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The UK Proposes Guidelines to Regulate Stablecoins

  • The UK government proposes guidelines to regulate stablecoins
  • The proposal comes after the crash of TerraUSD, a stablecoin which erased investors’ money worth $40 billion in 2022.
  • Among the top 3 stablecoins, Binance and USD Coin recorded price growth of 26% and 4%, respectively, while Tether recorded negative growth 11% year to date.

Recently, the government of the UK proposed amending the existing legislation to deal with the failure of stablecoin issuers, which could constitute a systemic concern. This comes after the crash of TerraUSD, a stablecoin which erased investors’ money worth $40 billion in 2022. The guidelines proposed amendment to the Financial Market Infrastructure Special Administration Regime, which would provide the Bank of England the authority to assure the continued availability of stablecoin payment services in the event of a crisis.

Stablecoin

Stablecoins are cryptocurrencies that are pegged to a fiat currency such as the US dollar or the euro. Stablecoins are divided into two categories: the first category, which are backed by reserves consisting of assets such as fiat currency, bonds, commercial paper, etc., and the second category, those that are algorithmic or decentralized. Major stablecoins such as Tether, USD Coin, and Binance are reserve-backed cryptocurrencies as they hold dollar-denominated assets to maintain an exchange rate of 1:1, while TerraUSD is an algorithmic cryptocurrency.

Why Stablecoins are Becoming Popular?

Unlike cryptocurrencies, stablecoins are digital currencies backed by a fiat currency, which on paper makes them more stable than cryptocurrencies such as Bitcoin and Ethereum. The stablecoin market has attracted a lot of interest in recent years. Stablecoins were introduced as the safest cryptocurrencies as they were meant to protect crypto investors from the volatility of the cryptocurrency market. They are meant to be used as a safe crypto asset for investors who intend to limit their exposure to the volatility of the sector.

Outlook

The recent crypto crash made it clear that stablecoins such as Terra and Luna could be as volatile as other cryptocurrencies. Regulation of the crypto sector is long overdue. Until regulations are introduced, and requirements are made to only use fiat currencies and liquid assets as collateral for stablecoins, more algorithmic stablecoins will likely be affected.

 

 

 



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