The autumn of crypto giants this yr reignited questions in regards to the stability of cryptocurrencies and their affect on fiat ecosystems. Hong Kong Financial Authority (HKMA) assessed the scenario and located that the instabilities of crypto property, together with asset-backed stablecoins, can probably spill over to the standard monetary system.
The HKMA evaluation on asset-backed stablecoins pointed out the dangers of liquidity mismatch, negatively impacting their stability throughout “fire-sale” occasions. A fireplace sale occasion pertains to a momentary value fluctuation when traders should buy stablecoins cheaper than their market value — a phenomenon noticed during the Terra crash.
In keeping with Hong Kong’s central financial institution, the interconnection of crypto property has made the crypto ecosystem extra weak to systematic shocks. As well as, the rise in crypto publicity from monetary establishments might be topic to knock-off results from abrupt developments in cryptocurrency costs:
“The rising dimension of asset-backed stablecoins, along with their inherent dangers, may make asset-backed stablecoins a possible magnifier of the volatility spillover from crypto to conventional monetary property.”
The flowchart shared by HKMA means that fluctuations within the value of asset-backed stablecoins may end in reserve adjustment by stablecoins. That is primarily pushed by the idea that the demand and provide of stablecoins can set off volatility of their value.
The examine additionally recalled the crash of Terra USD (UST), an algorithmic stablecoin issued by Terraform Labs, which had brought on mass redemption of Tether (USDT). On this mild, HKMA really useful standardizing common disclosures that may assist regulators inspects liquidity situations and dangers.
The second suggestion for regulators is to strengthen the asset-backed stablecoins’ liquidity administration by way of restrictions on the composition of reserve property.
The Securities and Futures Fee of Hong Kong suggested administration corporations seeking to supply exchange-traded fund (ETF) choices to “have an excellent monitor report of regulatory compliance,” amongst different necessities.
HKEX welcomes the SFC’s announcement at the moment allowing the itemizing of ETFs with digital property as their underlying. This may help the continued progress of #HongKong as Asia’s premier #ETF market, additional strengthening Hong Kong’s position as a world monetary centre. pic.twitter.com/zLRgAUV6iX
— HKEX 香港交易所 (@HKEXGroup) October 31, 2022
The SFC round got here as a part of a coverage replace from Hong Kong’s authorities, which introduced its readiness to have interaction with world crypto exchanges on regulatory points.