TechFlow, the Hong Kong Monetary Authority (HKMA) today released a research report titled "Assessing Volatility Spillovers from Cryptocurrencies to Traditional Financial Assets: The Role of Asset-Backed Stablecoins." The report states that asset-backed stablecoins play a key role in the crypto ecosystem due to the stable value provided by their backing in traditional financial assets. However, these stablecoins face liquidity mismatch risks similar to those of money market funds, which could force them to sell off reserve assets at distressed prices during periods of instability in the crypto ecosystem, thereby increasing volatility in those reserve assets. In extreme cases, the failure of stablecoins or other crypto assets could trigger massive redemptions of asset-backed stablecoins and fire sales of their reserves, potentially exerting significant impacts on the traditional financial system.
The report notes that as the crypto ecosystem continues to expand and becomes increasingly intertwined with the financial sector, the linkages between cryptocurrencies and traditional financial assets may grow stronger, potentially amplifying the aforementioned spillover risks. Crucially, the crypto ecosystem remains largely outside regulatory oversight, and substantial data gaps hinder regulators' ability to assess these spillover risks. Given that the international regulatory community is considering establishing appropriate frameworks to regulate stablecoins, this study proposes two recommendations for regulators to consider: 1) Require issuers of asset-backed stablecoins to conduct standardized and regular disclosures of their reserve holdings, which would help regulators assess and compare their liquidity positions and potential liquidity mismatch risks, enabling more timely consideration of appropriate measures to mitigate spillover risks during market stress; 2) Strengthen liquidity management of asset-backed stablecoins, possibly through restrictions on the composition of reserve assets and requirements for clear redemption rights, which could also help reduce spillover risks.
