In its latest Financial Stability Report, the Financial Planning Committee (FPC), an offshoot of the Bank of England has recommended pushing for an ‘enhanced’ regulatory framework.
According The FPC stated that the apparent vulnerabilities of the emerging industry do not pose a threat to the wider financial system.
However, the report highlighted the need for close monitoring cryptocurrencies The perceived vulnerabilities are very similar to those of traditional mainstream financial players.
These vulnerabilities were identified by the FPC as “liquidity mismatches that lead to run dynamics and fires sales and leveraged positions being undound, amplifying price drops.” Investor confidence in certain “stablecoins”, especially those without riskier backing assets and lower transparency, was significantly eroded.
“On liquidity mismatches we can agree with the FPC’s recommendations as the current events show. Three Arrows Capital, one of the largest and most well-established hedge funds in cryptocurrency ecosystem, was ordered to liquidate by a Court of Law in British Virgin Islands. The firm’s headquarters are in British Virgin Islands.
The Terra-LUNA coin, which lost more than 99.9% in a matter of days, was a direct result of these price drops. It was also depegged from $1 by its sister stablecoin, UST. The FPC specifically mentioned stablecoins in its report, noting that “some stablecoins being used for payments may offer no similar protections to central bank or commercial banking money.”
While the United Kingdom is doing all it can to align its approach toward regulating stablecoins, the European Union has drawn a framework for stablecoins in its Markets in Crypto Assets (MiCA) bill passed last week. Japan also passed a law to regulate stabilitycoins. This is a sign that global regulators are not letting their guard down when it comes to these asset classes.
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