HKMA researchers say stronger disclosure and liquidity oversight on stablecoins needed to stem volatility in financial system
- The study called for adding disclosure requirements for stablecoin issuers, imposing restrictions on reserve assets
- ‘An effective implementation of the above would require internationally coordinated regulation and cooperative oversight,’ HKMA researchers say
Stronger disclosure and liquidity management rules are needed to prevent volatility in the cryptocurrency ecosystem from infecting the financial system in times of market disruption, according to a study by Hong Kong Monetary Authority (HKMA) researchers.
Such reporting for stablecoin issuers and restrictions on the composition and redemption of reserve assets backing their values are needed, given lessons from the mass redemptions in Tether in May this year amid the collapse of Terra USD, both among the biggest stablecoins.
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“An effective implementation would require internationally coordinated regulation and cooperative oversight, given the borderless nature of the cryptocurrency ecosystem,” the HKMA researchers Gabriel Wu and Victor Leung wrote in the report, adding that the recommendations were their personal opinions. “Differing regulatory approaches across jurisdictions could lead to regulatory arbitrage and increase potential systemic risks.”
Heightened volatility in money market instruments was observed at the same time as the intraday price volatility of Tether peaked that day, the researchers noted, providing evidence of volatility spillover into the safest money-market instruments.
“In extreme circumstances, failures of stablecoins or other crypto assets could result in large-scale redemptions of asset-backed stablecoins and a fire-sale of their reserve assets, potentially posing material impacts on the traditional financial system such as the money market.”
