Hong Kong Says “No” to Algorithmic Cryptocurrency Stablecoins

Paigambar Mohan Raj
Source: Forkast News

Hong Kong has revealed its regulatory plans for the cryptocurrency industry. The special administrative region will not allow algorithmic stablecoins and will require licenses for stablecoin issuers.

Following comments on a discussion paper issued the previous year, the Hong Kong Monetary Authority (HKMA) released its latest regulatory aims. The HKMA mentioned that it would build a system to regulate stablecoins based on the 58 replies it received.

The HKMA intends to regulate the creation, distribution, and stabilization of fiat-backed stablecoins. Issuers need to have backing equal to the amount of the cryptocurrency in supply. Since Tether’s revelation that a large portion of its backing is unsecured short-term debt in 2021, stablecoin backings have come into question.

Major players including the United States, the European Union, and Japan are also working on stablecoin issuer restrictions. The official release stated,

“The reserve assets should be of high quality and high liquidity. Stablecoins that derive their value based on arbitrage or algorithm will not be accepted.”

Algorithmic stablecoins have taken a beating after the fall of Terra’s UST. According to CryptoCompare, such tokens make up only 1.71% of the total market share.

Furthermore, the new rules would prevent firms from moving from their core activities. The article uses wallet operators, as an example, who are not allowed to take part in lending operations.

When will Hong Kong’s cryptocurrency rules come into effect?

As per the statement, Hong Kong’s new cryptocurrency rules will come into effect sometime this year or the next. The region is one of the biggest financial hubs of the world, and therefore it is not surprising that it wants to bring regulations to the budding industry. The fall of the Terra UST stablecoin in 2022 was one for the history books. The fall led to many investors losing life savings and investments.