch newsletter — market highlights, charts, degen trade ideas, governance updates, and more.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.

Tags

Upcoming Events

Javits Center North | 445 11th Ave

Tues - Thurs, March 18 - 20, 2025

Blockworks’ Digital Asset Summit (DAS) will feature conversations between the builders, allocators, and legislators who will shape the trajectory of the digital asset ecosystem in the US and abroad.

recent research

Research Report Templates (3).jpg

Research

Solana Colosseum organizes hackathons, supporting founders through accelerators and their $60 million pre-seed fund. Their recent Solana Radar hackathon attracted 10,000+ participants with 1,359 product submissions. Five winners are highlighted below.

article-image

There were previous reports that Lutnick — a leader of Trump’s transition team — was in the running for treasury secretary

article-image

Let’s quickly run through some of the events leading up to these listings

article-image

“You’re gonna, at least for a period of time, wish you’d had a million bucks in solana”

article-image

Perena is built on the premise that as stablecoins proliferate, liquidity could fragment, and stablecoins aren’t useful if they aren’t liquid

article-image

From hackathons to trading tools and DAO governance, AI agents are redefining how we build and innovate

article-image

CME’s large bitcoin contracts are so big that investors are turning to micro bitcoin contracts