Assessments On Crypto-Backed Stablecoin

As the rate of digitalization has increased, blockchain technology and the Crypto sector have found more applications in traditional finance. Cryptocurrencies have enabled new digital payment systems, increased financial inclusion, and facilitated innovation. However, digital assets are highly volatile, making their use as a store of value and a means of payment difficult.

Because of this volatility, we have stablecoins. Because of faster remittance payments, these digital assets have grown in popularity. However, stablecoins have proven volatile in extreme market conditions.

According to a report, the Central Bank is worried that stablecoins and digital assets will undermine the fiat currency system.

The Hong Kong Monetary Authority assessed the situation. They discovered that the instabilities of digital assets and asset-backed stablecoins could spread to the traditional financial system. The risk of liquidity mismatch was highlighted in the asset-backed stablecoins assessment, which affects their stability during sell-out (fire-sale) events. A fire sale event is a period of monetary price fluctuation during which investors can purchase stablecoins at a lower price than the market price.

According to the Hong Kong Central Bank, the correlation of crypto assets has made the crypto industry vulnerable to systematic shocks. Furthermore, financial institutions’ increased exposure to cryptocurrency may make them vulnerable to the shutdown effects of sudden changes in cryptocurrency prices.

The HKMA elaborated with a flowchart depicting the effects of cryptocurrency on traditional finance assets. According to the flowchart, asset-backed stablecoin price fluctuations could cause stablecoin reverse adjustments. The hypothesis that price volatility in stablecoins may result from supply and demand factors guides the adjustment.

Meanwhile, the Hong Kong Securities and Futures Commission (SFC) issued comments supporting the HKMA’s recommendations. According to the commission, management firms that want to offer exchange-traded funds (ETFs) should have a good track record of regulatory compliance.

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