Hong Kong Monetary Authority: The volatility of stablecoins may spread to the traditional financial sector

ChainCatcher news, the Hong Kong Monetary Authority today released a research report titled "Assessing Volatility Spillovers from Cryptocurrencies to Traditional Financial Assets: The Role of Asset-Backed Stablecoins." The report states that asset-backed stablecoins play a key role in the crypto ecosystem due to the stable value provided by the backing of traditional financial assets. However, these stablecoins share similar liquidity mismatch risks with money market funds, which may expose them to fire sales of reserve assets during periods of instability in the crypto ecosystem, thereby increasing the volatility of these reserve assets. In extreme cases, the failure of stablecoins or other crypto assets could lead to massive redemptions of asset-backed stablecoins and the liquidation of their reserve assets, potentially having a significant impact on the traditional financial system.

The report states that, in light of the international regulatory community's consideration of establishing appropriate frameworks to regulate stablecoins, the research summarizes two recommendations that regulators may consider: 1. Requiring issuers of asset-backed stablecoins to standardize and regularly disclose their held reserve assets, which may help regulators assess and compare their liquidity positions and potential liquidity mismatch risks. This would enable regulators to more timely consider taking appropriate measures to reduce spillover risks during market turbulence; 2. Strengthening the liquidity management of asset-backed stablecoins, possibly by limiting the composition of reserve assets and requiring clear redemption rights, which may also help reduce spillover risks. (source link)