It is the latest sign of how regulators are trying to catch up with fast-moving developments in crypto markets which straddle national borders.
"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 ministry said.
Banks, insurers and mainstream payment companies must comply with rules which ensure their deposit accounts, policies or services can be transferred quickly to another provider if they go bust, to help avoid panic and contagion in markets.
Stablecoins, which play a pivotal role in crypto markets, are digital tokens pegged to the value of traditional assets, such as the U.S. dollar, and are seen as having a bigger role in payments.
The collapse of TerraUSD, a popular stablecoin which was the 10th largest cryptocurrency, triggered central bank concerns in a little-regulated sector.
"The failure of a systemic digital settlement asset firm could have a wide range of financial stability as well as consumer protection impacts," the ministry said in a consultation paper https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1079348/Stablecoin_FMISAR_Consultation.pdf.
"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."
While work continues on whether bespoke rules were needed for winding down failed stablecoins, existing rules for handling payment firm failures should be adapted, the ministry said.
It proposed amending the Financial Market Infrastructure Special Administration Regime, which would give the Bank of England powers to ensure continuity in stablecoin payment services during a crisis.
(Reporting by Huw Jones; Editing by David Holmes)
By Huw Jones
