On 31 January 2023, the Hong Kong Monetary Authority (HKMA) confirmed in its consultation conclusions (the Conclusions), the plan to regulate certain activities relating to stablecoins. The Conclusions follow the HKMA’s discussion paper on crypto-assets and stablecoins published in January 2022 and responses from 58 industry participants that were mostly supportive of a 'risk-based and agile' regulatory framework for stablecoins.
Stablecoins can be broadly defined to capture a wide range of crypto-assets that aim to maintain a stable value relative to a specified class of assets such as fiat currencies or commodities. Key points to note about the expected regulatory framework include the following:
- The HKMA will start with regulating stablecoins that are pegged to one or more fiat currencies (In-scope stablecoins) including the Hong Kong dollar, as they are more likely to be used in payments and linked to the traditional financial system, and therefore carry greater monetary and financial stability risks.
- In-scope stablecoins must be fully backed and redeemable at par within a reasonable period. Stablecoins that derive their value based on arbitrage or algorithm will not be accepted.
- Entities including those that conduct or actively market a regulated activity in Hong Kong, or conduct a regulated activity concerning stablecoins pegged to the Hong Kong dollar, will require a licence from the HKMA. The HKMA will also be empowered to require an entity to obtain a licence and become regulated having regard to matters of significant public interest.
- Key activities subject to compulsory licensing and to be regulated include issuance, governance, stabilisation and wallet services of In-scope stablecoins. The HKMA noted that these key activities are not intended to be exhaustive so there may be additional activities or elaborations set out at its next consultation on the more granular regulatory requirements.
- The framework will be comprehensive and entail regulatory requirements in areas such as ownership, governance and management, financial resources requirements, risk management, anti-money laundering and counter-terrorist financing, user protection and regular audits and disclosure requirements.
- The target implementation date of the regulatory framework is 2023/2024.
- The HKMA will further assess and work with other stakeholders in the Hong Kong SAR Government and local regulators to address any issues of regulatory overlaps or gaps.
The Conclusions represent another step forward in Hong Kong's cautious and incremental approach in regulating the broader virtual assets market. Steps already taken include the new regulatory regime for virtual asset service providers under the amended Anti-Money Laundering and Counter Terrorist Financing Ordinance (Cap. 615) (see our updates here and here) and what we have observed as a steady evolution of the regulatory landscape concerning digital assets since 2017 (see this Legal Update).
The vulnerabilities of the international virtual assets market highlighted recently by incidents concerning TerraUSD, Tether and FTX vindicates the efforts of the HKMA and the Securities and Futures Commission to steadily develop a safe and transparent environment to nurture the growth of the digital asset industry while safeguarding consumers' interests.
What to Expect Next
The HKMA will soon announce its next consultation on the more granular requirements of the regulatory regime which will feature in the draft legislation. In this process, the HKMA said it will draw reference from recommendations made by international regulatory bodies.