In January 2022, the Hong Kong Monetary Authority (the "HKMA") issued a Discussion Paper on Crypto-assets and Stablecoins ("Discussion Paper"), inviting industry comments on the regulatory approach of crypto-assets, in particular payment-related stablecoins. You may refer to our publication in January 2022 Hong Kong Monetary Authority to regulate stablecoins here.
On 31 January 2023, the HKMA issued its consultation conclusions on the Discussion Paper, summarising the feedback received from the industry and the HKMA's proposed regulatory regime.
The majority of the respondents to the Discussion Paper agreed with regulating stablecoins on a risk-based approach. There was also a broad consensus that the regulatory regime should be in line with global standards and practices. It is noteworthy that the proposed regulatory regime will not support algorithmic stablecoins, reflecting the Hong Kong government’s incremental approach to regulating crypto assets.
Proposed regulatory regime
As a priority, the HKMA will launch a licensing regime to regulate stablecoins that purport to reference to fiat currencies as they possess greater and more imminent monetary and financial stability risks than other types of stablecoins. The regulatory regime may extend to cover other stablecoin arrangements and stablecoin-related financial activities as necessary in the future.
The scope of the licensing regime will cover key activities in connection with stablecoins, including the establishment and maintenance of rules governing stablecoin issuance, creation and destroying of in-scope stablecoins, stabilisation and reserve management as well as wallet services ("Regulated Activities").
The licensing regime will be triggered when a person:
- conducts a Regulated Activity in Hong Kong;
- actively markets a regulated activity to the public of Hong Kong (it will be interesting to see whether “active marketing” will be defined in the legislation, or whether similar to the licensing regime under the Securities and Futures Ordinance, market players will have to rely on guidance issued by the HKMA); or
- conducts a Regulated Activity which concerns a stablecoin that purports to reference to the value of Hong Kong dollar.
The regime will also apply where, in the opinion of the HKMA, the conduct or activity in question should be regulated as matter of significant public interest.
Key regulatory principles
The HKMA will adopt a risk-based approach in formulating the regulatory framework. There will be separate licensing requirements for each type of Regulated Activity, and the requirements will be proportionate to the risks posed by the relevant activity.
The HKMA considers the following principles as essential elements of the regulatory regime:
- Comprehensive regulatory framework: The regulatory framework shall be comprehensive, covering a wide range of issues including but not limited to ownership, governance and management, financial resources requirement, risk management, anti-money laundering and counter-terrorist financing, user protection and regular audits and disclosure requirements.
- Full backing and redemption at par: At any given time, the value of a stablecoin shall be fully backed by reserve assets. Such reserve assets shall also be of high quality and high liquidity. Stablecoins that derive their value based on arbitrage or algorithms will be not accepted by the HKMA. Further, stablecoin holders shall be able to redeem the stablecoins into the referenced fiat currency at par within a reasonable period.
- Principal business restriction: Licensed entities will be restricted from deviating from their principal business under their relevant licence, except for authorised institutions.
The HKMA aims to implement the regulatory regime by 2023/24. In the meantime, the HKMA will further consult the industry and monitor market developments in order to formulate the details of the regulatory requirements. The legislative approach to implement the licensing regime, whether by way of amending existing legislations or introducing a new legislation, is also yet to be decided.
Authored by Mark Parsons, and Katherine Tsang.