The results of the Hong Kong Stablecoin Consultation are out: Understand the regulatory requirements and industry evaluation in one article

On July 17 , a blockbuster news detonated the Hong Kong cryptocurrency market - the Hong Kong Financial Services and the Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA) jointly issued a consultation summary on legislative proposals for implementing a regulatory system for issuers of fiat stablecoins in Hong Kong.

The author understands that the two-month public consultation was completed in February this year. During the consultation period, the Hong Kong regulatory authorities received a total of 108 submissions from market participants, industry organizations, chambers of commerce and professional groups and other stakeholders. With the increasing popularity and continued development of virtual assets, the vast majority of respondents agree that it is necessary to introduce a regulatory system for issuers of fiat stablecoins to properly manage potential monetary and financial stability risks and provide transparent and appropriate regulations. Respondents generally support the proposed regulatory requirements and implementation arrangements, and also put forward optimization suggestions in written opinions.

Hong Kong Treasury Secretary Paul Hui said that in addition to the current regulatory system for virtual asset trading platforms, the establishment of a licensing system for issuers of fiat currency stablecoins will strengthen Hong Kong's virtual asset regulatory framework, align with international standards, and effectively mitigate the risks posed to financial stability by activities related to the issuance of fiat currency stablecoins, while Hong Kong Monetary Authority Chief Executive Eddie Yue believes that a good regulatory environment will help promote the sustainable and responsible development of Hong Kong's stablecoin ecosystem. The Treasury and the HKMA will finalize legislative proposals to implement the regulatory system in response to the opinions and suggestions of the respondents, and will submit a draft bill to the Legislative Council as soon as possible.

So, what are Hong Kong’s specific requirements for stablecoin regulation?

The Hong Kong Treasury Department stated that in view of the important role of legal currency stablecoins in the Web3 and virtual asset ecosystem, and the increasingly close connection between the traditional financial system and the virtual asset market, the SAR government needs to establish a regulatory system for legal currency stablecoin issuers and conduct supervision in a risk-based and pragmatic manner. The three main requirements include:

1. Reserve management and stabilization mechanisms (e.g. requiring issuers to ensure that fiat stablecoins are fully backed by high-quality and highly liquid reserve assets);

2. Redemption request;

3. Regulatory requirements such as governance, knowledge and experience.

Next, let me explain to you one by one from three aspects: risk management, regulatory scope and licensing system.

Risk Management: The Hong Kong Treasury Department and the HKMA believe that both single-currency and multi-currency fiat stablecoins are linked to the traditional financial system and both may pose risks to financial stability. Other major international financial markets and regulators generally agree with this view. Therefore, we believe it is necessary to include all fiat stablecoins in the proposed regulatory regime. For fiat stablecoins that reference multiple currencies, requirements commensurate with the complexity of the business operations of the fiat stablecoin issuers will be formulated to ensure that the issuers can adequately address the relevant risks. For example, such issuers need to consider whether there is a supply of high-quality and highly liquid assets in the relevant currencies and demonstrate the ability to properly manage reserve assets denominated in multiple currencies, but there is no intention to stipulate the range of reference currencies for fiat stablecoins under the regulatory regime.

Regulatory scope: In addition, the Hong Kong Treasury Bureau and the HKMA also stated that they will retain the proposal to regulate fiat currency stablecoins because, compared with other types of stablecoins (such as stablecoins that maintain a relatively stable value with commodities or precious metals), fiat currency stablecoins are more likely to develop into a generally accepted payment method, and therefore pose a higher and more urgent risk to monetary and financial stability. Given that virtual assets are still in their infancy and the market environment is constantly evolving, it is also intended to give regulators the flexibility to expand the scope of regulated stablecoins, while closely monitoring market developments and adjusting the regulatory scope of stablecoins as needed.

Licensing system: The Hong Kong Treasury and the HKMA pointed out that fiat stablecoin licensees have the responsibility to maintain a sound stability mechanism for the fiat stablecoins they issue, and the proper management and custody of reserve assets are key. In the license application evaluation process, one of the links is that the HKMA will review the way the applicant manages reserve assets, but it does not currently believe that there is a need to establish a separate licensing system for such activities. From the perspective of risk management and user protection, the storage of private keys and the provision of wallet services in different usage scenarios are important. The government and financial regulators are exploring the regulatory model adopted for these activities and will keep in touch with the public and relevant stakeholders in the process.

In fact, some analysts believe that only licensed fiat stablecoin issuers, banks, licensed corporations, and licensed virtual asset trading platforms can sell fiat stablecoins in Hong Kong or actively promote related services to the Hong Kong public. There will also be corresponding transitional arrangements for the proposed regulatory regime for existing stablecoin issuers. The Hong Kong Treasury Department also hopes that an appropriate regulatory regime for fiat stablecoin issuers that complies with international regulatory recommendations can provide users with sufficient protection to deal with potential risks to monetary and financial stability, allowing Hong Kong's virtual asset ecosystem to develop sustainably and responsibly.

How has the industry responded?

According to the author, OSL CFO Hu Zhenbang said that some of the most popular dollar-pegged stablecoins on the market, including USDC and USDT , have been widely used as a digital asset payment tool around the world, especially in Southeast Asia, the Middle East and Africa. However, the market has many questions about its issuers, and many users are concerned about the asset reserves, investment activities, solvency, and whether the stablecoin issuers can mint and redeem in an efficient manner.

If stablecoin issuers are subject to supervision by Hong Kong regulatory authorities, they can effectively ensure the issuers' financial and market transparency, solvency and liquidity, and can connect with traditional financial institutions. These elements provide protection for investors and promote the global application of products.

Lu Zhihong, managing partner of Deloitte China Digital Assets Hong Kong, said that the characteristic of stablecoins is price stability. In addition to being viewed as a safe-haven asset by investors, stablecoins are also very important in the Web3 ecosystem. Stablecoins have become an important alternative tool in global transactions because they have fast transaction speeds, low costs, and are available " 24/7 ". In addition, there is no "middleman" in their blockchain functions. Therefore, many institutions use stablecoins as a payment tool and regard them as an ideal choice for international remittances and cross-border transactions.

Lui Chi-hung made an analogy, just like a regulated casino, customers can go to the casino to exchange funds for chips, and at the same time they can ensure that their chips can be exchanged for cash at any time, but if there are some unregulated casinos, customers' chips cannot be exchanged for cash, which will cause chaos in the market. The SAR government is right to regulate in a risk-based and pragmatic way, because it can improve the clarity and security of the market, ensure that these digital assets remain pegged to legal currencies, and ensure that issuers have sufficient reserves to cope with investor redemptions to protect the interests of investors.

Summarize

The importance of regulated stablecoins is self-evident. Although stablecoins are very important for the development of virtual assets in Hong Kong, it would be counterproductive if they were promoted too hastily, because the lack of clear regulation would create uncertainty and could hinder potential users. The Hong Kong SAR Government is right to regulate in a risk-based and pragmatic manner, as it can improve market clarity and security.

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