In the key principles of its upcoming regulatory framework, the Hong Kong Monetary Authority (HKMA) did not find a place for algorithmic stablecoins. Instead, the main financial regulator will require all stablecoin issuers to back their securities with underlying reserve assets at all times.

On January 31, the HKMA issued the conclusion of the consultation to the discussion paper on cryptocurrencies and stablecoins, which summarizes the comments of 58 submissions. In his summary, the regulator repeats the popular formula of an “agile and risk-based” approach, which is necessary for the maturing crypto industry.

Based on the consultation process, regulatory arrangements are expected in 2023/24, either in the form of new legislation or amendments to existing laws. As repeatedly specified in the document, the priority would be to regulate stablecoins that “purport to reference one or more fiat currencies.”

The new licensing process would be mandatory both for issuers that do business in Hong Kong directly and for companies that “actively” market their products to the Hong Kong public. Key regulatory principles highlighted the importance of full support and par redemption:

“Stablecoins that get their value based on arbitrage or algorithm will not be accepted. Stablecoin holders should be able to redeem stablecoins in the reference fiat currency at par within a reasonable period.”

The HKMA intends to develop a comprehensive regulatory framework for stablecoins based on the principle of full support and redemption at par. It would also restrict companies from straying from their core business. The document cites the example of wallet operators, who would not be allowed to engage in lending activities.

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Since the regulation would focus on the areas of issuance, governance, and stabilization, some of the activities related to stablecoins “may not be captured” in the regulatory scope at the early stage. Among them are the purchase or exchange of a stablecoin with fiat currency, the operation and management of centralized stablecoin lending services, the issuance of debit/credit cards for crypto assets, and the operation of ATMs or exchange houses. of cryptoactives.

According to a recent report by CryptoCompare, the current market share of algorithmic stablecoins stands at 1.71%while its historical record in April 2022 reached 12.4% of the entire crypto market.