The Crypto Council for Innovation (CCI) has voiced its recommendations regarding the proposed stablecoin regulations by the Hong Kong Monetary Authority (HKMA) and the Financial Services and Treasury Bureau (FSTB), urging not to dismiss the potential of algorithmic stablecoins. The CCI’s detailed response on the last day of the comment period brings to light concerns over reserve requirements, operational stipulations, and particularly the inclusion and fair treatment of algorithmic stablecoins within the regulatory regime.
Critical Assessment of Proposed Regulations
The HKMA and FSTB’s consultation paper, released on December 27, laid out a framework for licensing stablecoin issuers in Hong Kong, emphasizing the need for an office in the region with a senior manager present and reserves matching the par value of issued stablecoins. The CCI commends the initial steps towards regulation but warns of potential issues, such as the undue burden reserve requirements might impose, especially if they mirror those in other jurisdictions.
Highlighting the global nature of crypto businesses, the CCI points out the challenge of mandating the physical presence of senior management and key personnel in Hong Kong. It suggests adopting a risk-based approach to reserve requirements and an equivalence framework that recognizes issuers’ licenses from other countries, drawing parallels to Japan’s regulatory practices.
Defense of Algorithmic Stablecoins
The bulk of the CCI’s letter is dedicated to defending algorithmic stablecoins, which the HKMA’s proposal seemingly undervalues by setting a licensing criteria that such innovations might find difficult to meet, particularly regarding reserve requirements. In the wake of the Terra/LUNA collapse, the CCI acknowledges the reputational damage but remains optimistic about the innovative potential of algorithmic stablecoins, advocating for “narrowly tailored guardrails” specific to this category.
CCI emphasizes that not all algorithmic stablecoins are created equal, and those that are overcollateralized with external collateral could enhance decentralized finance (DeFi) through real-time auditability and automated liquidation systems. The council proposes setting “decentralization thresholds” for algorithmic stablecoins, arguing that outright rejection of such innovations could be counterproductive.
