Here is our pick of the 3 most important Stablecoin news stories during the week.
How do we handle failure?
Some interesting developments in the regulatory sphere this week that are more accommodating of innovation. The big problem of innovation is that we love what we get when it works, however it is by necessity a series of experiments that always involves, unfortunately, multiple failures.
Firstly the UK Treasury proposed a method of managing the wind down of a stablecoin that would certainly have been useful in the recent Terra/Luna instance.
You can find the paper here along with an opportunity to respond by the 2nd August.
Managing the failure of systemic Digital Settlement Asset (including stablecoin) firms – GOV.UK (www.gov.uk)
This proposal follows the collapse of algorithmic stablecoin TerraUSD (UST), which lost its 1:1 peg with the U.S. dollar during a sell-off across the crypto market earlier this month.
- The government recommends changing existing legislation to give the Bank of England power to appoint administrators to oversee insolvency arrangements with failed stablecoin issuers.
- Normal insolvency rules require the administrator to work in the best interests of creditors, in this case the proposal is for public interest to take first consideration.
- “Since the initial commitment to regulate certain types of stablecoins, events in crypto asset markets have further highlighted the need for appropriate regulation to help mitigate consumer, market integrity and financial stability risks,” the Treasury said in its proposal, which will be considered by Parliament.
Regulators across the globe have shifted focus to stablecoins following Terra’s implosion, with the European Commission favoring a large-scale ban of the asset class.
UK Government Proposes Stablecoin Safeguards After Terra Collapse (coindesk.com)
However, the UK Government proposal avoids mentioning any approaches to stopping failure in the first place, or at least making it less likely, by for example opening up access to Reserve Bank master accounts. Manmohan Singh, a senior economist with the IMF proposes that backing stablecoins with reserves and granting them access to Fed master accounts are just a couple of ways to make the payment system quicker and more efficient.
Manmohan Singh on the Role and Structure of Stablecoins and the Impact of Collateral in the Financial System | Mercatus Center
Meanwhile the Japanese Government has passed legislation that stipulates that the issuance of stablecoins is limited to licensed banks, registered money transfer agents and trust companies in Japan.
The new legislation also introduces a registration system for financial institutions to issue such digital assets and provides measures against money laundering.
Japan passes bill to limit stablecoin issuance to banks and trust companies (cointelegraph.com)
Capitalism has a few key pillars to its success such as property rights and share ownership, but maybe as significant is the process of handling failure known as insolvency and administration. Stablecoins are not by nature like everyday capitalism, where if my Fintech company goes bust the pain is limited to the shareholders and creditors. But if we can have a system to manage the wind up of a stablecoin in a manner that limits the damage, then innovation will have gained and in the long run that is valuable to us all.
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Alan Scott is an expert in the FX market and has been working in the domain of stablecoins for many years. Twitter @Alan_SmartMoney
We have a self imposed constraint of 3 news stories per week because we serve busy senior Fintech leaders who just want succinct and important information.
For context on stablecoins please read this introductory interview with Alan “How stablecoins will change our world” and read articles tagged stablecoin in our archives.
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