The Hong Kong Monetary Authority released a research report titled “Assessing Volatility Spillover from Cryptocurrencies to Traditional Financial Assets: The Role of Asset-Backed Stablecoins.”
Asset-backed stablecoins play a key role in the crypto ecosystem as they provide stable value backed by traditional financial assets, the report said. However, these stablecoins have similar liquidity mismatch risks to money market funds, which could expose them to fire sales of reserve assets when the crypto ecosystem is unstable, thereby increasing the volatility of these reserve assets.
In extreme cases, the failure of stablecoins or other cryptoassets could lead to mass redemptions of asset-backed stablecoins and fire sales of their reserve assets, with potentially significant repercussions for traditional financial systems.
As the crypto ecosystem continues to expand and become more exposed to the financial sector, the link between cryptocurrencies and traditional financial assets may become stronger, potentially increasing the risk spillovers discussed above, the report said.
Importantly, the crypto ecosystem remains largely outside the reach of regulators, with large data gaps hindering their assessment of spillover risks.