UPDATE: See consultation conclusions issued 17 July 2024 here.

This week, Hong Kong is set to unveil the results of its consultation on stablecoins, a pivotal development in the realm of virtual assets. The Financial Services and the Treasury Bureau, along with the Hong Kong Monetary Authority, have been deliberating on regulatory frameworks for issuers of fiat-backed stablecoins since the end of last year. This move comes in the wake of the implementation of licensing requirements for virtual asset service providers in June last year, underscoring the government’s proactive stance on integrating traditional financial systems with the burgeoning virtual asset market.

Stablecoins, pegged to fiat currencies to maintain a stable value, play a crucial role in both physical and virtual economies. For instance, holders can exchange fiat currency for an equivalent value of stablecoins issued by authorised entities, facilitating seamless transactions across payment systems, capital markets, trade and supply chains, and within the Web3 ecosystem.

The proposed regulatory framework emphasises a risk-based and pragmatic approach to overseeing fiat-referenced stablecoin (“FRS“) issuers. Key requirements include:

• stringent reserve management and stability mechanisms
• mandating issuers to fully back stablecoins with high-quality and highly liquid reserve assets

Redemption requirements and governance standards are also pivotal aspects of the proposed regulations. For example:

FRS users are entitled to redeem their FRS at par value directly from the issuer, with a claim on reserve assets to cover any shortfall in issuer obligations.

Redemption requests must be processed promptly and without undue costs. Issuers are prohibited from imposing unreasonable conditions, such as high minimum thresholds, and must transparently communicate any applicable redemption fees which should be proportionate and not deterrent.

Payment upon redemption must be made in the fiat currency specified by the FRS. In cases where normal exchange channels are disrupted, the issuer must facilitate direct redemption in a timely manner.

Additionally, issuers must maintain a contingency plan ensuring orderly redemption, even in scenarios involving license suspension or revocation.

The above requirements are aimed at ensuring investor protection and mitigating potential risks to monetary and financial stability.

To safeguard stablecoin users, the proposed regulations suggest that only the following entities will be authorised to sell fiat-backed stablecoins in Hong Kong or actively promote such services to the public:

• licensed stablecoin issuers
• accredited institutions (such as banks)
• licensed corporations
• licensed virtual asset trading platforms

Transitional arrangements under the new regulatory framework are expected to be put in place to accommodate existing stablecoin issuers.

The Financial Services and the Treasury Bureau expects that a robust regulatory framework aligned with international standards will provide adequate safeguards for stablecoin users.

The forthcoming announcement on stablecoin regulations marks a significant step towards enhancing regulatory clarity and fostering a secure environment for the integration of stablecoins within Hong Kong’s financial landscape.

Resources

Consultation Paper on the Legislative Proposal (December 2023) 20231227e4a1.pdf (hkma.gov.hk)

Conclusion to the Discussion Paper (January 2023) 20230131e9a1.pdf (hkma.gov.hk)

Discussion Paper (January 2022) 20220112e3a1.pdf (hkma.gov.hk)