Hong Kong's latest proposed stablecoin regulation plan is released: a quick overview of the key contents

What will Hong Kong regulate? Which entities will be regulated? What is the next step?

The Hong Kong Monetary Authority today released a 36-page "Conclusions of the Discussion Paper on Crypto-Assets and Stablecoins", which roughly outlines the parameters of the proposed regulatory scheme based on feedback from previous discussion papers. Priority will be given to regulating stablecoins that reference legal tender and may be used for payment, and detailed introductions to regulatory activities, target implementation time, licenses, regulatory principles, etc.

Some of the main regulatory requirements include that stablecoins should be fully backed and redeemable at par, that reserve assets should be highly liquid, and that stablecoins that gain value based on arbitrage or algorithms will not be accepted. Stablecoin holders should be able to redeem stablecoins at par for reference fiat currencies within a reasonable period of time. In addition, regulated entities should not engage in activities that are different from the main business permitted by their relevant licenses, for example, wallet operators should not engage in lending activities.

Key information at a glance

1. On January 12, 2022, the Hong Kong Monetary Authority published a discussion paper on crypto assets and stablecoins and invited stakeholders to provide feedback. The discussion paper outlines the HKMA's idea of ​​prioritizing the development of a regulatory framework for payment-related stablecoins, believing that such stablecoins may have the potential to develop into a widely accepted payment method while also providing institutional flexibility.

Second, the crypto asset market has continued to develop since then. However, it is worth noting that the stablecoin market experienced significant volatility and adjustments in May 2022 after the TerraUSD crash. There have also been some cryptocurrency exchanges that have fallen into trouble and crisis, such as the FTX crash in November 2022. Against this backdrop, authorities have called for more comprehensive regulation of stablecoins to address the financial stability risks that stablecoins may pose. International regulators, international standard-setting bodies (SSBs), and some major jurisdictions have put forward more specific policy recommendations and regulatory measures or proposals for stablecoins.

3. More and more major jurisdictions are prioritizing the regulation of stablecoins that claim to reference fiat currencies, as regulators believe that such stablecoins are more likely to be used for payments and are linked to the traditional financial system, and are more likely to pose more pressing monetary and financial stability risks than other types of stablecoins or crypto assets. Major jurisdictions also note the importance of building appropriate flexibility into the regulatory system to adjust the scope of regulation to respond to rapidly changing markets and international regulatory developments.

IV. As of the end of the feedback period on March 31, 2022, the MAS received a total of 58 comments. Respondents generally expressed support for the MAS's proposal to bring stablecoins under its regulatory scope. Taking into account the latest international recommendations and the feedback received, the MAS will further work on establishing a regulatory regime. The proposed key parameters of the relevant regime are summarized as follows:

What to regulate?

Key activities related to stablecoins will be subject to a compulsory licensing regime. Specifically, the MAS will adopt a risk-based (index) approach to determine the scope of stablecoin structures to be regulated under the proposed regime. Given that stablecoins may pose higher and more pressing monetary and financial stability risks, the MAS will prioritize the regulation of stablecoins that claim to reference one or more fiat currencies. The authority will then build in flexibility to regulate other stablecoin structures in the future.

What are the main activities regulated?

• Governance : Establish and maintain rules for managing in-scope stablecoins (in-scope, meaning stablecoins that reference fiat currencies and may be used for payments);

• Issuance : issuing, creating or destroying relevant stablecoins;

• Stability : the stability and reserve management arrangements of the relevant stablecoin (whether or not provided by the issuer);

• Wallet : Provides services that allow storage of user cryptographic keys (allowing users to access and manage such stablecoins).

Which entities require a HKMA licence?

• Carrying out regulated activities in Hong Kong;

• Actively market regulated activities to the Hong Kong public;

• Carrying out regulated activities involving stablecoins that purport to reference the value of the Hong Kong dollar;

• Matters involving significant public interest (which the authorities believe should be regulated as such).

Key regulatory principles

Comprehensive regulatory framework : Appropriate regulatory requirements will be in place in the areas of ownership, governance and management, financial resource requirements, risk management, anti-money laundering and counter-terrorist financing (AML/CFT), user protection and regular audit and disclosure requirements.

Stablecoins should be fully backed and redeemable at par : The value of the stablecoin's reserve assets should always match the value of outstanding stablecoins. Reserve assets should be of high quality and high liquidity. Stablecoins that derive value based on arbitrage or algorithms will not be accepted. Stablecoin holders should be able to redeem stablecoins at par for reference fiat currencies within a reasonable period of time.

Restriction on main business : Regulated entities are not allowed to engage in activities that are different from the main business permitted by their relevant licenses. For example, wallet operators should not engage in lending activities.

Target implementation date: 2023/2024

Legislative approach : The MAS is weighing the pros and cons of introducing new legislation and amending existing laws to implement the regulatory regime.

5. The HKMA will conduct more detailed consultations in due course and provide further details on the regulatory regime.

6. Regarding the broader crypto-asset sector, in accordance with the Policy Statement on the Development of Virtual Assets in Hong Kong issued by the Hong Kong SAR Government on October 31, 2022, the HKMA will continue to engage in ongoing discussions with the Hong Kong SAR Government and other stakeholders in financial regulators, and actively participate in relevant international forums. The HKMA supports financial innovation and encourages institutions to explore the potential of distributed ledger technology (DLT) to support the development of Hong Kong's virtual asset ecosystem.

7. The HKMA pointed out that the proposed regulatory activities of the above-mentioned stablecoin regime may overlap or intersect with other financial regulatory regimes in Hong Kong, such as the licensing regime for virtual asset service providers (VASPs) which is managed by the Securities and Futures Commission (SFC). The HKMA will conduct further assessments and continue to work with other stakeholders of the Hong Kong Special Administrative Region Government, local financial regulators, etc. in formulating the details of the regime to avoid regulatory arbitrage and address duplication of supervision or regulatory gaps, and mitigate the risks arising from different activities.

Next steps

1. The HKMA stated that after reaching broad consensus on the proposed regulatory scheme, the HKMA intends to develop a flexible, risk-based (index) regulatory regime for stablecoins. This will help ensure monetary and financial stability, protect users, and minimize regulatory arbitrage risks.

2. The HKMA will consider the responses received and make reference to relevant international discussions in formulating the details of the regulatory regime. It will also continue to monitor market developments, engage with the industry and collaborate with other stakeholders in the Hong Kong SAR Government and other financial regulators.

3. More detailed consultations will be held in due course to provide more detailed information on the regulatory regime with a view to finalizing the main parameters that the draft legislation will cover. In addition, the MAS will conduct further assessments on certain issues, such as whether to introduce new legislation or amend existing laws to implement the proposed regulatory regime, how to minimize possible duplication of supervision, how to deal with the risks of multiple or bundled financial services that may be provided by related entities, and local registration requirements.

Fourth, the MAS will also work closely with other stakeholders to implement the regulatory regime through appropriate legislative activities. It is envisaged that the draft legislation will clarify key issues such as (i) defining the structures and activities that will be regulated or unregulated under the legislation ; (ii) the scope of powers that the MAS should be granted to implement supervision, taking into account both supervisory effectiveness and proportionality); (iii) key supervisory requirements; (iv) the scope of powers that should be granted to the authority (and the relevant framework) so that the regulatory regime can be updated in a timely manner to cover additional structures or activities; and (v) relevant guiding factors that the authority should consider when exercising the powers related to point (iv) above.