On January 31, Hong Kong Monetary Authority issued their conclusion of discussion paper on crypto-assets and stablecoins . You can download the original PDF file. Here are key take aways from it:

  • What is payment-related stablecoins

stablecoins that may have the potential to develop into a widely acceptable means of payments, while providing flexibility in the regime to make adjustments to the scope of stablecoins that may be subject to regulation as needed in the future.

  • What to regulate

HKMA will start with regulating stablecoins that purport to reference to one or more fiat currencies, given the higher and more imminent monetary and financial stability risks that they may pose.

  • What key activities to be regulated
  1. Governance: establishment and maintenance of the rules governing an in-scope stablecoin arrangement;
  2. Issuance: issuing, creation or destroying of an in-scope stablecoin;
  3. Stabilisation: stabilisation and reserve management arrangements of an in-scope stablecoin (whether or not such arrangements are provided by the issuer); and
  4. Wallets: provision of services that allow the storage of the users’ cryptographic keys which enable access to the users’ holdings of an in-scope stablecoin and the management of such stablecoins.
  • What are the key regulatory principles

regulatory requirements will be developed on areas:

  1. ownership.
  2. governance/management.
  3. financial resources requirements.
  4. risk management.
  5. AML/CFT.
  6. user protection.
  7. regular audits, and
  8. disclosure requirements.

Full backing and redemption at par: The value of the reserve assets of a stablecoin arrangement should meet the value of the outstanding stablecoins at all times. 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. Stablecoin holders should be able to redeem the stablecoins into the referenced fiat currency at par within a reasonable period.

  • And following are some abtracts from HKMA’s responses to the feedbacks of the questions:

There was broad consensus that the HKMA should regulate the activities of “issuing, creating or destroying stablecoins”, “managing reserve assets to ensure stabilisation of the stablecoin value” and “facilitating the redemption of stablecoins”.

In other words, stablecoin-related activities not listed in paragraph 4.22 – including those listed in paragraph 4.19 – may not be captured in the proposed regulatory scope at the initial stage.

The HKMA is of the view that imposing a local incorporation requirement is highly conducive to enabling the HKMA to effectively supervise the licensed entities and enforce the regulatory requirements, particularly for ensuring the company’s assets and liabilities will be appropriately segregated from the rest of the group and to facilitate seizure of assets where necessary for the purpose of user protection in case of failure of business.

Those conducting a regulated activity in Hong Kong concerning an in-scope stablecoin or actively marketing such activities to the public of Hong Kong should hold a relevant licence.

In terms of the timeline of introducing the new regulatory regime, the HKMA is reviewing its work target. Among other things, the FSB has recently reviewed its recommendations on GSCs and indicated its latest plan to review the implementation of the revised recommendations by end-2025…the HKMA will work towards putting in place the regulatory regime by 2023/24.

Having considered the feedback received and drawing reference from the way forward of many major jurisdictions, the HKMA is of the view that both AIs and non-AIs should be allowed to issue stablecoins as long as they could satisfy relevant licensing and regulatory requirements. (AIs: Authorized Institutions)

With respect to the issue of sandbox, the HKMA has set up a Fintech Supervisory Sandbox that allows banks and their partnering technology firms to conduct pilot trials of their fintech initiatives involving a limited number of participating customers without the need to achieve full compliance with the HKMA’s supervisory requirements. While developing the regulatory regime for stablecoins, we will also give thoughts to the implementation arrangements.