Hong Kong Regulators Need to Focus on Algo Stablecoins: CCI

On the final day of the comment period for the stablecoin regulatory regime proposed by Hong Kong, the Crypto Council for Innovation (CCI) made its voice heard loud and clear. 

In a five-page letter submitted to the Hong Kong Monetary Authority (HKMA) and Financial Services and the Treasury Bureau (FSTB), the advocacy group raised substantial criticisms and defended algorithmic stablecoins.

As reported earlier by TheCoinRise, crypto exchanges have until February 29 to apply for a virtual asset trading platform (VATP) license issued by the city’s Securities and Futures Commission (SFC).

Addressing Hong Kong Authorities

The proposed regulatory framework aimed at licensing stablecoin issuers operating within Hong Kong, requiring a physical office with senior management present and reserves equal to at least the par value. However, the CCI expressed concerns about potential burdens and challenges arising from these requirements, especially considering the global nature of many crypto businesses.

The CCI recommended a risk-based approach to reserve requirements and suggested an equivalence framework aligned with other jurisdictions, akin to Japan’s recognition of licenses from other countries after review.

CCI Expresses Concerns

A significant portion of the CCI’s letter delved into the discussion of algorithmic stablecoins, which the proposal treated equally alongside other stablecoins. 

While acknowledging past reputational challenges, particularly those exemplified by the Terra/LUNA ecosystem collapse, the CCI remained optimistic about their potential. It argued for tailored regulations that recognize the innovation and benefits of algorithmic stablecoins, emphasizing their efficiency in decentralized finance.

Distinguishing Between Algo Stablecoins

The CCI highlighted the importance of distinguishing between various types of algorithmic stablecoins, advocating for overcollateralized stablecoins with exogenous collateral while addressing Hong Kong regulators. 

These coins, it argued, could enhance efficiency through real-time auditability and automated liquidation systems, thereby benefiting decentralized finance.

Moreover, the CCI advocated for stablecoins tied to cryptocurrencies like Bitcoin and Ether, noting their resilience during recent market downturns compared to fiat-referenced stablecoins. Coins such as Dai, RAI, and LUSD, backed by these cryptocurrencies, remained unaffected, showcasing the potential of such stablecoin models.

Fostering Innovation in Hong Kong

In conclusion, while commending the FSTB and the Hong Kong regulatory for their regulatory efforts, the CCI urged a reevaluation of proposed regulations, particularly concerning reserve requirements and the treatment of algorithmic stablecoins. 

It emphasized the need for nuanced regulations that foster innovation while ensuring stability and security within the burgeoning stablecoin ecosystem. As the consultation period closes, the ball is now in the regulator’s court to consider these critical perspectives from industry stakeholders.