Hong Kong Reveals Valuations on Crypto Stablecoin

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Considering the increase in the rate of digitalization, blockchain technology and the Crypto sector have found more applications in the traditional financial sector. Cryptocurrencies have provided new digital payment systems, broader financial inclusion, and innovation. However, digital assets are highly volatile, which poses a challenge to their use as stores of value and means of payment.

This volatility led to the introduction of stablecoins. These digital assets have grown in popularity over the years due to faster payouts. But stablecoins have also proven to be volatile in extreme market conditions.

A report has revealed that the Central Bank of Hong Kong is concerned that stablecoins and digital assets will have a negative impact on the fiat money system.

The Hong Kong Monetary Authority (HKMA) has assessed the situation. In their findings, they observed that instabilities in digital assets and asset-backed stablecoins could spill over into the traditional financial system.

HKMA Assessment Details

The valuation of asset-backed stablecoins has highlighted the risk of inadequate liquidity, which affects their stability during selling events (fire selling). A fire sell event is a period of fluctuating currency prices where investors can buy stablecoins at a price below the market price.

According to the Central Bank of Hong Kong, the correlation of crypto assets has made the crypto industry vulnerable to systematic shocks. Additionally, the increased exposure of financial institutions to crypto can make them prone to shutdown effects due to sudden changes in cryptocurrency prices.

The HKMA further explained with a flowchart, showing the ripple effects of crypto on traditional financial assets. The flowchart suggests that price fluctuations of asset-backed stablecoins could trigger reverse adjustments on stablecoins. The assumption drives the adjustment that the demand and supply of stablecoins can cause price volatility.

A flowchart illustrates the transaction mechanism of Tether stablecoin and the overflow channel from crypto to traditional financial assets.

Source: Hong Kong Monetary Authority

The HKMA investigated the collapse of USD Terra (USDT), which caused a massive price drop in the stablecoin Tether. The Hong Kong bank has suggested institutionalizing regular financial disclosures to allow regulators to keep tabs on the liquidity conditions of crypto firms.

The HKMA also recommended that regulators strengthen the liquidity management of asset-backed stablecoins by imposing restrictions on the composition of reserve assets.

Hong Kong Welcomes Crypto ETF Offerings

Meanwhile, the Hong Kong Securities and Futures Commission (SFC) made comments that support the HKMA’s recommendations. The commission advised management companies wishing to offer exchange-traded fund (ETF) offerings to have a good track record of regulatory compliance.

Hong Kong Central Bank Reveals Valuations On Crypto Stablecoin
Cryptocurrency Market Declines on Chart | Source: Total Crypto Market Cap at TradingView.com

In a new update, HKEX Group has released a Tweeter welcoming the announcement of the SFC as permission to list ETFs with virtual assets. The exchange said the information would facilitate Hong Kong’s growth as Asia’s top ETF market.

The Hong Kong-based exchange noted that listing ETFs would enhance Hong Kong’s role as an international financial center.

Featured image from Pixabay, chart from TradingView.com


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