Check out the latest proposals for the Hong Kong Stablecoin regulation

23-01-31 19:09

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A Quick Look at the latest Proposals for the Regulation of Stablecoin in Hong Kong

Karen, Foresight News

The Hong Kong Monetary Authority today released a 36-page discussion paper on crypto assets and Stablecoinsconclusion", which Outlines the parameters of the proposed regulatory scheme based on the feedback from the previous discussion paper, giving priority to the regulation of stablecoins that reference fiat currency and may be used for payment, and gives a detailed description of regulatory activities, target implementation time, licensing, regulatory principles, etc.

Some of the main regulatory requirements include that stablecoins should be fully supported and allowed to be redeemed at face value, that reserve assets should be highly liquid, and that stablecoins based on arbitrage or algorithmically obtained value will not be accepted. Stablecoin holders should be able to convert Stablecoin into reference fiat currency at par within a reasonable period of time. In addition, regulated entities are not allowed to engage in activities different from their main business permitted under their relevant licences, for example, wallet operators are not supposed to engage in lending.

Key information list

1. On 12 January 2022, the Hong Kong Monetary Authority published a discussion paper on crypto assets and stablecoins and invited stakeholders to provide feedback. The discussion paper Outlines the HKMA's thinking on prioritising the development of a regulatory framework for payment-related stablecoins, which may have the potential to develop into a widely accepted payment method while also providing institutional flexibility.

Second, since then, the crypto asset market has continued to develop. It's worth noting, though, that the stablecoin market experienced a lot of volatility and correction in May 2022, following TerraUSD's collapse. There are also some cryptocurrency trading platforms in trouble and crisis, such as the FTX crash event in November 2022. Against this background,Authorities have called for more comprehensive regulation of stablecoins to address the financial stability risks they may pose.International regulators, international standard setting bodies (SSBS) and some major jurisdictions have made more specific policy recommendations and regulatory measures or proposals for stablecoins.

3. An increasing number of major jurisdictions are prioritizing the regulation of stablecoins that claim to reference fiat currencies because regulators believe they are more likely to be used for payments and linked to the traditional financial system, posing more immediate monetary and financial stability risks than other types of stablecoins or cryptoassets. Major jurisdictions also noted the importance of building appropriate flexibility in regulatory regimes to adjust regulatory coverage in response to rapidly changing markets and international regulatory developments.

4. A total of 58 submissions were received by the MAS at the end of the feedback period up to 31 March 2022. Respondents generally expressed support for the HKMA's proposal to bring Stablecoins under the regulatory umbrella. Taking into account the latest international recommendations and feedback received, the HKMA will proceed further to establish a regulatory regime. The proposed key parameters of the relevant regime are summarized below:

Regulate what?

Key stablecoin-related activities will be subject to the compulsory licensing regime. Specifically, the MAS will adopt a risk-based (index) approach to determine the scope of the stablecoin structure for supervision under the proposed regime. Given the potentially higher and more immediate monetary and financial stability risks posed by stablecoins,The HKMA will give priority to the supervision of Stablecoins claiming to reference one or more fiat currencies.The authorities will then establish flexibility to regulate other stablecoin structures in the future.

What major activities are regulated?

· GovernanceEstablish and maintain rules governing in-scope stablecoins (stablecoins that reference legal tender and may be used for payment);

· IssueIssue, create or destroy related stablecoins;

· Stability: Stabilization and reserve management arrangements for stablecoins in the relevant scope (whether or not provided by the issuer);

· Wallet: Provides services that allow users to store encryption keys (allowing users to access and manage such stablecoins).

Which entities need to obtain an HKMA licence?

· Carry out regulated activities in Hong Kong;

· Actively promote regulated activities to the Hong Kong public;

· Conduct regulated activities involving Stablecoins claiming to reference the value of Hong Kong dollars;

· Matters of significant public interest (which the authorities consider should be regulated).

Principle of key supervision

Comprehensive regulatory framework:Appropriate regulatory requirements audit and disclosure requirements will be developed in the areas of ownership, governance and management, financial resource requirements, risk management, anti-money laundering and anti-terrorist financing (AML/CFT), user protection and periodic supervision.

Stablecoins shall be fully supported and redeemable at par:The value of the reserve assets of Stablecoins should always match the value of the outstanding stablecoins. Reserve assets should be of high quality and highly liquid. Stablecoins that gain value based on arbitrage or algorithms will not be accepted. Stablecoin holders should be able to convert Stablecoin into reference fiat currency at par within a reasonable period of time.

Main business restrictions:Regulated entities shall not engage in activities different from the main business permitted by their relevant licences. For example, wallet operators should not engage in lending.

Target implementation date: 2023/2024

Legislative method:The MAS is weighing the pros and cons of introducing new legislation and amending existing laws to implement the supervisory regime.

5. The HKMA will conduct a more detailed consultation in due course to provide further detailed information on the regulatory regime.

6. On the broader crypto asset sector, in accordance with the Policy Statement on the Development of Virtual Assets in Hong Kong issued by the HKSAR Government on 31 October 2022, the HKMA will continue its ongoing discussions with the HKSAR Government and other stakeholders in the financial regulatory authorities, and actively participate in relevant international forums.The HKMA supports financial innovation and encourages institutions to explore the potential of distributed ledger technology (DLT) to support the development of Hong Kong's virtual asset ecosystem.

7. The HKMA points out that where the proposed regulatory activities under the Stablecoin system may overlap or intersect with other financial regulatory regimes in Hong Kong, for example, the licensing of Virtual Asset Service Providers (VASPs) is administered by the Securities and Futures Commission (SFC). The HKMA will carry out further assessment and continue to work with other stakeholders in the HKSAR Government, local financial regulators and others in formulating the regime details to avoid regulatory arbitrage and address duplication or regulatory gaps, as well as mitigate risks arising from different activities.

Subsequent steps

1. The HKMA said,Following broad consensus on the proposed regulatory scheme, MAS intends to develop a flexible, risk-based (index) regulatory regime for stablecoins. This will help ensure monetary and financial stability, protect users and minimise the risk of regulatory arbitrage.

2. The HKMA will consider the responses received and take into account relevant international discussions in formulating the details of the regulatory regime. It will also continue to monitor market developments, engage with the industry and work with other stakeholders of the Hong Kong SAR Government and other financial regulators.

3. A more detailed consultation will take place in due course to provide more detailed information on the regulatory regime with a view to finalising the main parameters to be covered by the draft legislation. In addition,The HKMA will conduct further assessments on issues such as whether to introduce new legislation or amend existing laws to implement the proposed regulatory regime, how to minimise possible duplication of regulation, how to address the risk that multiple or bundled financial services may be provided by affiliated entities, and local registration requirements.

4. The HKMA will also work closely with other stakeholders to implement the regulatory regime through appropriate legislative activities. It is envisaged that the draft legislation will shed light on key issues such as (i) Define the structures and activities that will be regulated or unregulated under the legislation;(ii) the scope of authority granted to the HKMA to exercise supervision, while taking into account the effectiveness and proportionality of supervision); (iii) Major regulatory requirements; (iv) the scope of powers (and the relevant framework) to be granted to the authority to update the regulatory regime in a timely manner to cover additional structures or activities; (v) relevant guiding factors to be taken into account by the authority in exercising its powers in relation to point (iv) above.