The UK Treasury has submitted proposed legislation to regulate cryptocurrency businesses. In the wake of the Terra LUNA and UST crypto collapses, it published a consultation paper on May 31.

The paper highlighted the importance and impact of stablecoins on innovation, as well as their financial stability in general, should systemic failures occur. It demanded amendments to the existing legislation surrounding the Financial Market Infrastructure Special Administration Regime (FMI SAR) that was created to address the risk posed by systemic failures of payment systems.

As proposed, the new rules would allow the Bank of England to oversee cryptocurrency firms and have the power to appoint an administrator in case of failure. The paper explains that, in addition to the mandate to provide continuity of services to firms that are insolvent, amendments will include an additional objective to return or transfer customer funds and custody assets.

The Treasury believes that continuity may not be enough to mitigate financial stability risks arising from a failure of a digital settlement asset firm (DSA). It feels that large numbers of people may lose access to funds and assets they had chosen to keep as DSAs. A DSA could also include wallet providers, stablecoin issuers and third-party payments providers.

It also stated that the government considered it important to ensure that existing legal frameworks could be used to effectively manage the risk posed by systemic DSA companies for the purposes of financial stability. The consultation period closes on August 2; the Treasury will then prepare a follow-up for the proposal to be presented to Parliament.