Systematic shocks within the crypto ecosystem risk to have knock-off effects upon traditional financial institutions
According to Hong Kong Monetary Authority (HKMA), fiat-backed stablecoins bear risks of liquidity mismatch during “fire-sale” events. Therefore, Hong Kong’s central bank noted that the increase in crypto exposure from financial institutions can endanger traditional fiat systems in times of abrupt developments in cryptocurrency prices.
The assessment of recent collapses of crypto giants concluded that the interconnection of cryptocurrencies has made the digital asset ecosystem more vulnerable to systematic shocks.
The chart published by HKMA suggests that fluctuations in the price of asset-backed stablecoins could result in reserve adjustment, causing volatility in traditional asset markets.
The study also recalled the crash of Terra USD (UST), an algorithmic stablecoin, which brought up mass redemption of Tether as an example of interconnectedness in the crypto ecosystem. Moreover, current crypto decline caused by the FTX bankruptcy also triggered short-term stablecoin volatility.
Therefore, HKMA recommended standardising regular legal disclosures. It can help regulators inspect liquidity conditions and risks. Besides, regulators should strengthen the asset-backed stablecoins’ liquidity management via restrictions on reserve assets.
The Securities and Futures Commission of Hong Kong also advised management companies looking to offer ETFs with virtual assets to “have a good track record of regulatory compliance.”