One of these, Terra USD, which had a market capitalisation of around $ has collapsed completely. An algorithmic stablecoin, its mechanism for maintaining its value to the dollar was maintained by algorithmic buying and selling of another crypto-asset, Luna and supplemented by a reserve of Bitcoin. When the price of Luna (and Bitcoin) fell sharply, confidence in Terra’s ability to maintain the peg eroded, leading to a run on the stablecoin and its complete collapse. At this point, another familiar amplifier of financial market stress – contagion – entered the picture. The collapse of Terra put a spotlight on the adequacy of the backing of other stablecoins,  Page 4  particularly the adequacy of the real economy reserve assets backing the largest stablecoin, Tether, which suffered significant outflows and, on several crypto exchanges, broke its peg to the dollar – meaning many coinholders were not able to redeem at par. A further example is the inherent risk that comes with leverage – a familiar one given its role in many financial crises. Leverage is a powerful tool in financial markets, but leveraged positions can greatly amplify losses when asset prices move against investors, driving fire sales of assets and self-reinforcing downward price spirals. In recent years, we have seen the small but growing development of exchanges and other mechanisms in the crypto world, like DeFi platforms, which have given investors – retail and wholesale – the ability to take very highly leveraged positions.
There are a number of other, similarly key, requirements in the guidance which I will not detail here – for example the need for a responsible and accountable legal entity behind the operation and for governance arrangements which allow for timely human intervention, ensuring that expert judgement and decision making is available to deal with unforeseen circumstances. The guidance also provides considerations for what should be considered systemically important in this context, though I should note that all payment systems are encouraged to observe the PFMI. The point is that in this one area of the financial system, systemic payments, we are engaged in the work to deliver “same risk, same regulatory outcome”. Stablecoins used primarily for payment are just one element of the crypto- ecosystem. For the ‘same risk, same regulatory outcome’ approach to be effective, it needs to be carried forward across international standards and those standards need to be incorporated into domestic regulatory regimes. Similar work is also in train in other areas. The Basel Committee on Banking Standards is in the process of issuing guidance on the prudential treatment of cryptoassets held by banks[6]. IOSCO is looking at the application of the standards for investor protection and market integrity across cryptoassets, exchanges and platforms for lending and trading[7]. These international standard setting bodies are working closely together on stablecoins to ensure we understand how we treat  Page 7  similar risks in different regulatory regimes and how the regimes might interact with each other.