February 3, 2023
By Joe Pan and Tsering Namgyal
Hong Kong is set to require mandatory licensing for stablecoin issuers, the Hong Kong Monetary Authority (HKMA), the city-state’s de facto central bank, said last week.
Experts generally believe that the new regime would help Hong Kong’s budding cryptocurrency industry by providing regulatory clarity to the crypto operators, though some think that the implementation of the new rules may not be as straightforward as it seems.
According to the new regulation, entities conducting regulated activity in Hong Kong will have to obtain a license to operate stablecoin services.
The HKMA has published its stablecoin regulatory framework after receiving feedback on a discussion paper published last year. It has received 58 responses and the regulator said it will set up a new regime to oversee stablecoins, crypto assets which are pegged to the price of other assets.
The HKMA plans to supervise the governance, issuance and stabilization of fiat-backed stablecoins, for which issuers must maintain reserves matching the amount of the crypto in circulation.
Stablecoin reserves have come under heavy scrutiny around the world since 2021, when the issuer of the top stablecoin by market capitalization, Tether, showed much of its reserves were made up of unsecured short-term debt.
“The value of the reserve assets of a stablecoin arrangement should meet the value of the outstanding stablecoins at all times,” the report said. “The reserve assets should be of high quality and high liquidity. Stablecoins that derive their value based on arbitrage or algorithm will not be accepted.”
“In drawing up the specific regulatory arrangements, the HKMA will consider the feedback received, latest market development and international discussion. We will also engage with stakeholders and market participants. We expect to implement the regulatory arrangements in 2023/24,” HKMA Chief Executive Eddie Yue said in a press statement.
“On the whole, the respondents were supportive of regulating stablecoins with a risk-based and agile approach,” the statement said. “The respondents also broadly supported the need to take into account the latest market developments and draw reference from the discussion of international regulatory bodies when developing the relevant regulatory regime.”
Founder and CEO of crypto firm Coinstreet, Samson Lee commented, “Stablecoin is going to be the most common form of ‘Medium of Exchange’ for Web3 transactions. Regulation is the only option to facilitate such growth in a healthy environment protecting interests for all stakeholders.”
“With this framework, we are moving toward the right direction of have a regulatory sandbox which we have waited for a long time,” said Agost Makszin, MD and co-founder of Lendary Asia Capital, a German-headquartered asset management firm that set up it’s Asia arm in Hong Kong in 2020.
Makszin was also glad that he didn’t make the move to Singapore or elsewhere as some of the crypto-focused operators have done in the past two years. “Given our positive return and track record in 2022, we are in a good position to grow and scale in 2023 with a clear regulatory framework,” he said.
Some have reservations in terms of implementation of the new regime, however.
“As there are no integrated systems between the HKMA and Securities and Future Commission (SFC), compliance monitoring process and ongoing reporting may not be efficient and effective,” said Emil Chan, Co-Chair of Hong Kong Digital Finance Association.
For example, an operator providing a USDC stacking service may need to (be) under the monitoring of both HKMA and SFC’s supervision. I don’t know if it is required to obtain a Money Service Operator (MSO) license in the future but I do believe that an operator have to carry out KYC and AML/CFT compliance process under multiple regulators with different standards based on the current system,” he said.
About the author
Joe Pan and Tsering Namgyal are, respectively, contributing editor and chief content officer of NFTMetta.com.