Hong Kong is adopting a new regime on the regulation of stablecoins that will go into effect on August 1. The new legislation is named the Stablecoins Ordinance, and its purpose is to control some of the cryptocurrencies. The decision was made as stablecoins are gaining an increasing level of interest and can be used in personal finance and international business.
Issuance of license will be done by the Hong Kong Monetary Authority (HKMA). A new regulation means that neither an unlicensed fiat-referenced stablecoin (FRS) nor its issue can be sold to a retail investor, nor can an unlicensed FRS issue be marketed to the population of Hong Kong. Companies that intend to issue stablecoins have certain requirements to meet in order to receive a license. These necessities focus on managing reserves appropriately, redemption, and stabilization of assets. Moreover, businesses have to face the restrictions directed against the infringement of money laundry and support of the terrorism, and their resources are supposed to be revealed and investigated.
HKMA has warned that it does not plan to give out many licenses to stablecoin issuers, and many may be disappointed.
What are Stablecoins?
Stablecoins are cryptocurrencies whose values are pegged to other objects. In contrast to cryptocurrencies that can be highly volatile in their prices, such as the case with Bitcoin (BTC) and Ether (ETH), stablecoins are created to fix a more or less stable price. They are stable against common currency, such as fiat currencies (US Dollar or Euro), commodities (such as gold) or other cryptocurrencies, or by using computer algorithms to regulate the value. A US Dollar-stablecoin should be maintained near the price of $1. Stablecoins are not Central Bank Digital Currencies (CBDCs), because stablecoins may also be privately issued pegged to foreign currencies.
Regulation Necessity
Stablecoins have both external and internal importance, both within crypto and in the world. They are embraced by crypto investors to trade easily in the exchanges and people in different parts of the world use it to preserve the savings value in countries with devalued native currencies or save money on international payments. There are places where stablecoins are even used as a medium of every-day-life and not only as a trading asset: Argentina, Turkey, and Afghanistan.
The amount of stable coins that have been released has worried governments. By way of example, the biggest stablecoin, Tether (USDT), has a circulating supply that exceeds 163 billion USDT. One thing the governments fear is that when the use of stablecoins increases, there is a possibility that fiat currency or commodities that support the payment will lose value. It has also made issues with the stablecoin issuers not ensuring adequacy of reserves to their stablecoins. As of now, stablecoin users do a lot of their own due diligence on the reserve status of their issuers. The solution to such concerns is perceived to be through regulation.
Instability and the Fall of Stablecoins
Stable coins can become volatile despite the name and support that support them. Technical glitches or other events happening in the world can make their prices change beyond their normal spectrum thus creating panic by investors. As an illustration, the USDT that is pegged to the US Dollar has in the past fallen to about $0.92.
Other stablecoins have even failed completely. In May 2022, Terra algorithmic stablecoin, UST and its correlated cryptocurrency LUNA, lost the majority of their value in a few hours. This resulted into panic selling by the investors and caused liquidity crunch which froze assets on all crypto exchanges and fintech platforms around the world.
International Stablecoin Law
Regulation of stablecoins is also taking place in other nations as well. In the United States, the GENIUS Act passed by President Donald Trump in July would enforce stable coins to be 100 percent backed, meaning in liquid assets such as U.S. dollars or short term Treasuries. The issuers will also be required to undertake monthly works disclosures on reserves composition and follow the rules and regulations pertaining to marketing. Japan, Singapore have also made stablecoins a regulated form, and there are other general regulations that have covered them.
