Hong Kong Introduces Regulatory Regime for Stablecoin Issuers

Despite its name, the global stablecoin market has been far from stable in recent years. In response, regulators and governments across the globe have been looking at how to regulate and manage crypto. 

In Hong Kong, The Financial Services and the Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA) issued a consultation paper in December 2023. It contained a proposal to regulate fiat-referenced stablecoin (FRS) issuers in light of the potential monetary and financial stability risks posed by FRS (as demonstrated by the high profile TerraUSD collapse which wiped out nearly half a trillian US dollars from the cryptocurrency markets back in 2022) and the policy objective of fostering a sustainable virtual asset ecosystem in Hong Kong. The consultation conclusions were recently issued, setting out the features of the regime and confirming that a licensing regime will be introduced. 

What is a stablecoin

By way of reminder, a “stablecoin” is a cryptographically secured digital representation of value that, among other things:

• is expressed as a unit of account or store of economic value;
• is used (or intended to be used) as a medium of exchange accepted by the public for payment for goods or services, discharge of a debt and/or investment;
• can be transferred, stored or traded electronically;
• is operated on a decentralised distributed ledger or similar technology; and
• purports to maintain a stable value with reference to a specified asset, or a pool or basket of assets.

Key takeaways from the consultation response 

Broadly speaking, activities related to FRS issuance, marketing of the issuance and offering of FRS may be regulated. In particular, an FRS issuer will require a licence from the HKMA (FRS Licence) in certain circumstances. Some of the key takeaways include:

• A licensing regime will be introduced for those who: (i) issue an FRS in Hong Kong; (ii) issue an HKD-referenced stablecoin; or (iii) actively market its FRS issuance to the Hong Kong public. 
• Key licensing criteria will include: (i) the full backing of issued FRS by reserve assets; (ii) minimum paid-up share capital of HK$25 million or 1% of par value of issued FRS (whichever is higher); and (iii) certain localisation requirements. 
• Offering of FRS in Hong Kong can only be conducted by a specified group of regulated entities (including authorized institutions, licensed corporations and licensed virtual asset trading platforms).
• Detailed drafting has not yet been issued. The bill is expected to be introduced into the Legislative Council later this year. 

For more information on the key features of the regime, see our article here.