Stablecoin Volatility Might Impact Traditional Finance – HKMA

Hong Kong Monetary Authority (HKMA) has published a 22-page research study on the impact of cryptocurrency on fiat currencies with a focus on stablecoin. The study also made several recommendations for the subsector and the broader crypto ecosystem.

Stablecoins are usually asset-backed and pegged to a fiat currency during a fire-sale event; there’s always a liquidity mismatch that negatively affects the prices of these assets.

According to the study, to prevent volatility in the crypto ecosystem from affecting the financial system in a period of market disruption, it’s necessary to introduce stronger disclosure and management rules.

Owing to the borderless nature of cryptocurrency, there will be a need for a collaborative and internationally coordinated regulation to effectively implement the recommendations of the study.

Citing the collapse of the Terra-Luna ecosystem that resulted in the mass redemption, the researchers advised that regulators should compel stablecoin issuers to regularly disclose assets holdings and liquidity position. Also, regulators should impose restrictions on the composition of reserves and requirements for redemption.

Notably, after the de-pegging of LUNA in May, stablecoin issuer Circle, published a set of 19 principles for stablecoin regulations.

Interestingly, two executives of Moody’s, a global financial services firm, have said the Markets in Crypto Assets (MiCA) which is a proposed regulation of the European crypto ecosystem by the EU may foster stablecoin innovation.

The Hong Kong crypto industry

Meanwhile, the Securities and Futures Commission of Hong Kong has charged management companies that offer exchange-traded funds to maintain a good track record of regulatory compliance in addition to other criteria and guidelines. The SFC’s call is part of the government’s willingness to collaborate with global crypto exchanges concerning regulations.

 Also, after the sudden fall of FTX, the Hong Kong government has called for increased supervision and transparency in the digital asset space to prevent a similar occurrence.

In its bid to become a digital asset hub and a financial center, Hong Kong is working on a series of pilot projects including a Central Bank Digital Currency (CBDC) dubbed the digital Hong Kong dollar.