The autumn of crypto giants this 12 months reignited questions in regards to the stability of cryptocurrencies and their impression on fiat ecosystems. Hong Kong Financial Authority (HKMA) assessed the state of affairs 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 hearth sale occasion pertains to a momentary worth fluctuation when traders can buy stablecoins cheaper than their market worth — a phenomenon seen through the Terra crash.
In line 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 may be topic to knock-off results from abrupt developments in cryptocurrency costs:
“The rising measurement of asset-backed stablecoins, along with their inherent dangers, might 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 might lead to 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 brought about mass redemption of Tether (USDT). On this mild, HKMA beneficial standardizing common disclosures that may assist regulators inspects liquidity circumstances and dangers.
The second suggestion for regulators is to strengthen the asset-backed stablecoins’ liquidity administration through restrictions on the composition of reserve belongings.
Associated: May Hong Kong actually turn out to be China’s proxy in crypto?
The Securities and Futures Fee of Hong Kong suggested administration corporations trying to supply exchange-traded fund (ETF) choices to “have a great observe file of regulatory compliance,” amongst different necessities.
HKEX welcomes the SFC’s announcement as we speak allowing the itemizing of ETFs with digital belongings as their underlying. This can help the continued progress of #HongKong as Asia’s premier #ETF market, additional strengthening Hong Kong’s function 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 interact with world crypto exchanges on regulatory points.