The autumn of crypto giants this 12 months 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 belongings, together with asset-backed stablecoins, can doubtlessly spill over to the normal 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 worth fluctuation when buyers should buy stablecoins cheaper than their market worth — a phenomenon observed throughout the Terra crash.
In keeping with Hong Kong’s central financial institution, the interconnection of crypto belongings has made the crypto ecosystem extra susceptible to systematic shocks. As well as, the rise in crypto publicity from monetary establishments could be topic to knock-off results from abrupt developments in cryptocurrency costs:
“The rising measurement 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 belongings.”
The flowchart shared by HKMA means that fluctuations within the worth of asset-backed stablecoins may end in reserve adjustment by stablecoins. That is primarily pushed by the belief that the demand and provide of stablecoins can set off volatility of their worth.
The examine additionally recalled the crash of Terra USD (UST), an algorithmic stablecoin issued by Terraform Labs, which had precipitated mass redemption of Tether (USDT). On this gentle, HKMA beneficial standardizing common disclosures that may assist regulators inspects liquidity situations and dangers.
The second advice for regulators is to strengthen the asset-backed stablecoins’ liquidity administration by way of restrictions on the composition of reserve belongings.
Associated: Might Hong Kong actually change into China’s proxy in crypto?
The Securities and Futures Fee of Hong Kong suggested administration corporations seeking to supply exchange-traded fund (ETF) choices to “have a superb monitor report of regulatory compliance,” amongst different necessities.
HKEX welcomes the SFC’s announcement right this moment allowing the itemizing of ETFs with digital belongings as their underlying. This may assist the continued progress of #HongKong as Asia’s premier #ETF market, additional strengthening Hong Kong’s position as a global 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.
