Home CryptocurrencyAltcoin Hong Kong believes stablecoin volatility can spill over into mainstream finance

Hong Kong believes stablecoin volatility can spill over into mainstream finance

by SuperiorInvest

The fall of the crypto giants this year has reignited questions about the stability of cryptocurrencies and their impact on fiat ecosystems. The Hong Kong Monetary Authority (HKMA) has assessed the situation and found that the volatility of crypto-assets, including asset-backed stablecoins, can potentially spill over into the mainstream financial system.

HKMA Assessment on asset-backed stablecoins pointed out the risks of liquidity mismatch, which negatively affects their stability during fire-sale events. A sell-off event refers to a momentary price fluctuation where investors can buy stablecoins cheaper than their market price — a phenomenon noted during Terra (MOON) crash.

According to the Central Bank of Hong Kong, the interconnection of cryptoassets has made the cryptoecosystem more vulnerable to systematic shocks. In addition, the increase in exposure to cryptocurrencies by financial institutions may be subject to the negative effects of sudden developments in cryptocurrency prices:

“The growing size of asset-backed stablecoins, along with their inherent risks, could make asset-backed stablecoins a potential lever for volatility spillovers from crypto to traditional financial assets.”

A flowchart shared by the HKMA suggests that fluctuations in the price of asset-backed stablecoins could lead to a reserve adjustment by stablecoins. The reason is primarily the assumption that the demand and supply of stablecoins can cause volatility in their price.

An illustration of Tether’s transaction mechanism and the spillover channel from crypto to traditional financial assets. Source: HKMA

The study also recalled the fall of Terra USD (UST), the algorithmic stablecoin issued by Terraform Labs, which caused a mass buyout of Tether (USDT). In this light, the HKMA recommended standardizing regular disclosures that can help regulators monitor liquidity and risk conditions.

The second recommendation for regulators is to strengthen the liquidity management of asset-backed stablecoins by limiting the composition of reserve assets.

Related: Could Hong Kong really become China’s representative in cryptocurrencies?

Hong Kong’s Securities and Futures Commission has advised management companies looking to offer exchange-traded funds (ETFs) to, among other things, “have a good record of compliance”.

The SFC circular came as part of a policy update from the Hong Kong government, which has announced its readiness to engage with global crypto exchanges on regulatory issues.

Source Link

Related Posts

%d bloggers like this: