The Crypto Council for Innovation (CCI) submitted a comment on the proposed stablecoin regulatory regime in Hong Kong on the last day of the comment period. The advocacy group’s five-page letter contained substantial criticism of the proposed reserve and operational requirements and mounted a lively defense of algorithmic stablecoins, which Hong Kong authorities had taken a dim view of.
The Hong Kong Monetary Authority (HKMA) and Financial Services and the Treasury Bureau (FSTB) released a consultation paper on Dec. 27. The proposed regulatory framework foresaw licensing stablecoin issuers that had an office in Hong Kong with senior manager present and reserves “at least equal to the par value.”
“We applaud FSTB and HKMA for taking important first steps in crafting a regulatory regime,” the CCI wrote. Nonetheless, it saw potential problems ahead. Reserve requirements could be an “outsized burden” if they duplicate requirements in other countries, the CCI wrote, and:
“Taking into consideration the global nature of many cryptoasset businesses, ensuring that there is a physical presence of senior management and key personnel in Hong Kong may be a challenge.”
The CCI suggested a risk-based approach to reserve requirements and recommended an “equivalence framework” harmonized with other jurisdictions that would allow issuers to operate in Hong Kong similarly to Japan, where issuers’ licenses from other countries are recognized after review.
Much of the CCI letter was taken up by a discussion of algorithmic stablecoins. The proposal would treat all stablecoins equally, it claimed:
“An issuer of an FRS [fiat-referenced stablecoin] that derives its value from arbitrage or algorithm will fall under the scope of the regulatory regime, but it will be highly unlikely that such issuer will meet the proposed licensing criteria.”
An algorithmic stablecoin would be unable to meet reserve requirements, the documents stated.
Algorithmic stablecoins suffered a reputational black eye after the collapse of the Terra/LUNA ecosystem, but the CCI was bullish on them. “CCI wishes to respectfully highlight algorithmic stablecoins as an important category of innovation meriting its own set of narrowly tailored guardrails and related requirements,” it wrote.
Not all algorithmic stablecoins are equal, CCI said. However, an overcollateralized stablecoin with exogenous collateral can improve efficiency in decentralized finance with “real-time auditability and automated liquidation systems.” Rejecting such innovation would be self-defeating.
The benefits of algorithmic stablecoins are proportional to the extent of their decentralization, CCI said, and it recommended that the HKMA and FSTB set “decentralization thresholds” for them.
The CCI also spoke up for stablecoins tied to cryptocurrencies. Coins such as Dai (DAI), RAI and LUSD, backed by Bitcoin (BTC) and Ether (ETH), were unaffected by the recent market downturn, it pointed out.
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