Governments around the world are racing to put in new and additional safeguards around stabelcoins, a crucial part of the cryptocurrency industry, after TerraUSD’s implosion led to multibillion-dollar losses from a supposedly safe asset.
Such tokens are estimated to have a combined market value of US $161 billion. These new measures come as holders of failed stablecoin ventures are still picking up the pieces from the most recent crash in the cryptocurrency market.
TerraUSD began slipping from its intended 1:1 peg to the US dollar in early May when the mix of algorithms and trader incentives, meant to safeguard the link, failed to work as planned. The crash led to a steep sell-off across cryptocurrencies and the Terra blockchain backing TerraUSD and its sister Luna token effectively collapsed.
The implosion hurt the confidence in other stablecoins as well. In late May, the Terra community approved a plan to establish a new blockchain, which excludes the TerraUSD token.
Law enforcements, especially the financial investigators in South Korea, are launching investigations against Terra founder Do Kwon. Some other past holders are also trying to sue him. That such an unregulated ecosystem was damaged by the whims of big investors has put the onus on national regulators to monitor the health of stablecoins and protect small holders and investors.
New Bill in Japan
Japan has become one of the first major economies to truly clarify the legal status of stablecoins and has set a precedent for more regulations on the largely unregulated crypto industry. The new Bill passed in Japan’s Parliament essentially links this kind of crypto to real-world currency – in this case the Japanese Yen or any other legal tender – mandating that people have rights to redeem those tokens at face value.
The Bill passed by the Japanese Parliament has banned stablecoin issuance by non-banking institutions. This would mean that stablecoins and crypto assets that link their value to fiat currencies, will only be issued by banks, fund transfer companies and trust companies. The new legal framework will come into effect from 2023.
This makes Japan one of the first major economies to introduce a legal framework around stablecoins. The new Bill clarified the legal status of stablecoins, defining them essentially as digital money. Stablecoins must be linked to the Japanese Yen or another legal tender and should guarantee holders the right to redeem them at face value, according to the new law.
The new legislation has also introduced a registration system for financial institutions to issue such digital assets and provides measures against money laundering. The Bill aims to protect investors and the financial system from risks associated with the rapid adoption of stablecoins, which saw its market surging significantly in recent years.
The legislation, however, does not address existing asset-backed stablecoins from overseas issuers like Tether or their algorithmic counterparts. Crypto exchanges in Japan do not list stablecoins.
UK wants additional safeguards
The government of the United Kingdom (UK) has issued a Consultation Paper that outlined a strategy to reduce risk for investors holding stabecoins. The government recommended changing of the existing legislation to give the Bank of England the power to appoint administrators to oversee insolvency arrangements with failed stablecoin issuers.
According to the Consultation Paper, the recent events in the crypto asset markets have further highlighted the need for appropriate regulation to help mitigate consumer, market integrity, and financial stability risks.
The deadline for feedback on the Consultation Paper is August 2, 2022 and the proposal will be considered by the UK Parliament in due course of time.