Grounded Ingenuity | Refined Results

February 20 2023
By Timothy Loh
In January, 2023, the Hong Kong Monetary Authority ("HKMA") released its conclusions ("Stablecoin Licensing Proposal") on a consultation for new proposed regulations of stablecoins, digital assets designed to maintain a stable value by being pegged to a specific asset or basket of assets. If you would like more information on these new proposals or would like to find out how these new proposals may affect you, please contact one of our fintech lawyers.

The proposed new HKMA Stablecoin Licensing Proposal contemplates that persons engaged in prescribed regulated activities would need to apply for a license from the HKMA. These regulated activities would include the issuance of stablecoins, the stabilization of stablecoins and the operation of wallets for stablecoins. The proposed new regulatory framework aims to promote the development of stablecoins in Hong Kong while ensuring that they operate in a safe and sound manner, protecting investors and promoting financial stability.


What Stablecoins Are Regulated?

The HKMA Stablecoin Licensing Proposal proposes to begin by regulating digital coins that are designed to maintain a stable value by being pegged, whether by arbitrage, algorithm or otherwise, to a fiat currency or a basket of fiat currencies. Though other types of coins may be regulated in the future, the HKMA considers that the coins initially proposed to be in-scope for regulation pose higher and more imminent monetary and financial stability risks. The HKMA will reserve the right to declare other types of coins as being in-scope for regulation.

Though the HKMA Stablecoin Licensing Proposal does not specifically address types of coins which may be excluded from the new regulatory framework, it suggests further consultation, including in respect of the possible exclusion of central bank digital currencies, settlement tokens and tokenised deposits of regulated banks.

What Activities are Regulated?

The HKMA Stablecoin Licensing Proposal aims to regulate a range of activities related to stablecoins. The activities that are regulated under the proposals include:

  • Governance of stablecoins including the establishment and maintenance of rules governing stablecoins

  • Issuing and redeeming stablecoins

  • Stabilisation including management of reserves, whether or not such arrangements are provided by the stablecoin issuer

  • Wallets including the provision of services that allow the storage of users’ cryptographic keys to enable access to holdings or management of stablecoins

The HKMA will reserve the right to bring other activities into the scope of regulation in the future.

Extra-Territorial Application

The proposed new regulatory framework may include regulation of stablecoins that are referenced to the Hong Kong dollar, regarldess of whether the relevant regulated activity is conducted in Hong Kong or actively marketed to the general public of Hong Kong.

What Licensing Requirements Will Apply?

As proposed, the HKMA Stablecoin Licensing Proposal will establish different licensing requirements for different regulated activities. Regulations for licensees will cover:

  • Conduct of Business including ownership, governance and management, financial resources requirements, risk management, AML/CFT, user protection, and regular audits and disclosure requirements.

  • Management of reserves including a requirement to hold high quality liquid reserve assets that back the full value of the stablecoins.

  • Principal business restriction so that licensees cannot deviate from their principal regulated business activity.

The principal business restriction would limit bundling of services. So, for example, a wallet operator would be prohibited from engaging in lending activities.

There will be no requirement that licensees be regulated banks.

A licensee must be a company incorporated in Hong Kong. This will enable the HKMA to supervise the licensee and, in particular, to ensure that the assets and liabilities are segregated from the rest of any corporate group and to facilitate seizure of assets in case of business failure.

What is the Timetable?

The HKMA is aiming to put in place the proposed new stablecoin regulatory framework this year or in 2024. As the new framework will overlap with other regulatory regimes, including the virtual asset service provider licensing regime admoinistered by the Securities and Futures Commission, the HKMA will conduct further assessment to avoid regulatory arbitrage and to identify regulatory overlaps and gaps.

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