The Crypto Council for Innovation (CCI) has submitted its comments on the proposed regulatory regime for stablecoins in Hong Kong. In a detailed five-page letter, the advocacy group expressed significant criticism of the suggested reserve and operational requirements, and strongly defended algorithmic stablecoins, which have faced skepticism from Hong Kong authorities.
On December 27, the Hong Kong Monetary Authority (HKMA) and Financial Services and the Treasury Bureau (FSTB) released a consultation paper outlining their proposed regulatory framework. According to the framework, stablecoin issuers would need to obtain a license and have an office in Hong Kong with a senior manager present. Additionally, they would be required to maintain reserves “at least equal to the par value.”
In their letter, the CCI commended the FSTB and HKMA for taking the initial steps in creating a regulatory regime. However, they expressed concerns about potential issues that may arise. The CCI argued that reserve requirements could become an excessive burden if they overlap with requirements in other countries. To address this, they suggested a risk-based approach and recommended an “equivalence framework” that aligns with regulations in other jurisdictions, allowing issuers to operate in Hong Kong under the same conditions as in Japan.
A significant portion of the CCI’s letter focused on algorithmic stablecoins. The proposal treats all stablecoins equally, but the CCI argued that algorithmic stablecoins would not be able to meet reserve requirements. Despite the reputation hit algorithmic stablecoins suffered due to the collapse of the Terra/LUNA ecosystem, the CCI remained optimistic about their potential. They emphasized the need for tailored regulations and guardrails for algorithmic stablecoins, as they offer efficiency in decentralized finance through real-time auditability and automated liquidation systems. The CCI highlighted that rejecting such innovation would be counterproductive.
The CCI stressed that the benefits of algorithmic stablecoins are directly linked to their decentralization level and recommended that the HKMA and FSTB establish “decentralization thresholds” for these types of stablecoins.
Additionally, the CCI advocated for stablecoins tied to cryptocurrencies, such as Dai (DAI), RAI, and LUSD, which are backed by Bitcoin (BTC) and Ether (ETH). The CCI pointed out that these stablecoins were unaffected by the recent market downturn.
Overall, the CCI’s comments highlight the need for a regulatory approach that takes into account the unique characteristics of algorithmic stablecoins and stablecoins tied to cryptocurrencies, while ensuring an appropriate balance between innovation and risk management.