The Crypto Council for Innovation (CCI) has submitted a comprehensive response to the proposed regulatory regime for stablecoins in Hong Kong. In their five-page letter, the advocacy group expressed significant criticism of the proposed reserve and operational requirements, while passionately defending algorithmic stablecoins, which had received negative scrutiny from Hong Kong authorities.
The Hong Kong Monetary Authority (HKMA) and Financial Services and the Treasury Bureau (FSTB) released a consultation paper on December 27th, outlining their proposed regulatory framework. The framework suggested that stablecoin issuers with an office in Hong Kong and a senior manager present would be required to obtain a license. Additionally, these issuers would need to maintain reserves that are “at least equal to the par value.”
The CCI commended the FSTB and HKMA for their efforts in establishing a regulatory regime but expressed concerns about potential issues that may arise. The CCI highlighted that reserve requirements could place an excessive burden on stablecoin issuers if they duplicate requirements already imposed by other countries. To address this, the CCI recommended a risk-based approach to reserve requirements and proposed an “equivalence framework” that aligns with other jurisdictions. This framework would allow issuers to operate in Hong Kong similarly to Japan, where licenses from other countries are recognized after review.
A significant portion of the CCI’s letter focused on algorithmic stablecoins. The proposal treated all stablecoins equally, but the CCI argued that algorithmic stablecoins should be considered separately. Although algorithmic stablecoins faced criticism following the failure of the Terra/LUNA ecosystem, the CCI expressed optimism about their potential. They emphasized the need for tailored guidelines and requirements specific to algorithmic stablecoins, highlighting their benefits in terms of real-time auditability and automated liquidation systems. Rejecting such innovation, according to the CCI, would be counterproductive.
The CCI stressed that not all algorithmic stablecoins are equal, and they suggested that the HKMA and FSTB establish “decentralization thresholds” for these coins. They also advocated for stablecoins tied to cryptocurrencies, citing examples such as Dai (DAI), RAI, and LUSD, which remained unaffected by the recent market downturn due to their backing by Bitcoin (BTC) and Ether (ETH).
Overall, the CCI’s response to the proposed stablecoin regulatory regime in Hong Kong provided a critical analysis of the requirements while highlighting the potential benefits and importance of algorithmic stablecoins and stablecoins tied to cryptocurrencies.