In a new consultation paper published on Tuesday Britain's Treasury proposed a new set of crypto regulations adapting existing rules to deal with major stablecoin collapses and reduce risk for investors holding stablecoins.

Following the collapse of Crypto backed algorithmic stablecoin TerraUSD (UST) which in turn wiped out hundreds of billions from the crypto market, the government recommends changing existing legislation to provide more power to the Bank of England so that it can oversee the administration of failed stablecoin projects.

 The Treasury stated,

"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,"

They said that a failure of a systemically important stablecoin could pose

 “a wide range of financial stability as well as consumer protection impacts”.

In its report, the Treasury highlighted the importance of stablecoins in innovation but also noted their ability to impact financial stability should systemic failures occur. Specifically, the Treasury called for:

• The appointment of the country's Financial Market Infrastructure Special Administration Regime (FMI SAR) as the primary entity to address the potential systemic failure of digital settlement asset (DSA) firms. DSAs include, but are not limited to, stablecoin issuers, wallet providers and third-party payment providers.

• The expansion of the FMI SAR's mandate to include and oversee the timely return or transfer of customers' funds in the event of failure of a DSA firm.

• The assignment of greater powers to the Bank of England to direct administrators and create regulations in support of the FMI SAR.

• A requirement that the Bank of England consult with the nation's Financial Conduct Authority prior to seeking an administration order or directing administrators in the event of regulatory overlap.

The aforementioned proposal states that the government needs to amend FMI SAR (Financial Market Infrastructure Special Administration Regime) to get it to include any possible risks that may come from failures of stablecoin issuers that are not registered as banks.

FMI SAR would become the major default framework for handling failed stablecoin projects. Thus, should a collapse of a stablecoin be evaluated to threaten financial stability, the project that minted it will access special insolvency arrangements. Besides, the amended legislation would ensure that the failed project would make the interests of the suffering investors its priority.

What's certainly become clear from this is that Algorithmic Crypto backed Stablecoins whose underlying assets that feeds the algorithm and shift the reserves are volatile and are far from stable in comparison to collateralised Stablecoins such as

e-money.com's suite of European Stablecoins and the Paxos Dollar which are transparent and 100% backed by cash.

Stablecoins which play a pivotal role in crypto markets are now seen as having a bigger role in payments and consumers want certainty while regulators require transparency which when delivered make Stablecoins a very ubiquitous very high utility asset.

A consultation on the proposal is currently underway and will close on Aug. 2.

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