Regulation
Hong Kong Pushes for New Stablecoin Legislation
Hong Kong monetary authorities propose new regulation for fiat stablecoins.
What happened: Following a two-month public consultation that ended in February 2024, 108 contributions from various market participants and stakeholders provided input to the Financial Services and Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA).
A significant part of the new regulatory framework mandates that stablecoin issuers set up physical companies in Hong Kong and entrust their reserves 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 address potential risks to monetary and financial stability associated with the growing prevalence of virtual assets (VAs).
The regulatory framework aims to provide transparent and adequate safeguards for the stablecoin ecosystem.
Requirements and key answers:
- Local presence: Issuers of fiat-backed stablecoins must establish physical companies in Hong Kong. This measure is intended to enable effective regulatory oversight and provide greater protection for stablecoin users in the event of business disruptions or failures.
- Safekeeping of reserve assets: Reserves must be held in Hong Kong-licensed banks. This requirement ensures that the assets backing the stablecoins are securely managed and safeguarded.
- No interest payments: Stablecoin issuers are prohibited from offering interest to users, in line with regulatory practices in other major jurisdictions. The ban extends to entering into agreements with third parties to provide interest.
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Consultation feedback and legislative approach:
During the consultation period, most of the interviewees supported the establishment of a regulatory regime for stablecoin issuers.
The main concerns were the scope of regulated activities, the management of reserve assets and the prohibition on interest payments.
The feedback led to several improvements in the proposed regulations, such as clearer definitions and guidelines for issuers.
The Secretary of Financial Services and the Treasury, Mr. Christopher Huistressed that the new licensing regime for stablecoin issuers would strengthen Hong Kong’s VA regulatory framework and mitigate risks to financial stability. HKMA Director-General Mr. Eddie Yueexpressed gratitude for the constructive feedback and stressed the importance of a well-regulated environment for the sustainable development of the stablecoin ecosystem.
FSTB and HKMA will finalize the legislative proposal and seek to submit a bill to the Legislative Council soon. 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 braces for the impact of Benzinga The Future of Digital Assets conference of November 19th.
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