May 20, 2022
For those who follow the activity of the cryptocurrency word in all its mercurial madness, you’ll have seen a dramatic shift in the mood music being played recently. Thanks to the dubbed “crypto crash” the once optimistic notes are sounding a little quieter and the minor key voices are swelling into the foreground.
The primary reason for that is the recent attack on UST (an algorithmic stablecoin with a value linked to US Dollars but which isn’t backed up by dollar reserves in order to maintain its peg. Instead, UST uses its partner coin LUNA to maintain its value, with each UST token minted resulting in the equivalent of $1 of LUNA being removed from circulation, and vice versa). The attack successfully “broke the peg” so that rather than being worth $1, UST went down to $0.64, before bouncing back to ~$0.90 and, LUNA went from $90 down to $24 and, ultimately to $0 – a not so stable outcome.
The ramifications have been felt across the whole cryptocurrency landscape, with the value of cryptoassets falling dramatically. The market is now firmly of the view that crypto is in a bear market (or a “crypto winter” depending on your preferred phrasing).
The world of stablecoins (and algo-stables in particular) have long been a source of debate within the crypto community and outside it. Questions have been raised about whether assets that otherwise have high degrees of volatility can ever successfully reduce that volatility, either by holding an equivalent amount of fiat currency or by algorithmically maintaining the peg. On the latter, UST and LUNA were well on the way to proving doubters wrong until the attack.
Within that context, it’s perhaps somewhat surprising to hear reports that HM Treasury now firmly intends to legalise stablecoins as a means of payment in the UK.
This isn’t a new proposal of course. UK regulators have been tussling with crypto assets for years now by:
HMT also published a consultation in 2021 about how it might regulate stablecoins, which led to the more recent newsworthy developments that stablecoins will, indeed, be brought into UK payment regulations.
What that regime will look like remains to be seen, but here at SL we like to follow the breadcrumb trail to see what tasty treat lies at the end.
Here’s what we know so far:
The road won’t always be paved with gold. A lot of projects operating within the UK, or with sufficient nexus to the UK, will suddenly find themselves within the regulatory perimeter and will need to register with the FCA – a process that can be complex and doesn’t necessarily guarantee a positive result on the other end. (If you're eager to have a fighting chance, we can help make FCA authorisation as pain-free as possible.)
What it does mean, however, is that the UK will be one of the first jurisdictions to provide regulatory certainty as far as cryptoasset projects are concerned. And for those projects who do successfully set up in the UK, they’ll be able to operate under the halo of having been registered with the FCA, which will give investors and customers greater confidence in the project.
In the meantime, our Head of Finreg Gareth Malna will continue hunting for breadcrumbs like an eager Augustus Gloop. If you would like to speak to him about cyptoasset regulation and how it might apply to your project, you’d better do it quick before the food coma sets in.
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