Hong Kong Monetary Authority (HKMA) assessed the situation and found that the instabilities of crypto assets, including asset-backed stablecoins, can potentially spill over to the traditional financial system. "The growing size of asset-backed stablecoins, together with their inherent risks, could make asset-backed stablecoins a potential magnifier of the volatility spillover from crypto to traditional financial assets."
According to Hong Kong’s central bank, the interconnection of crypto assets has made the crypto ecosystem more vulnerable to systematic shocks. In addition, the increase in crypto exposure from financial institutions can be subject to knock-off effects from abrupt developments in cryptocurrency prices.
The flowchart shared by HKMA suggests that fluctuations in the price of asset-backed stablecoins could result in reserve adjustment by stablecoins. This is mainly driven by the assumption that the demand and supply of stablecoins can trigger volatility in their price.
Policy and Regulation
Stablecoins
