Hong Kong Stablecoin Consultation Results Released: Understand Regulatory Requirements in One Article

On July 17, a blockbuster news set off 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 the legislative proposal to implement a regulatory regime 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 continuous development of virtual assets, the vast majority of respondents agreed that there is a need to introduce a regulatory regime for issuers of fiat stablecoins to properly manage potential monetary and financial stability risks and provide transparent and appropriate regulations. Respondents generally supported the proposed regulatory requirements and implementation arrangements, and also put forward optimization suggestions in their written opinions.

Hong Kong Treasury Secretary Paul Chan said that in addition to the current regulatory system for virtual asset trading platforms, the establishment of a licensing system for fiat stablecoin issuers 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 stablecoins. Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, 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 the specific requirements for stablecoin regulation in Hong Kong?

Hong Kong's Treasury Department said that in view of the important role of fiat stablecoins in the Web3 and virtual asset ecosystems, as well as the increasingly close connection between the traditional financial system and the virtual asset market, the SAR government needs to establish a regulatory system for fiat stablecoin issuers to regulate in a risk-based and pragmatic manner. The three main requirements include:

1, reserve management and stabilization mechanism (for example, requiring issuers to ensure that fiat stablecoins are fully backed by high-quality and highly liquid reserve assets);

2, redemption requirements;

3, governance, knowledge and experience and other regulatory requirements.

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

Risk Management:The Hong Kong Treasury and the HKMA believe that both single-currency and multi-currency fiat stablecoins are related 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 system. For fiat stablecoins that reference multiple currencies, requirements commensurate with the complexity of the fiat stablecoin issuer's business operations will be formulated to ensure that the issuer can adequately address the relevant risks. For example, such issuers need to consider whether they have a supply of high-quality and highly liquid assets in the relevant currencies and demonstrate their ability to properly manage reserve assets denominated in multiple currencies, but there is no intention to stipulate the reference currency range of fiat stablecoins under the regulatory system.

Regulatory scope:In addition, the Hong Kong Treasury Bureau and the HKMA also stated that they will retain the proposal to regulate fiat stablecoins because, compared with other types of stablecoins (such as stablecoins that maintain a relatively stable value with commodities or precious metals), fiat stablecoins have a greater chance of developing 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 the fiat stablecoin licensee has the responsibility to maintain a sound stability mechanism for the fiat stablecoin it issues, and the proper management and custody of reserve assets is the key. In the license application assessment 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 system for existing stablecoin issuers. The Hong Kong Treasury Department also hopes that the regulatory system for issuers of legal currency stablecoins that is appropriate and in line with international regulatory recommendations can provide users with sufficient protection to deal with potential risks to monetary and financial stability, so that Hong Kong's virtual asset ecosystem can develop sustainably and responsibly.

What is the industry's response?

According to the author's understanding, OSL Chief Financial Officer Hu Zhenbang said that some of the most popular dollar-pegged stablecoins on the market, including USDC, USDT, etc., 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 the stablecoin issuers are supervised by Hong Kong regulators, 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.

Deloitte China Digital Assets Hong Kong Managing Partner Lu Zhihong said that the characteristic of stablecoins is price stability. In addition to investors viewing them as safe-haven assets, stablecoins are also very important in the Web3 ecosystem. Stablecoins have become an important alternative tool in global transactions because they are fast, low-cost, and available "24/7", and there is no "middleman" in their blockchain functions. Therefore, many institutions will use stablecoins as payment tools and regard them as ideal for international remittances and cross-border transactions.

Lu Zhihong 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. However, 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 market clarity and security, ensure that these digital assets remain pegged to legal tender, and ensure that issuers have sufficient reserves to cope with investor redemptions to protect investors' interests.

Conclusion

The importance of regulated stablecoins is self-evident. Although stablecoins are very important for the development of virtual assets in Hong Kong, if they are promoted too hastily, they will have a counterproductive effect, because the lack of clear supervision will create uncertainty and may hinder potential users. The Hong Kong SAR government is right to regulate in a risk-based and pragmatic way, because it can improve market clarity and security.

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