Just today, July 16, 2024, the Hong Kong Treasury Bureau recently pointed out that due to the importance of fiat stablecoins in the Web3 and virtual asset ecosystem, and the increasing connection between the traditional financial system and the virtual asset market, the Hong Kong SAR government needs to develop a regulatory system for fiat stablecoin issuers, which will adopt a risk-based and pragmatic approach. This system has three main requirements:
As for the stablecoin license, the Hong Kong Financial Services and Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA) jointly issued a consultation document on the "Legislative Proposal for Implementing a Regulatory System for Stablecoin Issuers" in December 2023 (it is likely to be used as a reference for the application requirements). The following is the main content of the document compiled by Aiying:
Unlicensed institutions are not allowed to issue legal currency stablecoins.
Non-designated licensed institutions are not allowed to provide purchasing services.
Power to adjust the scope of supervision: The authorities have the right to adjust the scope of regulated stablecoins and related activities according to market changes.
Transition arrangements: Existing stablecoin issuers will have a transition period to allow them to adapt to the new regulatory requirements.
2. Basic requirements for Hong Kong stablecoins
Reserve management and stabilization mechanism:
Full reserve support: Issuers must ensure that their stablecoins are backed by sufficient reserve assets to cope with all stablecoins in circulation.
Investment restrictions: Reserve assets must be of high quality and high liquidity to reduce risks.
Separation and custody: Reserve assets need to be kept separately from other assets and set up in separate accounts at licensed banks or other approved custodians.
Risk management: Issuers need to have sound policies and measures in place to ensure the safety of reserve assets and address the risk of large-scale redemptions.
Disclosure and reporting: Issuers must disclose to the public the total amount of stablecoins in circulation and details of reserve assets on a regular basis, and have them verified by independent auditors.
Prohibition of interest payments: Issuers may not pay interest from reserve assets to users.
Effective stabilization mechanism: Issuers must ensure the effectiveness of their stabilization mechanism, even if it is executed by a third party.
Redemption requirements: Users should have the right to redeem stablecoins at par, and redemptions must be processed within a reasonable time and without unreasonable fees.
Have a physical company and office in Hong Kong: The issuer must set up a registered office and management team in Hong Kong in order to be regulated.
Disclosure requirements: The issuer needs to publish a white paper to disclose company information, user rights and responsibilities, stability mechanism, etc. in detail.
Financial resource requirements: The issuer must have sufficient funds to ensure the stable operation of its stablecoin business, with a minimum paid-up share capital of HK$25 million or 2% of the par value of the circulating stablecoin.
Governance, knowledge and experience: The management of the issuer must have relevant knowledge and experience and be approved by the regulator.
Risk management regulations: Issuers need to develop comprehensive risk management measures, including data and system security, fraud monitoring and contingency plans.
Audit requirements: Issuers need to submit audit reports to regulators every year to ensure their compliance and operational robustness.
Anti-money laundering requirements: Issuers must take measures to prevent and combat money laundering and terrorist financing activities.
Restrictions on business activities: Without approval, issuers may not engage in other financial activities and can only carry out auxiliary activities related to the issuance of stablecoins.
III. Other licensing matters
Qualifications for applying for a license: All eligible entities can apply for a license and must go through a strict approval process.
Continuing licensing conditions: The regulator can set, modify or cancel license conditions to ensure continued compliance.
Issuing multiple stablecoins: Prior approval is required.
Open license: The license will remain valid as long as the issuer is compliant and the license has not been revoked.
Register of licensees and license fees: Issuers are required to display their license numbers in advertisements and software applications, and regulators will collect annual license fees.
Fourth, custody and purchase services
Custody services: Custody and purchase services for virtual assets require specific supervision.
Purchase services: Only licensed institutions can provide stablecoin purchase services in Hong Kong, and stablecoins of unlicensed issuers can only be sold to professional investors.
Hong Kong Stablecoin Sandbox Arrangement Participants and Policies
The Hong Kong Stablecoin Sandbox Arrangement was officially launched by the Hong Kong Monetary Authority (HKMA) on March 12, 2024. This arrangement was launched immediately after the previous "Legislative Proposal for the Implementation of a Regulatory Regime for Stablecoin Issuers" was released and the public consultation ended in February 2024. Current Participants At present, the main participants in the Hong Kong Stablecoin Sandbox program include some well-known financial and technology companies. According to Aiying's understanding, the following companies are participating in or planning to participate in this sandbox program:
Harvest Global Investment: This is a company with an asset management scale of more than US$200 billion.
RD Technologies: A company dedicated to financial technology innovation.
Venture Smart Financial Holdings: A comprehensive financial services company.
In addition, there are companies preparing to join the sandbox program, including those planning to issue stablecoins pegged to the Hong Kong dollar or other fiat currencies.
Sandbox Arrangement Policy The Stablecoin Issuer Sandbox Program launched by the Hong Kong Monetary Authority (HKMA) aims to provide a controlled environment for institutions that intend to issue fiat-pegged stablecoins in Hong Kong to test and develop their business. Below are the main policies and requirements of the sandbox program:
Purpose and objectives
Support the development of the virtual asset ecosystem: Through the sandbox program, HKMA hopes to promote the sustainable development of Hong Kong's virtual asset market.
Communicate regulatory expectations: HKMA communicates regulatory expectations and compliance guidelines with institutions that intend to issue stablecoins through the sandbox program.
Collect feedback: Collect feedback from participants through the sandbox program to ensure that the final regulatory system meets market needs.
Conditions for participation
Real interest and reasonable plan: Applicants must demonstrate their real interest in issuing fiat-pegged stablecoins and submit a specific business plan.
Controlled business scope: Sandbox participants need to conduct business within a controlled and limited scope to ensure that risks are controllable.
Application Procedure
Contact HKMA: Institutions interested in participating in the Sandbox Program should contact HKMA and submit their applications. HKMA will determine the processing time based on the complexity of the business plan and the adequacy of the information provided.
Announcement and Confidentiality: Applicants may not disclose their application status before successfully joining the Sandbox. After joining, participants must obtain the consent of HKMA before publishing relevant announcements.
Regulation and Compliance
No replacement for licensing procedures: Joining the sandbox program is not equivalent to obtaining regulatory approval. Participants still need to apply for a formal license separately after the sandbox test.
Adjusting sandbox requirements: HKMA may adjust the specific requirements of the sandbox program based on the suggestions of participants and the progress of testing.
Through this sandbox arrangement, HKMA can not only better understand market demand, but also ensure that the future regulatory framework is practical and risk-oriented, thereby promoting the healthy development of Hong Kong's stablecoin issuance business.
Market Reaction
OSL Chief Financial Officer Hu Zhenbang said that some of the more popular dollar-pegged stablecoins on the market, such as USDC and USDT, have been widely used around the world, especially in Southeast Asia, the Middle East and Africa, as a digital asset payment tool. However, the market has many questions about the issuers of these stablecoins, including their asset reserves, investment activities, solvency, and whether they can mint and redeem coins efficiently.
He believes that if stablecoin issuers accept Hong Kong supervision, they can effectively ensure their financial and market transparency, solvency and liquidity, and can connect to traditional financial institutions. These factors can provide protection for investors and promote the global application of these products.
Importance of Stablecoins
Deloitte China Digital Assets Hong Kong Managing Partner Lu Zhihong said that stablecoins are characterized by stable prices. Not only are they regarded as safe-haven assets by investors, they are also very important in the Web3 ecosystem. Stablecoins have become an important alternative tool in global transactions because they are fast, low-cost, operate 24/7, and have no "middlemen" in their blockchain technology. These advantages have led many institutions to choose to use stablecoins as a payment tool and regard them as an ideal choice for international remittances and cross-border transactions.
Lu Zhihong used an analogy, saying that stablecoins are like regulated casinos, where customers can exchange money for chips and can ensure that these chips can be exchanged for cash at any time. Without supervision, customers' chips may not be exchanged for cash, which will cause market chaos. Therefore, it is very correct for the SAR government to regulate in a risk-based and pragmatic manner, which can improve the transparency and security of the market, ensure that these digital assets remain pegged to legal tender, and ensure that issuers have sufficient reserves to meet investors' redemption needs to protect investors' interests.
Hong Kong's legal tender stablecoin regulatory system has not been fully implemented. According to the HKMA's plan, Hong Kong hopes to introduce clear regulatory guidelines by the end of 2024.
JinseFinance
Xu Lin
Edmund