As the world continues to embrace digital currencies and blockchain technology, governments and financial institutions are adapting their regulatory frameworks to accommodate these emerging assets. In the case of Hong Kong, a new stablecoin licensing regime is set to be implemented by 2024.
Hong Kong has long been a prominent global financial hub, and its regulators have been closely monitoring the rapid growth of cryptocurrencies. The need for a robust regulatory framework for stablecoins has become increasingly apparent due to their potential impact on financial stability, consumer protection, and money laundering risks. The Hong Kong Monetary Authority (HKMA) aims to address these concerns and create a secure and transparent environment for stablecoin operations.
In this sense, Christopher Hui Ching-yu, Secretary for Financial Services and the Treasury, said that the city “will continue to seek a holistic and predictable regulatory approach towards digital assets by following the principle of “similar risk, similar regulation”, which describes the need for rules to regulate the crypto space similar to financial markets.”[1]
In January, the Hong Kong Monetary Authority (HKMA), which serves as the city’s quasi-central bank, revealed its intentions to introduce a compulsory licensing system for activities involving stablecoins. According to the HKMA, this licensing regime will mandate platforms to maintain reserves that fully support the stablecoin tokens.
The potential new regime was supported by Christopher Hui Ching-yu who said “What we have done and will continue to do, is put together a sustainable regulatory framework in such a way that we can grow this market, yet at the same time ensure the relevant risks are being managed,”[2] which supports the likelihood of Hong Kong becoming a crypto hub.
This regulation comes after the HKMA issued a discussion paper on crypto-assets and stablecoins in January 2022 and with the later conclusion in 2023 which confirmed that the HKMA would take a risky and agile approach in regulating stablecoins.
With this regulation the HKMA is seeking to “prioritise the development of a regulatory framework for stablecoins as a means of payment and start with regulating stablecoins pegged to fiat currencies, since they are more likely to pose imminent financial stability risks”[3]
The regime emphasises that stablecoins must be fully backed by high-quality and high-liquidity assets at all times. Furthermore, “Stablecoins that derive their value based on arbitrage or algorithm will not be accepted, which effectively rules out algorithmically stabilised tokens like UST”[4]
“The paper also suggests that stablecoin issuers will be regulated in the same manner as banks which would bring them firmly within the purview of the HKMA.”[5]. It therefore seems to aim at protecting the investors while at the same time is being supported by many in the industry as Elizabeth Wong, director of licensing for the Securities and Futures Commission (SFC), which enforces Hong Kong’s new virtual asset trading regime. Elizabeth said that “the agency is also formulating its own stablecoin policy and will collaborate with HKMA.”[6]
All of this comes at the same time that Hong Kong launched a licensing regime for crypto service providers and exchanges last 1st of June. Both licensing regimes reflects the city’s commitment to fostering a safe and transparent environment for stablecoin operations, and exemplify how Hong Kong is moving towards a crypto-friendly environment which makes them likely to become a crypto hub not only in their region but in the worldwide market.
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[1]https://www.scmp.com/tech/policy/article/3224783/hong-kong-vows-regulate-stablecoins-explore-rules-virtual-asset-derivatives-protect-investors?module=perpetual_scroll_0&pgtype=article&campaign=3224783
[2]https://www.scmp.com/tech/policy/article/3224783/hong-kong-vows-regulate-stablecoins-explore-rules-virtual-asset-derivatives-protect-investors?module=perpetual_scroll_0&pgtype=article&campaign=3224783
[3] https://techcrunch.com/2023/06/13/hong-kong-eyes-stablecoin-regulatory-regime-by-2024/
[4] https://techcrunch.com/2023/06/13/hong-kong-eyes-stablecoin-regulatory-regime-by-2024/
[5] https://coingeek.com/hong-kong-wants-public-input-on-stablecoin-regulation/
[6]https://www.scmp.com/tech/policy/article/3224783/hong-kong-vows-regulate-stablecoins-explore-rules-virtual-asset-derivatives-protect-investors?module=perpetual_scroll_0&pgtype=article&campaign=3224783
