The Hong Kong Monetary Authority (HKMA) has announced the conclusions of its public consultation on its proposed regulatory regime for fiat-referenced stablecoins, and the participants in its stablecoin sandbox program.
The consultation began in February 2024 and lasted two months, receiving some 108 submissions. The conclusions will form the foundations of draft stablecoin regulations, which the Financial Services and Treasury Bureau plan to introduce to the Legislative Council later in 2024.
Some noteworthy features of the Consultation Conclusions are outlined below:
Stablecoin issuers must obtain licence
The proposed legislation will require stablecoin issuers to apply for and obtain a licence from the HKMA if they issue stablecoins in Hong Kong, reference the Hong Kong dollar, or ‘actively market’ to Hong Kong users. Any unlicenced issuer can only offer stablecoins to professional investors.
No interest payable
Stablecoins cannot pay interest to holders directly or through arrangements with third parties. However, stablecoin issuers are allowed to offer marketing incentives, so long as they do not relate to the amount of stablecoins held and the duration over which the user holds the balance.
Stablecoins must be fully backed by reserve assets
Stablecoins must be fully backed by reserve assets ‘at any given point in time’, and issuers must publish monthly confirmations of those assets by an independent auditor.
Reserve assets must be of ‘high quality’ and ‘highly liquid’. The HKMA identified the following assets as being suited to this purpose in particular:
Cash
Bank deposits
Overnight reverse repo agreements with minimal counterparty risk and the same quality backing
Marketable securities issued by governments, central banks or qualified international organisations with high credit quality
Tokenised versions of the above assets
Generally, the reserve assets must match the stablecoin’s currency unless prior HKMA approval is obtained.
Issuers must hold sufficient capital
The Consultation Conclusions recommend that licenced stablecoin issuers be required to hold the greater of 1% of the stablecoin issuance, or HKD25 million (A$4.8 million), in capital. This was reduced from 2% in an earlier legislative proposal.
Local subsidiary required
Overseas issuers who wish to offer stablecoins in Hong Kong are required to establish a local subsidiary with key personnel based in the city. Some have expressed concerns that this would deter participation by global issuers. The HKMA may consider regulatory cooperation in order to enable cross-border offerings in future.
The Stablecoin sandbox continues
In March 2024, the HKMA announced a sandbox arrangement giving industry players the opportunity to test stablecoin products in a risk-controlled environment. This arrangement also gave HKMA real-world feedback on its regulatory proposals. On 18 July 2024, the HKMA announced the list of participants in that sandbox, which includes JINGDONG Coinlink, RD InnoTech and Standard Chartered Bank, Animoca Brands and HKT.
It is expected that the sandbox arrangement will result in further refinements of the proposed regulations ahead of their introduction into the Legislative Council.
Written by A Lee, J Huang & S Pettigrove
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