New Stablecoins Regulations in Hong Kong 2023/ 2024

On the last day of January 2023, the Hong Kong Monetary Authority (“HKMA”) published the Conclusion of Discussion Paper on Crypto-assets and Stablecoins, summarising their responses to its consultation held last year (available here). Importantly, the HKMA proposes to impose a new regulatory regime for stablecoins by 2023/24.

What are the In-scope Stablecoins?

Stablecoin generally refers to a crypto-asset that aims to maintain a stable value relative to a specified asset, or a pool or basket of assets. Some widely-used stablecoins in the market include Tether (USDT), USD Coin (USDC) and Binance USD (BUSD).

The HKMA proposes that, at the initial stage, key regulated activities relating to stablecoins that purport to reference to one or more fiat currencies (“In-scope Stablecoins”) will be subject to a mandatory licensing regime. This is regardless of whether the coin is predominately used for retail, wholesale, or crypto-transactions.

Certain arrangements will be excluded from the proposed licensing regime, for example, those already being subject to another financial regulatory regime, or used within a well-confined environment outside the reach of the general public. The HKMA will conduct further analysis and additional consultation in this regard. For instance, it is expected that the treatment for central bank digital currencies (CBDC) will be further clarified.

What are the new regulated activities?

Initially, the key regulated activities include:

• Issuance – issuing, creation or destroying of In-scope Stablecoins;
• Wallets – provision of services that allow the storage of users’ cryptographic keys which enable access to the users’ holdings of an In-scope Stablecoin and the management of such stablecoins;
• Stabilisation – stabilisation and reserve management arrangements of an In-scope Stablecoin; and
• Governance – establishment and maintenance of the rules governing an In-scope Stablecoin arrangement.

As the HKMA is inclined to regulate each type of regulated activity with a different type of licence, a stablecoin arrangement that involves multiple regulated activities will require multiple licences.

Who will need to be licensed?

Both banks and non-banks may need to be licensed. An entity should be licensed if:

• it conducts a regulated activity in Hong Kong;
• it actively markets a regulated activity to the public of Hong Kong (and this may apply to overseas entities actively marketing to Hong Kong public);
• it conducts a regulated activity which concerns a stablecoin that purports to reference to the value of the Hong Kong dollar; or
• the authority considers it should be regulated having regard to matters of significant public interest.

What are the key regulatory principles?

A licensee will be subject to regulatory requirements consistent with the following key principles:

• Comprehensive framework – the regulatory requirements will cover issues including ownership, governance and management, financial resources requirements, risk management, AML/CFT, user protection, and regular audits and disclosure requirements;
• Full backing and redemption at par, algorithmic stablecoins are not allowed – at all times, the amount of reserve assets should be adequate to meet the value of the outstanding stablecoins. The reserve assets will be subject to quality and liquidity requirements. Stablecoins should be redeemable in the referenced fiat currency at face value within a reasonable period. Note that, licensees are not allowed to carry out regulated activities relating to stablecoins that derive their value based on arbitrage or algorithm; and
• Principal business restriction: Except for authorised banks, the regulated entities should only carry out its principal business as permitted under the relevant licence.

When will the regime be implemented?

The HKMA targets to implement the new regulatory regime by 2023/24. The HKMA is considering whether to introduce a new legislation or amend existing laws for implementation of the proposed regime.

What are the expected future developments?

With the virtual asset service provider (VASP) licensing regime coming into effect in June 2023 (see our previous article here), and the HKMA’s latest announcement of the proposed regulatory regime for stablecoins, it is telling that the regulators in Hong Kong are determined to push forward the regulation of virtual assets at full speed. The market is expecting more detailed consultation with more granular information about the stablecoin regulatory regime to be conducted in due course.

The HKMA has indicated that it will continue to monitor the interconnectedness between other crypto-assets and the mainstream financial system and consider whether other crypto-assets may be regulated.