The Crypto Council told Hong Kong.

The Crypto Council for Innovation (CCI) has commented on the proposed stablecoin regulatory regime in Hong Kong on the last day of the comment period. The advocacy group's five-page letter contained sharp criticism of the proposed backup and operational requirements and a lively defense of algorithmic stablecoins that Hong Kong authorities have blacked out.

The Hong Kong Monetary Authority (HKMA) and the Financial Services and Treasury Bureau (FSTB) issued a consultation paper on 27 December. The proposed regulatory framework foresees the approval of stable coin issuers with an office in Hong Kong and the presence of a senior manager and “in” at least equivalent to a fair value.

“We appreciate the FSTB and HKMA taking important first steps to create a regulatory framework,” the CCI wrote. However, he noted potential problems ahead. Reserve requirements can be “overburdened” if they duplicate requirements in other countries, the CCI wrote, and:

Given the global nature of many cryptocurrency businesses, ensuring the physical presence of senior management and key personnel in Hong Kong can be challenging.

The CCI suggested a risk-based approach to requirements and a “proportional framework” aligned with other jurisdictions to allow issuers to operate in Hong Kong, similar to Japan, where issuers from other countries' licenses are recognized after review.

Much of the CCI letter was taken from the discussion of algorithmically stable coins. The idea is to treat all stablecoins equally;

“The issuer of the FRS [fiat-referenced stablecoin] Value derived from an arbitrage or algorithm falls within the scope of the regulatory regime, but such an issuer is unlikely to meet the purported licensing requirement.

An algorithm cannot meet the reserve requirements of a stable coin, the documents said.

Algorithmic stablecoins suffered a black eye after the collapse of the Terra/LUNA ecosystem, but CCI was bullish on them. “CCI would like to respectfully highlight stablecoin as an important innovation category with its own narrow lines of protection and algorithmic compliance with related criteria,” he wrote.

Not all algorithmic stablecoins are equal, CCI said. However, an over-linked stablecoin with external collateral improves the efficiency of decentralized finance with “real-time auditing and automated verification systems”. To reject such innovation would be self-defeating.

The benefits of algorithmic stablecoins are proportional to the degree of decentralization, the CCI said, and recommended that the HKMA and FSTB develop “decentralization standards” for them.

CCI also talked about finding stablecoins tied to cryptocurrencies. Coins such as Dai (DAI), RAI and LUSD, backed by Bitcoin (BTC) and Ether (ETH) have not been affected by the recent market crash.

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