Hong Kong Pushes For New Stablecoin Legislation

Hong Kong’s monetary authorities are proposing new regulation for fiat stablecoins.

What Happened: After a two-month public consultation that concluded in February 2024, 108 submissions from various market participants and stakeholders delivered input for the Financial Services and the Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA).

A significant part of the new regulatory framework mandates that stablecoin issuers establish physical companies in Hong Kong and entrust their reserve assets to licensed banks within the city.

Additionally, stablecoin issuers are prohibited from offering interest to users.

The move to regulate stablecoin issuers stems from a broader effort to manage potential monetary and financial stability risks associated with the increasing prevalence of virtual assets (VAs).

The regulatory framework aims to provide transparent and suitable guardrails for the stablecoin ecosystem.

Key Requirements And Responses:

1. Local Presence: Issuers of fiat-referenced stablecoins must establish physical companies in Hong Kong. This measure is intended to enable effective regulatory oversight and provide greater protection to stablecoin users in the event of business disruptions or failures.
2. Custody of Reserve Assets: Reserve assets must be entrusted to licensed banks in Hong Kong. This requirement ensures that the assets backing the stablecoins are securely managed and safeguarded.
3. No Interest Payments: Stablecoin issuers are not allowed to offer interest to users, aligning with regulatory practices in other major jurisdictions. The prohibition extends to making arrangements with third parties to provide interest.

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Consultation Feedback And Legislative Approach:

During the consultation period, the majority of respondents supported the establishment of a regulatory regime for stablecoin issuers.

Key concerns included the scope of regulated activities, management of reserve assets, and the prohibition on paying interest.

The feedback led to several enhancements in the proposed regulations, such as clearer definitions and guidelines for issuers.

The Secretary for Financial Services and the Treasury, Mr. Christopher Hui, emphasized that the new licensing regime for stablecoin issuers would bolster Hong Kong’s VA regulatory framework and mitigate financial stability risks. HKMA Chief Executive, Mr. Eddie Yue, expressed gratitude for the constructive feedback and underscored the importance of a well-regulated environment for the sustainable development of the stablecoin ecosystem.

The FSTB and HKMA will finalize the legislative proposal and aim to introduce a bill into the Legislative Council soon. The HKMA is also processing applications for the stablecoin issuer sandbox, with the list of participants to be announced shortly.

Future Implications:

The implementation of these regulatory measures comes at a crucial time as the cryptocurrency industry gears up for Benzinga’s Future of Digital Assets conference on Nov. 19.

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