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Hong Kong regulators push for stablecoin guidelines

Why Are Stablecoins Always Depegging

Why Are Stablecoins Always Depegging

Regulators in Hong Kong are looking to establish guiding principles for stablecoins before the end of 2023.

The news is the latest in a series of crypto-focused regulations from Hong Kong as the city looks to revert to its former cryptocurrency-friendly stance.

Stablecoin rules coming in Hong Kong

Hong Kong Monetary Authority (HKMA) has announced an update to its planned stablecoin regulatory regime. The HKMA detailed this in a conclusion to its call for discussion papers on crypto assets and stablecoins published on Jan. 31. 

Hong Kong’s financial watchdog is looking to create a licensing regime for stablecoin issuers.

The HKMA is also looking to supervise the activities of entities that issue fiat-backed stablecoins. These are stablecoins that are supported by national currencies, for example, tether USD (USDT) which is pegged to the U.S. dollar. 

The HKMA report stated that fiat-backed stablecoin issuers must hold sufficient reserves to support their tokens. These reserves will also have to be of high quality, referring to the currencies used to maintain the parity of the stablecoin to the underlying fiat currency.

Hong Kong’s regulatory regime will not have any place for algorithmic stablecoins, according to the report. Algo stablecoins are not backed by fiat currency reserves. They are instead backed by crypto tokens, with their pegs maintained by means of supply expansion and contraction algorithms.

Some algorithmic stablecoins have collapsed in the past, including terra USD (UST), which was part of the Terra ecosystem.

Hong Kong’s developing crypto clarity

The latest report indicates Hong Kong’s drive towards ensuring crypto clarity. HKMA Chief Executive Eddie Yue stated that there are plans to implement stablecoin rules before the end of 2023.

Hong Kong regulators have recently outlined plans for several crypto regulations.

The city’s Securities and Futures Commission stated that retail traders would only be allowed exposure to highly liquid assets. This move is part of efforts to reopen the city’s crypto trading arena, which has been significantly restricted in recent years.

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