Introduction
The Hong Kong Monetary Authority (the “HKMA”) has issued a Discussion Paper on Crypto-assets and Stablecoins in January 2022 (the “Discussion Paper”). The Discussion Paper includes some principles of a contemplated regulatory regime for payment-related stablecoins, and an invitation to stakeholders to provide feedback on the direction and scope of the new regime by 31 March 2022.
Existing regulations
In 2019, the Securities and Futures Commission launched a voluntary licensing regime for platforms which allows for the trading of virtual assets or tokens which are “securities” (as defined in the Securities and Futures Ordinance) to be licensed. This is an opt-in regime rather than a mandatory licensing regime. Furthermore, stablecoins and other crypto-assets which do not fall under the definition of “securities” are not subject to licensing.
In 2021, the Financial Services and Treasury Bureau issued consultation conclusions on the introduction of a regulatory regime for persons who operate virtual asset exchanges. In its initial stage, the regime only applies to the operation of virtual asset exchanges, but not other virtual asset activities conducted outside these exchanges.
The Payment Systems and Stored Value Facilities Ordinance (“PSSVFO”) created a licensing regime for stored value facilities such as pre-paid cards and e-wallets. However, in practice, many types of stablecoins do not fall under the definition of “stored value facility”. For example, where there is no undertaking by the issuer to use the stablecoin as a means of payment to third parties, such stablecoin will not be regulated under the PSSVFO, even if it operates in a manner similar to that of a regulated “stored value facility”.
Proposed regime
Recognizing the growing adoption and rapid evolvement of crypto-assets and the gaps in existing regulations, the HKMA proposed in the Discussion Paper the introduction of a new regulatory framework for payment-related stablecoins which are asset-linked, for example those which are pegged to fiat currencies (e.g. USD), commodities (e.g. gold) or other financial assets, as opposed to algorithm-based stablecoins, for example those which maintain the value via protocols that provide for changes in the supply of stablecoins in response to changes in demand. It indicated that it believes the initial focus should be on this kind of stablecoins as they are the more prevalent in the Hong Kong market and have a higher potential of being incorporated into the mainstream financial system.
According to the Discussion Paper, under the new regime, certain activities relating to payment-related stablecoins will be regarded as regulated activities. For the time being, the list of regulated activities proposed by the HKMA is as follows:
a) issuing, creating or destroying stablecoins
b) managing reserve assets to ensure stabilisation of the stablecoin value
c) validating transactions and records
d) storing the private keys providing access to stablecoins
e) facilitating the redemption of stablecoins
f) transmission of funds
g) executing transactions in stablecoins
Similar to the existing regulated activity licensing regime under the Securities and Futures Ordinance, any person who carries out a regulated activity or actively market to the public of Hong Kong any regulated activity will be required to be licensed by the HKMA.
In order to be licensed, such persons must satisfy certain requirements, such as maintaining adequate financial resources, having controllers and directors that are fit and proper, and ensuring the stabilisation mechanism is effective and reliable.
Timeline
The HKMA invites stakeholders to provide feedback on its proposal on the new regime by 31 March 2022. The HKMA aims to introduce the new regulatory regime no later than 2023/24.
Authored by: Mark Parsons, Katherine Tsang.
