HKMA Asset-Backed Stablecoins Study


On Nov. 21, HKMA issued analysis of asset-backed stablecoins.


  • HKMA issued an analysis of research entitled, An assessment of the volatility spillover from crypto to traditional financial assets: the role of asset-backed stablecoins.
  • Follows HKMA Jan. 2022 published a discussion paper on crypto-assets, see #126260.
  • Follows SIN MAS Aug. 2022, responded to risk parliamentary question, see #145140.
  • Background
  • Rapid growth of crypto ecosystem and increasing connection with traditional financial system have raised questions on how crypto assets volatility could spillover to system.
  • Asset-backed stablecoins play a pivotal role in the crypto ecosystem, but they bear liquidity mismatch risks similar to money market funds, which may expose them to a fire-sale of reserve assets in times of crypto instability, increase volatility of assets.
  • Research Findings
  • Study focused on largest asset-backed stablecoin, Tether, shows its reserve adjustment magnifies the volatility spillover from crypto assets to money market instruments.
  • This could be a channel through which risks borne by crypto assets could spillover to traditional financial system, as crypto ecosystem expands linkages will get stronger.
  • Particularly due to the crypto ecosystem being largely outside oversight of regulators.
  • Study contains 2 suggestions for international regulators when considering regulation.
  • Requiring standardized, regular disclosures by issuers of asset-backed stablecoins on their reserve assets holdings to help regulators assess liquidity condition/mismatch.
  • Strengthening the asset-backed stablecoins' liquidity management, possibly by imposing restrictions on composition of reserve assets and requiring well-defined redemption rights, which may also help reduce risk of spillover to traditional finance.
  • Nov. 25, 2022 Further Research
  • On Nov. 25, 2022, HKMA issued an event study on May 2022 stablecoin market crash.
  • Discusses further the collapse of algorithmic stablecoin TerraUSD (UST), which failed to maintain $1 price target and triggered widespread sell-offs across the crypto space.
  • However, some stablecoins saw less redemption pressure than others; paper uses event study approach to explore possible attributes that may explain such differences.
  • Compares 18 stablecoins in May 2022, including Tether, on reserve asset fair value via option pricing model, to compare asset backing strength across stablecoin projects.
  • Those with greater reserve assets saw less market capitalization decline/run pressure.
  • Crypto-collateralized stablecoins were the major shock receivers of the Terra crash, given their role as crypto leverage providers, and with extra redemption pressure.
  • Of such stablecoins, those with a stricter lending requirement were better shielded from run pressure in May 2022, highlighting the need for sufficient margin of safety.

Regulators HKMA
Entity Types B/D; Bank; Depo; Exch; MSB
Reference Memo 09/2022, 11/25/2022; Memo 07/2022, 11/21/2022
Functions Actuarial and Valuation; Compliance; Financial; Product Administration; Product Design; Research; Risk; Technology; Trading; Treasury
Countries Hong Kong
Category Central Government
State
Products Banking; Cryptocurrency; Payments; Securities
Regions AP
Rule Type Guidance
Rule Date 11/21/2022
Effective Date 11/25/2022
Rule Id 154188
Linked to Rule :126260
Reg. Last Update 11/25/2022
Report Section International

Last substantive update on 11/28/2022