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.
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.
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.