Regulators should seek more disclosure from stablecoin issuers, as stablecoins could transmit risk from markets to traditional finance, according to researchers at the Hong Kong Monetary Authority.

See related article: Hong Kong, BIS explore CBDC-backed stablecoins in retail prototype 

Fast facts

• In extreme market conditions, the failure of a stablecoin or other digital asset could lead to massive withdrawals or redemptions, which could weigh on traditional finance markets – currency markets, U.S. Treasuries and equities, said the researchers in their paper.

• The paper highlighted that the crypto ecosystem remains largely unscrutinized by regulators, with data gaps limiting regulators’ assessment of spillover risks.

• To reduce risk of spillovers in crypto markets, issuers whose assets support stable coins should be required to make “standardized and regular” disclosures of their holdings to help regulators assess liquidity and risks.

• The paper also recommended strengthening the liquidity management of asset-backed stablecoins, such as limiting the composition of reserve assets and requiring clear redemption rights.

• Given the borderless nature of the crypto industry, effective implementation of the above will require internationally coordinated regulation and cooperative oversight to prevent regulatory arbitrage, the paper concluded.

• Political Assistant to the Secretary for Hong Kong Financial Service and the Treasury Julian Ip said in October that Hong Kong regulators have identified stablecoins as an efficient lending tool, while it considers drawing on traditional regulatory regimes in regulating the digital asset.

• See related article: Stablecoin, CBDC take center stage at Singapore’s Future of Finance Forum