Hong Kong to ban algorithmic stablecoins in its jurisdiction

The Hong Kong Monetary Authority (HKNA) has released a new consultation paper on the regulation of cryptocurrencies and stablecoins, while banning algorithmic stablecoins in its jurisdiction.

The document emphasizes that companies issuing stable cryptocurrencies must maintain the necessary reserves.. Accordingly, algorithmic stablecoins do not fit this definition.. The regulator noted that it is necessary to maintain a “risk-oriented and flexible approach to the cryptocurrency industry”. It seems that algorithmic stablecoins have been deemed too risky.

It is expected that on the basis of the consultation paper, bills on the regulation of cryptocurrencies in Hong Kong will be developed and adopted.. The new licensing process will be mandatory both for companies operating directly in Hong Kong and for firms “actively promoting” their products to the population of the country.

“Stablecoins whose value is determined by arbitrage or algorithm are not allowed. Stablecoin holders should be able to exchange tokens for the specified fiat currency within a reasonable period of time,” the document says.

The regulator intends to develop the necessary regulatory framework for stablecoins. Its main requirement will be the requirement of full backing of stablecoins and the possibility of redemption at face value.. HKNA will also restrict cryptocurrency companies in terms of additional lines of business.. For example, wallet operators will be prohibited from engaging in lending activities.

Note that according to the CryptoCompare service, algorithmic stablecoins currently occupy 1.71% of the cryptocurrency market capitalization.. Back in April 2022, this figure reached 12.4%.

Earlier, the leadership of the Hong Kong Securities and Futures Commission (SFC) announced plans to limit the access of retail investors to certain crypto assets.