The Financial Services and the Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA) have released a consultation paper outlining their proposal to accept and regulate fiat-referenced stablecoins (FRS) within the region.
This significant development aims to provide a regulatory framework for stablecoin issuers while mitigating associated risks. The consultation period is set to conclude on Feb. 29, 2024.
Licensing requirement for stablecoin issuers
The core of the legislative proposal is the requirement for companies actively marketing the issuance of FRS to the public of Hong Kong to obtain a specific local license from the HKMA. The proposed criteria for obtaining this license are robust and include several key elements:
Reserve Backing: Stablecoin issuers must maintain reserves that are “at least equal to the par value” of all circulating stablecoins. This ensures that the stablecoins remain fully backed, contributing to their stability and reliability.
Segregation and Safekeeping: The legislation emphasises the segregation and secure safekeeping of reserve assets, enhancing the protection of users’ funds and preventing misuse.
Disclosure and Reporting: Issuers will be required to provide transparent disclosure and regular reporting, fostering accountability and transparency within the stablecoin ecosystem.
It is important to note that the proposed regulations explicitly exclude algorithmic stablecoins from obtaining an HKMA license, highlighting the preference for stablecoins with strong reserve backing.
Establishing a local presence
To further solidify their commitment to regulatory compliance, stablecoin issuers seeking an HKMA license will also be required to establish a registered office in Hong Kong. This office must have a chief executive, senior management team, and key personnel in place, aligning with Hong Kong’s efforts to ensure that all activities related to stablecoin issuance are conducted responsibly.
The proposed licensing regime for FRS aligns with Hong Kong’s broader strategy to foster the growth of the Web3 ecosystem within the region. Secretary for Financial Services and the Treasury, Christopher Hui, expressed the significance of this move, stating, “With the implementation of the licensing regime for VA trading platforms from June this year, the legislative proposal to regulate FRS is another important measure facilitating Web3 ecosystem development in Hong Kong.”
In a joint effort, the HKMA and the Securities and Futures Commission (SFC) have also signalled their readiness to receive applications for the authorization of various funds, including Virtual Asset Spot exchange-traded funds (VA Spot ETFs).
This proactive approach demonstrates Hong Kong’s commitment to embracing a diverse range of financial products within the virtual asset space.
