• Hong Kong is introducing mandatory licensing for stablecoin issuers.
• Algorithmic stablecoins like TerraUSD will not be accepted under the planned regime.
• The value of reserve assets of a stablecoin arrangement should always meet the value of outstanding stablecoins.
Hong Kong to Require Stablecoin Licensing
The Hong Kong Monetary Authority (HKMA) is set to demand mandatory licensing for all entities conducting regulated activity in Hong Kong related to the issuance, governance and stabilization of fiat-backed stablecoins. Algorithmic stablecoins like terraUSD will not be accepted under the planned regulatory regime.
Stablecoin Reserves Must Meet Value of Outstanding Coins
To ensure that the reserve assets of a stablecoin arrangement match the value of outstanding coins, these reserves must be high quality and highly liquid. Any deviation from this requirement may render an issuer ineligible for licensing. The HKMA is expected to consider feedback on its discussion paper, market developments and international standards when drawing up specific regulatory arrangements for issuers seeking a license.
Reaction from the Crypto Community
The regulation has been met with support from those within the crypto community who have expressed concern over financial risks due to unstable coins in circulation without adequate controls or supervision in place. On one hand, some believe that such regulations may bring stability and trust into digital currency markets while others worry that it could increase costs associated with issuing tokens or stifle innovation through overly restrictive rules or reporting requirements.
Previous Incident Involving TerraUSD
This news comes after an incident involving algorithmic stablecoin TerraUSD last year which collapsed after failing to maintain its peg due to arbitrage-driven losses caused by market volatility and liquidity issues. It serves as a reminder of how important it is for regulators to ensure that all participants adhere to stringent requirements when issuing tokens intended as payment instruments or store of value assets on behalf of customers or investors alike.
In conclusion, Hong Kong’s proposed regulations for fiat-backed stablecoins provide a much needed level of control and oversight into this burgeoning sector while still allowing space for innovation within its parameters. While some have voiced concerns about increased costs or restrictions imposed on token issuers, overall these measures are likely to bolster confidence in digital currencies among both consumers and businesses alike by providing greater transparency and security around their issuance process across global markets going forward.