The UK market regulator is paying close attention to the chaos in cryptocurrencies following the collapse of Terra, one of the largest experiments in decentralized finance.

The recent instability in the stablecoin market “will absolutely need to be taken into account” when the watchdog starts working with the Treasury on developing and implementing new rules for cryptocurrencies later this year, said Sarah Pritchard, chief financial officer of the Financial Control Office.

“Innovation lasts when it works well, and it’s clear we’ve seen the implications and some of the challenges that can arise,” Pritchard, who oversees the FCA’s work on the crypt, said in an interview Wednesday. Nearly 70% of adults under the age of 40 and younger who bought cryptocurrency mistakenly believed that digital assets were regulated, she said, citing an Opinium poll published by the FCA in October.

Pritchard’s comments come after the collapse of TerraUSD, a stablecoin that used algorithms and swaps with its cognate token Luna to maintain its peg to the US dollar rather than to a dollar-equivalent asset reserve. The combined market value of the two tokens before the destruction was more than $ 40 billion, which also reduced about $ 380 billion in the broad crypto sector.

Stablecoins are an important part of the crypto-ecosystem used by traders as a means of maintaining a fixed value without the need to convert tokens back into fiat currency. Investors can turn to them as a safe haven for their portfolio during periods of volatility or simply as a means of digital payment.

“It really shows the really significant problems that exist here, both in terms of a well-functioning market and, obviously, consumer protection,” Pritchard said. “Over the last week, when we’ve seen significant changes in prices, it brings to the fore and shows the importance of making people understand that it’s a risk of where they’re investing their money.”

In April, the Treasury Department said it intends to amend existing legislation for electronic money and payments to include the issuance of stablecoins and the provision of wallets, as well as conservation services. Stablecoin companies may require supervision by the Bank of England, as well as FCA approval, if their services are used by a large number of consumers because of the systemic risks they may pose.

Until now, the FCA has largely limited cryptocurrencies to meeting their anti-money laundering standards. An attempt to bring the industry to zero resulted in only 34 of the more than 100 contenders meeting the bar. Later this year, British control should receive new powers from the Treasury to regulate cryptocurrencies, and further details will be published in a future bill on financial services and markets.

The regulator held a CryptoSprint event earlier this month to act as a listening exercise before these changes. The two-day event was attended by about 100 participants, including CEO Nikhil Rati and senior staff, FCA-registered crypto-firms, industry organizations, investment banks and firms from a variety of professional services. Pritchard said the session was “significantly overstated” as more than 640 applicants were declared.

Topics discussed during the event included whether the FCA should create an individual regulatory regime for the crypt and its ability to enforce rules across geographical boundaries, according to two participants who were not allowed to speak publicly about the event. They said participants were particularly concerned about the pace of issuing new regulations and the preservation of cryptocurrencies. They were also concerned about the current environment of cryptocurrencies, which act as a de facto guardian for riskier areas such as decentralized finance, in determining which tokens are suitable for listing.

An FCA spokesman declined to comment on the discussion, but said the event was “very positive” and two virtual sprints will take place in early June.

© 2022 Bloomberg

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