Hong Kong’s New Rules Will Not Allow Algorithmic Stablecoins
The new rules for stablecoins in Hong Kong should be in place by 2024.
The Hong Kong Monetary Authority (HKNA) sought help include algorithmic stablecoins in its new regulatory framework’s core themes. Instead, the main financial regulator will force stablecoin issuers to always back their currencies with reserve assets.
The HKNA released the consultation conclusion to the discussion paper on crypto and stablecoins on January 31. It was a summary of the comments from 58 people. In summary, the regulator says that the crypto industry needs a “risk-based and agile” approach, which is a common phrase.
According to the consultation process, new laws or amendments to existing laws should be in effect by 2023–2024. The report frequently states that stablecoins that “appear to refer to one or more fiat currencies” would be controlled first.
Companies who directly do business in Hong Kong or “actively” try to market their products to Hong Kongers must undergo the new license process. The most critical regulatory principles were full backing and redemption at par:
“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. “
Stablecoins are completely backed and may be redeemed at face value. Thus the HKNA intends to create a complete set of laws for them. It would also make it harder for companies to move away from their primary business. The paper uses wallet operators as an example of people who couldn’t lend money.
As the regulation would focus on issuance, governance, and stabilization, some stablecoin-related activities “may not be captured” initially. They include purchasing or selling stablecoins with fiat money, conducting centralized stablecoin loan services, issuing crypto-asset debit and credit cards, and operating crypto-asset ATMs or exchange shops.
A recent report from CryptoCompare says that algorithmic stablecoins make up 1.71% of the market right now. But in April 2022, they made up 12.4% of the market as a whole.
