The financial regulator in the UK, as well as the Treasury, its finance ministry, are planning to investigate the recent collapse of stablecoin Terra while they are looking into creating new rules regarding cryptocurrency.
The volatility in the cryptocurrency market recently, particularly with stablecoins “will absolutely need to be taken into account” when rules are being created in the latter half of 2022.
Just this month, the stablecoin Terra UST dropped to sit at a value of just 23 cents, and around the same time the LUNA token, which was created to balance the algorithmic stablecoin Terra UST and keep it stable, dropped a massive 96 per cent in value.
An algorithmic stablecoin is one which is created to stay stable in value using software and algorithms, rather than being pegged by some kind of currency or value, such as the US dollar of a commodity like gold.
Instead of staying tied to a currency, algorithmic stablecoins are able to increase or decrease the supply of the token as necessary to adapt to price fluctuations.
A spokesperson for the Treasury said: “Recent events in crypto asset markets have highlighted the need for appropriate regulation to help mitigate consumer, market integrity and financial stability risks,
“The government will continue to work with the regulators to address these risks as it develops its legislative approach.”
The UK is currently said to be working on a new cryptocurrency regulation package including the regulation of stablecoins. During these consultations, the government is said to have proposed that algorithmic stablecoins need not be regulated.
