Questions regarding the stability of cryptocurrencies and their impact on fiat ecosystems have once again arisen in the wake of this year’s collapse of crypto companies. After conducting an analysis, the Hong Kong Monetary Authority (HKMA) concluded that the instability of crypto assets, particularly asset-backed stablecoins, could potentially affect the traditional financial system.
The risk of liquidity mismatch, which severely affects their stability during “fire-sale” events, was highlighted in the HKMA review of asset-backed stablecoins. An investor can buy stablecoins for a lower price than their market price during a fire sale event, which was observed during the Terra crisis.
The interconnectedness of crypto assets has increased the crypto ecosystem’s susceptibility to systemic shocks, as per Hong Kong’s central bank. Additionally, the increased exposure of financial institutions to crypto may be susceptible to spillover effects from sudden changes in crypto prices.
“…asset-backed stablecoins a potential magnifier of the volatility spillover from crypto to traditional financial assets”
According to the flowchart provided by HKMA, changes in the price of asset-backed stablecoins may cause stablecoins to alter their reserves. This is primarily motivated by the presumption that price volatility in stablecoins can be caused by changes in supply and demand.
After the algorithmic stablecoin Terra USD (UST) crashed, the HKMA suggested standardising periodic reports to aid regulators in assessing liquidity risks and circumstances. The second piece of advice for regulators is to improve the liquidity management of asset-backed stablecoins by placing constraints on the make-up of reserve assets.
Institutions who want to offer exchange-traded fund (ETF) services were instructed by the Securities and Futures Commission of Hong Kong to “have a good track record of regulatory compliance.”
The Hong Kong government expressed its openness to interact with international cryptocurrency exchanges on regulatory matters in the SFC circular.
As not every company model is genuine and serious, Mark Branson, a high ranking official of the regulatory agency in Germany, claimed that while the cryptocurrency industry has innovations to give, it is frequently taken advantage of by players who he referred to as “freeloaders and crooks.” Additionally, he claimed that these individuals raise the dangers and risks related to the market for digital assets, particularly when it comes to investment prospects.
Branson also admitted that the cryptocurrency market does not currently pose a threat to financial stability, but if the industry develops and gets more integrated with financial institutions like banks, hedge funds, and venture capital funds, the existing position may no longer be true.