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The Hong Kong Monetary Authority (HKMA) has said that algorithmic stablecoins pose significant risks and they intend to require that all stablecoins issuers back their value with an equivalent value of reserve assets at all times. The HKMA released the conclusions of a discussion paper on crypto-assets and stablecoins on Tuesday which summarized the feedback the agency received from 58 respondents.
Hong Kong Bans Algorithmic Stablecoins
The report said that stablecoins that derive their value based on arbitrage or algorithm will not be accepted. Stablecoin holders should be able to redeem the stablecoins into the referenced fiat currency at par within a reasonable period. Instead, priority will be given to stablecoins that purportedly refer to one or more fiat currencies. The new licensing process would be obligatory for both the issuers that conduct their activity in Hong Kong directly and those companies, that “actively” market their products to the Hong Kong public. Regulated entities are not permitted to conduct activities that deviate from their principal business as permitted under their relevant licenses. For example, wallet operators will not be able to engage in lending activities.
Comprehensive Regulatory Framework
The HKMA intends to develop a comprehensive regulatory framework for stablecoins that will include appropriate regulatory requirements in a variety of areas including ownership, governance and management, financial resources requirements, risk management, anti-money laundering and counter-terrorist financing (“AML/CFT”), user protection, and regular audits and disclosure requirements. It will also require that the value of a stablecoin's reserve assets meets the value of the outstanding stablecoins at all times. The report also said that reserve assets should be of high quality and high liquidity. The new requirements are expected to be enacted by 2024 either in the form of new legislation or amendments to the existing laws.