The words crypto and volatility are often repeated alongside one another but, when a stablecoin like terra crashes, entire economic systems can be caught off guard.
Stablecoins, or a cryptocurrency that's value is tied to another currency or asset, are meant to provide stability in a market known for its ups and downs.
But amid an across-the-board fall observed across cryptocurrency over the last few weeks, even stablecoins started losing their value and uprooting many die-hard crypto proponents faith in the system.
Even Stablecoins Are Down. What Does This Mean For Crypto?
Tether which is the biggest stablecoin by market cap and is intended to be one-for-one with the dollar, dropped to as low as 95 cents in mid-May.
Terra, a more volatile stablecoin with an associated token called luna, fell to below 35 cents for no apparent reason other than the public's waning interest in cryptocurrency.
The fall, which erased as much as $60 billion from the entire cryptocurrency market, sent shockwaves through the crypto community.
In some cases, investors who put all their eggs in certain currencies lost hundreds of thousands of dollars.
A Taiwanese citizen who invested over $2 million into Luna is reported to have fatally jumped from a high-rise tower after seeing its worth plunge by more than 98% overnight.
As regulators in several countries were already raising alarms about cryptocurrency's extremely volatile nature, the crash pushed people in the British government to consider safeguards that can be put in place in the case of a wider bigger collapse and "bank run" seen during the 2008 crisis.
While most stablecoins have since regained their value, the drop was enough to shake the country's treasury department into wanting to have more protections in place.
What's The British Government Doing About This?
"The government considers that it is important to ensure existing legal frameworks can be effectively applied to manage the risks posed by the possible failure of systemic DSA [digital settlement asset] firms for the purposes of financial stability," a governmental task force says in a proposal.
It also suggests putting in place legislation that includes steps to take in the event of a firm's insolvency.
As many firms operating key banking infrastructure are heavily tied up in cryptocurrency, the goal articulated by British treasury branch HM Treasury is to have protections in place that would allow these systems to keep running even if the firms significantly drop in value.
"The failure of a systemic digital settlement asset firm could have a wide range of financial stability as well as consumer protection impacts," the report further reads.
"This could be both in terms of continuity of services critical to the operation of the economy and access of individuals to their funds or assets."
In its current form, the government's proposal states that such protections are necessary but does not give guidance on what they would look like.
From now until Aug. 2, HM Treasury will consult experts for advice on potential solutions and eventually come up with a plan.
As the country's main bank, the Bank of England would be the main regulator enforcing these rules.
"Since the initial commitment to regulate certain types of stablecoins, events in cryptoasset markets have further highlighted the need for appropriate regulation to help mitigate consumer, market integrity and financial stability risks,” the proposal reads.
