In a move that could potentially revolutionize the crypto space, U.K.'s financial regulator and its finance ministry have decided to create new rules for cryptocurrencies in an effort to preserve stability during these volatile times.
According to reports, they will scrutinize the collapse of the Terra ecosystem's crypto tokens while creating the new rules for crypto assets.
In an interview with the press, the Financial Conduct Authority's executive director for markets says that recent market instability in stablecoins will absolutely need to be taken into account when they work with the Treasury on creating rules later this year.
Terra's UST algorithmic stablecoin slumped as low as $0.23 on May 13, and the LUNA token created to prevent it from being volatile fell 96% before recovering slightly. The idea of a stablecoin is to have one that maintains its peg or price ratio with respect to another currency (usually USD). It uses only software and rules, and it is not backed by collateral.
That is, in an effort to maintain the value of this stablecoin, developers use smart contracts that can adjust supply based on market conditions. It can increase supply if the price is falling or reduce supply if the price is increasing.
Early this year (March), the U.K. announced that it would be working on a new crypto regulatory package and planned to regulate stablecoins. In its consultation, the government proposed not regulating algorithmic stablecoin.
As of the time of writing, the Treasury and the FCA are yet to make any official comment on this issue.
The United Kingdom has been regulating the crypto industry in different ways. They don't consider cryptocurrency as either a currency or commodity.
The FCA has a long history of regulatory involvement in anti-money laundering and counteracting financing terrorism (AML/CFT) matters. Since 2020, more than 100 companies have registered to be supervised by this regulator.
In 2018, the FCA announced that cryptocurrency derivatives are capable of being financial instruments under the Markets in Financial Instruments Directive II (MIFID II) and must therefore comply with all rules for such products.
In 2019, FCA published its "Guidance on Crypto Assets," which set out three other ways crypto could be regulated. The document details how digital currency will fall under certain categories and instructions for traders who want to invest in cryptocurrencies or use them as payment methods with their banks/institutions.
The U.K.'s Treasury announced that crypto adverts would be subject to FCA rules. But it's been a tough year for crypto ads, with the Advertising Standards Authority (ASA) clamping down on them to make sure they comply with current regulations and don't mislead consumers.