On 12 January 2022, the Hong Kong Monetary Authority (HKMA) issued a "Discussion Paper on Cryptoassets and Stablecoins" (Discussion Paper) to invite feedback from stakeholders on a regulation framework for payment related stablecoins that have a potential reach and use across multiple jurisdictions, including as means of making payments and/or stores of value.
After taking into account the feedback received on the Discussion Paper, the HKMA published the consultation conclusion (Consultation Conclusion) on 31 January 2023 and sets out its responses.
The HKMA will adopt a risk-based approach by giving priority to regulating stablecoins that purport to reference to one or more fiat currencies irrespective of the underlying stabilisation mechanism of that stablecoin. The HKMA perceives this type of stablecoins as potentially posing more imminent monetary and financial risks as they are likely to be used in payments and have linkages with the traditional financial system.
Appropriate flexibility will also be built-in to the proposed regime for HKMA to adjust the scope of regulation down the road in light of rapid market and international developments (e.g. scope in other stablecoin structure(s)).
The HKMA will exclude certain arrangements from the definition of stablecoins. This is intended to avoid regulatory overlap with, for example, the arrangements already being subject to another financial regulatory regime, or used within a well-confined environment outside the reach of the general public. Note that the details of the exclusion will be subject to further analysis and additional consultations to be conducted by the HKMA.
The HKMA proposed to regulate the following key activities (each a “Regulated Activity”) in the lifecycle of a stablecoin:
| Activities | Explanation |
| Governance | establishment and maintenance of the rules governing an in-scope stablecoin arrangement. |
| Issuance | issuing, creation or destroying of an in-scope stablecoin. |
| Stabilisation | stabilisation and reserve management arrangements of an in-scope stablecoin (whether or not such arrangements are provided by the issuer). |
|
Wallets |
provision of services that allow the storage of the users’ cryptographic keys which enable access to the users’ holdings of an in-scope stablecoin and the management of such stablecoins. |
The following entities will need to be licensed by the HKMA:
The HKMA will introduce flexibility to scope in an entity according to circumstances.
The HKMA proposes to regulate each type of Regulated Activity by different licences rather than one single type of licence covering various activities. The regulatory requirements in the licences are still under discussion, but the HKMA considers the following as crucial principles to formulate the regulatory regime:
| Principles | Explanation |
| Comprehensive regulatory framework | The regulatory regime shall cover a broad range of areas such as ownership, governance and management, financial resources requirements, risk management, anti-money laundering and counter-terrorist financing, user protection, and regular audits and disclosure requirements. |
| Full backing and redemption at par | The value of the reserve assets of a stablecoin arrangement should meet the value of the outstanding stablecoins at all times. The reserve assets should be of high quality and high liquidity. Stablecoins that derive their value based on arbitrage or algorithm will not be accepted. Stablecoin holders should be able to redeem the stablecoins into the referenced fiat currency at par within a reasonable period. |
| Principal business restriction | The regulated entities should not conduct activities that deviate from its principal business as permitted under their relevant licences. For example, wallet operators should not engage in lending activities. |
The recent crash of algorithmic stablecoins and the collapse of a major crypto exchange has brought the regulation of stablecoins to the priority. Whilst a greater level of details on the regulatory framework are expected to materialise upon further consultation, the Consultation Conclusions are a helpful indication of the overall regulatory trajectory for cryptoassets and stablecoins in the coming two years.
As highlighted in the Consultation Conclusions, the HKMA currently aims to implement the regulatory regime by 2023/2024. The HKMA will conduct further assessment to avoid regulatory arbitrage, identify and address regulatory overlaps or gaps and mitigate the risks arising from different activities. A more detailed consultation on the draft legislation will be conducted in due course.
The HKMA envisages that the draft legislation will address the following key issues such as
The HKMA notes the way services are provided in the crypto space is evolving rapidly and is monitoring the interconnectedness between other crypto-assets and the mainstream financial system.
*Information is accurate up to 27 November 2023
