According to Hong Kong’s financial organization, the interconnection of crypto assets has created the crypto scheme additional vulnerable to systematic shocks.
The fall of crypto giants this year reignited questions about the steadiness of cryptocurrencies and their impact on rescript ecosystems. city financial Authority (HKMA) assessed things and found that the instabilities of crypto assets, together with asset-backed stablecoins, will doubtless spill over to the standard financial system.
The HKMA assessment on asset-backed stablecoins found out the risks of liquidity mate, negatively impacting their stability throughout “fire-sale” events. a fireplace sale event relates to a short value fluctuation once investors can buy stablecoins cheaper than their market value — a development detected throughout the Terra crash. According to Hong Kong’s central bank, the interconnection of crypto assets has created the crypto scheme additional at risk of systematic shocks. additionally, the rise in crypto exposure from monetary institutions will be subject to knock-off effects from abrupt developments in cryptocurrency prices:
“The growing size of asset-backed stablecoins, together with their inherent risks, could make asset-backed stablecoins a potential magnifier of the volatility spillover from crypto to traditional financial assets.”
The flowchart shared by HKMA suggests that fluctuations within the worth of asset-backed stablecoins may end in reserve adjustment by stablecoins. this is be principally driven by the belief that the demand and provide of stablecoins can trigger volatility in their worth.
The study conjointly recalled the crash of Terra USD (UST), an algorithmic stablecoin issued by Terraform Labs, that had caused mass redemption of Tether. in this light-weight, HKMA suggested standardizing regular disclosures which will facilitate regulators inspects liquidity conditions and risks.
The second recommendation for regulators is to strengthen the asset-backed stablecoins’ liquidity management via restrictions on the composition of assets.
The Securities and Futures Commission of urban center suggested management corporations trying to supply exchange-traded fund (ETF) offerings to “have a decent log of restrictive compliance,” among different necessities.
The SFC circular came as a part of a policy update from Hong Kong’s government, that proclaimed its readiness to engage with international crypto exchanges on restrictive problems.
( Arijit Sarkar, Cointelegraph, 2022 )