This week, the Hong Kong Monetary Authority (HKMA) released a Consultation Conclusion which confirmed that it will establish a mandatory licensing regime for stablecoin activities by 2024, including requiring fully-backed reserves and redemption at par at all times.
The Consultation Conclusion follows a discussion paper on crypto-assets and stablecoins released over a year ago. The HKMA had received 58 submissions to the discussion paper, including from Ant Group's Alipay Financial Services, the Hong Kong arm of Tecent Holding's WeChat Pay, the world’s biggest crypto-exchange Binance, and Hong Kong-based blockchain gaming unicorn, Animoca Brands.
In the Consultation Conclusion, HKMA said it will take a "risk-based approach" in implementing stablecoin regulation. The regulator will first target stablecoins purportedly backed by one or more fiat currencies, as they pose "more imminent monetary and financial stability risks". But the HKMA also said flexibility will be built in to the regime to enable them to regulate other stablecoins in the future.
According to the HKMA's paper:
The mandatory licensing regime will cover key risks such as stablecoin governance, issuance, stabilization and reserve management, and stablecoin wallets.
Entities undertaking stablecoin activities in Hong Kong or actively marketing to Hong Kong will need to be licensed. Stablecoins that purport to reference the value of the HK dollar are also in scope.
A comprehensive regulatory framework will be developed on topics such as ownership, governance and management, financial resource requirements, risk management, anti-money laundering and counter-terrorist financing, user protection, and regular audits and disclosure requirements.
Full backing and redemption at par will be required at all times. Stablecoins that derive their value based on arbitrage and algorithm will not be accepted.
Regulated entities should not conduct activities that deviate from their principal business as permitted under their relevant licenses. For example, wallet operators should not engage in lending activities.
The HKMA said its target implementation date will be by 2023 or 2024. It is still weighing the pros and cons between introducing new legislation and amending existing laws for implementation of the regulatory regime.
The HKMA's paper follows several announcements by the Hong Kong government aimed at boosting its virtual asset sector, including a new licensing regime for virtual asset service providers (which will take effect in June) and plans to allow greater retail participation in cryptocurrencies. It appears that recent market turbulence following FTX's implosion hasn't stopped, but rather accelerated Hong Kong's plans to establish a broadly based regulatory regime for cryptocurrency and digital assets.
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