The Central Bank of Hong Kong claims that stablecoins have the potential to enter the mainstream financial system

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The Hong Kong Monetary Authority (HKMA), Hong Kong’s central bank, is seriously considering regulating stablecoins. While stablecoins still represent a danger to financial stability, the HKMA believes they can be integrated into the market.

Stablecoins, according to the Hong Kong Monetary Authority, have promise.

In a discussion paper, the Hong Kong Monetary Authority (HKMA) has started a public consultation on cryptocurrency regulation. It outlined its thoughts on how to handle cryptocurrency legislation. The HKMA states in the document that the asset class poses a rising danger to the country’s financial stability because of its fast rise.

The HKMA identified stablecoins as a subject of rising interest worldwide and recommended laws to license and oversee stablecoin operations in the same way that banks are licensed and supervised. According to the report, the recommended strategy has taken into consideration worldwide guidelines, the commercial and regulatory situation locally and in other key jurisdictions, and the features of payment-related stablecoins.

According to HKMA Chief Executive Eddie Yue, the fast growth of crypto-assets, especially stablecoins, is a subject of intense interest in the worldwide regulatory community since it poses potential monetary and financial stability hazards.

This is mostly because stablecoins have the potential to “become a widely accepted means of payment,” yet they may not quickly fall into the existing financial regulatory regimes, as per the watchdog.

This news comes only days after the central bankers revealed intentions to unleash the e-HKD, the country’s own digital money, for retail usage. Hong Kong had also suggested laws requiring virtual asset service platforms (VASPs) to get operating licenses.

Is the danger posed by stablecoins real?

The stablecoin market has grown quickly, and it already has a market capitalization of more than $120 billion. Nevertheless, authorities are concerned about stable currencies’ support because of their fast development and rising usage in the cryptocurrency world. Stablecoins are designed to be backed by a fiat currency, most often the dollar, in a one-to-one ratio. Stablecoin issuers, on the other hand, have been dogged by controversy regarding the backing of the digital tokens they sell.

Tether, the world’s biggest stablecoin, was introduced in Hong Kong and accused of not being backed one-to-one by US dollars on multiple occasions. This has generated worries about what would happen if the asset is subjected to a bank run. In the United States, the Biden administration has advocated regulating stablecoin issuers such as banks.

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