Hong Kong will not tolerate algorithmic stablecoins in new regulation

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The Hong Kong Monetary Authority (HKMA) failed to include algorithmic stablecoins in its list of fundamental regulations. Instead, all stablecoin issuers must constantly support their values with underlying reserve assets, according to the senior financial regulator.

The response from 58 submissions was compiled in the consultation conclusion for the discussion paper on cryptocurrencies and stablecoins, which was released by the HKMA on January 31. The regulator reiterates the well-known concept of a “risk-based and agile” strategy in its conclusion, which is required for the developing crypto business.

The regulatory arrangements are anticipated in 2023–2024, either in the form of new legislation or revisions to the current laws, based on the consultation process. The regulation of stablecoins that “purport to reference to one or more fiat currencies,” as stated frequently in the report, would take precedence.

Both issuers that directly conduct business in Hong Kong and businesses that “actively” sell their goods to Hong Kong consumers will need to go through the new licencing process. The main governing principles emphasised the significance of complete backing and redemption at par:

Stablecoins that rely on arbitrage or algorithms to determine their value won’t be accepted. Holders of stablecoins should be able to exchange them for the linked fiat currency at par within a reasonable amount of time.

Based on the tenets of complete backing and redemption at par, the HKMA plans to create an extensive regulatory framework for stablecoins. Additionally, it would prevent the businesses from straying from their core competencies. The article uses wallet operators as an example, who are not permitted to engage in lending activities.

Some stablecoin-related activities “may not be caught” in the regulatory scope at first because the law would concentrate on the issuance, governance, and stabilisation domains. A few of these include buying or exchanging stablecoins for fiat money, operating and managing centralised stablecoin loan services, issuing debit and credit cards for digital assets, and running automated teller machines or exchanges for digital assets.

The market share of algorithmic stablecoins currently sits at 1.71%, whereas its all-time high record was established in April 2022, when it reached 12.4% of the entire crypto market, according to a recent analysis from CryptoCompare.

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