Algorithmic stablecoins “will not be accepted” in Hong Kong, the city’s top financial watchdog HKMA said in the new “Conclusion of Discussion Paper on Crypto-assets and Stablecoins” document. Further, the regulator said issuers would have to obtain a mandatory license to offer stablecoin services.

Stablecoin Issuers Must Obtain Mandatory License to Provide Services

Hong Kong is likely to ban algorithmic stablecoins in 2023, the city’s top financial regulator said Tuesday in its consultation to the discussion paper on cryptocurrencies and stablecoins. In addition, the regulator will require stablecoin issuers to obtain a mandatory license to continue providing their services.

“The value of the reserve assets of a stablecoin arrangement should meet the value of the outstanding stablecoins at all times,” the report said. “The reserve assets should be of high quality and high liquidity. Stablecoins that derive their value based on arbitrage or algorithm will not be accepted.”

– said the Hong Kong Monetary Authority (HKMA).

HKMA’s conclusion comes after the regulator received feedback on its discussion paper published in 2022. After receiving 58 responses, the HKMA said it would establish a framework to supervise stablecoins – digital assets whose value is pegged to other currencies.

In the document, the regulator said it would take a risk-based approach “in scoping in
stablecoin structures for regulation under the proposed regime.” The regulator will also prioritize regulating stablecoins pegged to one or more fiat currencies due to the severe and imminent risks these stablecoins pose. The regulator said it would oversee the governance, issuance, and stabilization of fiat-backed stablecoins. Their entities must maintain enough reserves to match the number of coins in circulation.

Tight Scrutiny of Stablecoin Continues

Stablecoins have been heavily investigated since 2021 when the issuer of USDT, Tether, revealed that most of its reserves consist of short-term unsecured debt. Similarly, algorithmic stablecoins have also come under intensified scrutiny since the collapse of TerraUSD and LUNA in May 2022.

These developments have forced major global economies, including the US, the UK, and Japan, to begin developing comprehensive regulatory frameworks. The UK government said last year it would amend several laws to bring stablecoins within its crypto regulatory framework.

Earlier today, USD-pegged algorithmic stablecoin Djed launched on the Cardano mainnet after a year of development. The stablecoin is over-collateralized by 400-800% with Cardano’s token ADA.

This article originally appeared on The Tokenist

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