Hong Kong to Reject Algorithmic Stablecoin Amid Incoming Stablecoin Regulation

The Hong Kong government is now a step closer to dispensing financial regulations to govern the stablecoin business in the country. In a discussion paper for January 2023, the Hong Kong Monetary Authority (HKMA) stated that algorithmic stablecoins would not be accepted in the new regulation.

“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,” the discussion paper outlined.

Stablecoins are cryptocurrencies designed to maintain a stable price pegged 1:1 to a particular asset like the US dollar, gold, etc. Reserves are used to enable a stablecoin to keep its peg. In the case of algorithmic stablecoins, smart contracts or other crypto assets are used to facilitate the reserves. An infamous example is TerraUSD, which imploded in May 2022.

Hong Kong Rules Out Algorithmic Stablecoins

On January 12, 2022, the HKMA issued a discussion paper on crypto assets and stablecoins. The discussion paper was designed to seek the opinion of “stakeholders” regarding a potential stablecoin regulation. HKMA received 58 feedbacks within two months. The responses indicated green lights for stablecoin regulation.

The latest document is the conclusion of the discussion paper. It shows that the financial agency is preparing to roll out “a regulatory regime” for the stablecoin family. HKMA stated that it would regulate the governance, issuance, and stabilization of stablecoins before they can be traded in the country.

Details of the paper showed that entities who wish to conduct a regulated activity in Hong Kong must obtain a stablecoin license. The same law applies to stablecoin issuers who may launch a stablecoin pegged to the Hong Kong dollar.

Recall that Hong Kong had earlier stated its plans to release regulations governing crypto trading in the country.

Stablecoins Comes Under Regulation

Since the debacle of TerraUSD and its affiliated cryptocurrencies, several regulatory authorities have called for regulation of the stablecoin business. An example is the U.S. Treasury Department, whose secretary, Janet Yellen, stated that stablecoins need to be regulated. 

The U.S. Securities and Exchange Commission (SEC) is another agency that has spoken on the need for stablecoin regulation. Its chairman, Gary Gensler, urged the Commodity Futures Trading Commission (CFTC) to oversee stablecoin regulations.