The Crypto Council for Innovation (CCI) has submitted a comprehensive response to the proposed regulatory regime for stablecoins in Hong Kong, just before the comment period closed. The advocacy group’s detailed five-page letter criticized the suggested reserve and operational requirements, while passionately defending algorithmic stablecoins, which were viewed unfavorably by Hong Kong authorities.
The Hong Kong Monetary Authority (HKMA) and Financial Services and the Treasury Bureau (FSTB) published a consultation paper on December 27th, outlining a regulatory framework that would require stablecoin issuers to obtain a license, have a physical presence in Hong Kong, and maintain reserves “at least equivalent to the par value.”
While the CCI commended the FSTB and HKMA for taking initial steps towards establishing a regulatory framework, it expressed concerns about potential issues. The CCI argued that reserve requirements could be excessive if they duplicated requirements already imposed by other countries. The group recommended a risk-based approach to reserve requirements and suggested an “equivalence framework” aligned with other jurisdictions, allowing issuers to operate in Hong Kong under the same conditions as in Japan, where licenses from other countries are recognized after review.
A significant portion of the CCI’s letter focused on algorithmic stablecoins. The proposed regulations treated all stablecoins equally, implying that algorithmic stablecoins would be unable to meet the reserve requirements. Despite the reputational damage suffered by algorithmic stablecoins following the collapse of the Terra/LUNA ecosystem, the CCI remained optimistic about their potential. The group emphasized the need for tailored regulations and requirements specific to algorithmic stablecoins, highlighting their importance as an innovative category deserving of support. Rejecting such innovation would be counterproductive, according to the CCI.
The CCI emphasized that not all algorithmic stablecoins are the same. It argued that overcollateralized stablecoins with external collateral could enhance efficiency in decentralized finance through real-time audits and automated liquidation systems. Therefore, the CCI recommended that the HKMA and FSTB establish “decentralization thresholds” for algorithmic stablecoins, as the benefits derived from them are directly proportional to their level of decentralization.
The CCI also advocated for stablecoins linked to cryptocurrencies, citing examples such as Dai (DAI), RAI, and LUSD, which are backed by Bitcoin (BTC) and Ether (ETH). It highlighted that these stablecoins remained unaffected by the recent market downturn, demonstrating their resilience.
In related news, a Crypto Council adviser has expressed optimism about the possibility of fair crypto laws in the United States, although acknowledging that substantial work is required to achieve this goal.