The autumn of crypto giants this 12 months reignited questions concerning 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 property, together with asset-backed stablecoins, can probably spill over to the normal monetary system.
The HKMA evaluation on asset-backed stablecoins identified the dangers of liquidity mismatch, negatively impacting their stability throughout “fire-sale” occasions. A fireplace sale occasion pertains to a momentary worth fluctuation when traders should purchase stablecoins cheaper than their market worth — a phenomenon seen throughout the Terra (LUNA) crash.
Based on 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 will 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 property.”
The flowchart shared by HKMA means that fluctuations within the worth of asset-backed stablecoins may 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 triggered mass redemption of Tether (USDT). On this mild, HKMA really helpful 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.
Associated: Might 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 superb monitor file of regulatory compliance,” amongst different necessities.
HKEX welcomes the SFC’s announcement at this time allowing the itemizing of ETFs with digital property as their underlying. This can help 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 international crypto exchanges on regulatory points.
