On 27 December 2023, the Financial Services and the Treasury Bureau (the “FSTB”) and the Hong Kong Monetary Authority (the “HKMA“) published the Consultation Paper on the Legislative Proposal to Implement the Regulatory Regime for Stablecoin Issuers in Hong Kong (the “Consultation Paper“).  Prior to this consultation, the HKMA issued a Discussion Paper on Crypto-assets and Stablecoins in January 2022 (the “2022 Discussion Paper“), with its Conclusion issued in January 2023, whereby respondents generally supported the HKMA’s proposal of bringing stablecoins into the regulatory perimeter and the HKMA indicated its expected key regulatory scope and requirements.

What are stablecoins and what prompted the regulatory concern?

Stablecoins are a sub-set of crypto-assets (or known as virtual assets, which are digital representations of value that are cryptographically secured, typically through the use of distributed ledger technology (DLT), like blockchain) that aims to maintain a stable value with reference to certain asset(s), typically fiat currencies like the U.S. or Hong Kong dollar. They have been gaining popularity in the wider market for several reasons, including their commitment to minimize price volatility, enabling faster and more cost-effective cross-border payments, and increasing financial inclusivity by providing access to digital payments for the unbanked population.

The collapse of TerraUSD in 2022 highlighted the urgency to introduce a regulatory regime of stablecoins in Hong Kong, with fiat-referenced stablecoins (“FRS“) being a priority for regulation and legislative guidance as they are more likely to be used in day-to-day payments and have linkages with the traditional financial system, thereby creating more direct and imminent monetary and financial stability risks than other types of stablecoins or other crypto-assets.

Proposed new licensing regime for fiat-referenced stablecoins (FRS) issuers

Against the above background, and taking into account the market conditions and needs in Hong Kong, the FSTB and the HKMA propose to introduce a new piece of legislation to implement a licensing regime for FRS issuers with the following key features:

(1)  requiring all FRS issuers who (a) issue an FRS in Hong Kong; (b) issue a Hong Kong dollar-referenced stablecoin; or (c) actively market their issuance of FRS to the public of Hong Kong, to be licensed by the HKMA;

(2)  requiring that FRS can only be offered by specified licensed entities, including licensed FRS issuers[1], authorised institutions[2], licensed corporations[3] and licensed virtual asset trading platforms (“VATP“), and for FRS not licensed by the HKMA, they can only be offered by specified licensed entities to professional investors;

(3)  prohibiting the advertising of:

(a) a person’s issuance of FRS unless the person is licensed by the HKMA; or

(b) a person’s offering of FRS unless the person is a specified licensed entity;

(4)  providing the necessary supervisory and investigation powers for the authorities to adjust the parameters of in-scope stablecoins and activities having regard to the rapid virtual assets market development;

(5)  subjecting regulated activities without a licence to criminal and civil offence and sanction provisions, and setting up of an appeal tribunal mechanism to ensure there are checks and balances to the HKMA’s powers; and

(6)  providing a transitional arrangement to facilitate the implementation of the regulatory regime.

Respondents to the earlier 2022 Discussion Paper expressed concerns about potential overlap between the proposed regime and other financial regulatory regimes in Hong Kong, including the licensing regime for VATP operators, administered by the Securities and Futures Commission (the “SFC“) under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615). More information on this regime can be found in our prior news updates dated 25 April 2023 and 16 August 2023.

To address these concerns and prevent regulatory arbitrage, the FSTB and the HKMA will collaborate with the SFC and other stakeholders to formulate the specific details of the stablecoin regime.

The proposed regime aims to strike a good balance between safeguarding financial stability and embracing innovation. The public is encouraged to provide feedback on the proposals by 29 February 2024.

Access the full Consultation Paper here for more details.

[1] A licensed FRS issuer can only offer FRS it issues.

[2] An authorized institution means a licensed bank, a restricted licence bank or a deposit-taking company under the Banking Ordinance (Cap. 155).

[3] A licensed corporation means a corporation (that is not an authorized institution) which is granted a licence to carry on one or more regulated activities under sections 116 and 117 of the Securities and Futures Ordinance (Cap. 571). When offering FRS, licensed corporations must hold a licence for Type 1 regulated activity (dealing in securities) and be permitted by the SFC to carry out dealing in virtual assets.