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HKMA Releases Conclusion on Crypto Assets & Stablecoins, Licensing Required & Regulatory Oversight with Target Implementation in 2023 or 2024

2nd February 2023 | Hong Kong

The Hong Kong Monetary Authority (HKMA) has released the Discussion Paper conclusion on Crypto Assets & Stablecoins, with licensing in Hong Kong to be required and increased regulatory oversight with target implementation in 2023 or 2024.  The HKMA is weighing the pros and cons between introducing a new legislation and amending existing laws for implementation of the regulatory regime.  HKMA: “In the Consultation Conclusion, the HKMA proposes to bring certain activities relating to stablecoins into the regulatory perimeter, and indicates the expected regulatory scope and key regulatory requirements.  The HKMA received a total of 58 submissions in response to the discussion paper on crypto-assets and stablecoins from the industry, public bodies, business and professional organisations, and individuals, etc.  On the whole, the respondents were supportive of regulating stablecoins with a risk-based and agile approach.   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.”  More info below.  Read More: Conclusion of Discussion Paper on Crypto-assets and Stablecoins 

” HKMA Releases Conclusion on Crypto Assets & Stablecoins, Licensing Required & Regulatory Oversight with Target Implementation in 2023 or 2024 “

 



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Eddie Yue, Chief Executive of the HKMA: “An appropriate regulatory environment will help address financial stability risks possibly posed by stablecoins, and promote the orderly and sustainable development of the industry.  We are grateful to the respondents for their valuable feedback to the discussion paper on crypto-assets and stablecoins and their general support for our recommended regulatory principles and direction.  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 Releases Conclusion on Crypto Assets & Stablecoins, Licensing Required & Regulatory Oversight with Target Implementation in 2023 or 2024

Hong Kong | Leading financial centre in Asia

What to regulate 

Key activities relating to stablecoins will be subject to a mandatory licensing regime.   The HKMA will adopt a risk-based approach in scoping in stablecoin structures for regulation under the proposed regime. As a priority, the 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. Flexibility will be built in to enable the authority to scope in other stablecoin structure(s) for regulation under the proposed regime in the future. 

Key activities to be regulated 

(i)  Governance: establishment and maintenance of the rules governing an in-scope stablecoin arrangement;
(ii)  Issuance: issuing, creation or destroying of an in-scope stablecoin; 

(iii) Stabilisation: stabilisation and reserve management arrangements of an in-scope stablecoin (whether or not such arrangements are provided by the issuer); and
(iv) 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. 

Entities that will require a licence from the HKMA 

Entities that 

(i)  conduct a regulated activity in Hong Kong;
(ii)  actively market a regulated activity to the public of Hong Kong;
(iii)  conduct a regulated activity which concerns a stablecoin that purports to reference to the value of the Hong Kong dollar; or
(iv)  the authority is of the opinion that should be so regulated,
having regard to matters of significant public interest.

Key regulatory principles 

Comprehensive regulatory framework: Appropriate regulatory requirements will be developed on areas such as but not limited to ownership, governance and management, financial resources requirements, risk management, anti-money laundering and counter-terrorist financing (“AML/CFT”), user protection, and regular audits and 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. Principal business restriction: The regulated entities should not conduct activities that deviate from its principal business as permitted under their relevant licences. For example, wallet operators should not engage in lending activities. 

Target implementation date 

By 2023/24. 

Legislative approach 

The HKMA is weighing the pros and cons between introducing a new legislation and amending existing laws for implementation of the regulatory regime. 

 

1. Executive summary 

1.1. On 12 January 2022, the HKMA issued a discussion paper on crypto-assets and stablecoins1 (the “Discussion Paper”) and invited feedback from stakeholders. The Discussion Paper outlines the HKMA’s thoughts on giving priority to the development of a regulatory framework for “payment-related stablecoins”, i.e. 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. 

1.2. Since then, the crypto-asset markets have continued to evolve. Of note, the stablecoin market experienced much price volatility in May 2022 subsequent to the collapse in value of TerraUSD. Some crypto exchanges also ran into trouble, e.g. FTX in November 2022. Against this backdrop, authorities have called for more comprehensive regulation of stablecoins to address the financial stability risks that they could potentially pose. The international regulatory bodies, standard-setting bodies (“SSBs”) and some major jurisdictions have responded with more specific policy recommendations and regulatory measures and/or proposals with respect to stablecoins. 

1.3. It is worth noting that while the definition of stablecoins could technically capture a wide spectrum of crypto-asset structures that aim to maintain a stable value,2 international regulatory bodies, SSBs and major jurisdictions have been according higher priority to those stablecoins that have a potential reach and use across multiple jurisdictions including as means of making payments and/or stores of value. Specifically, more major jurisdictions are giving priority to regulating those stablecoins that purport to reference to fiat currencies as they are more likely to be used in payments and have linkages with the traditional financial system, thereby creating higher and more imminent monetary and financial stability risks than other types of stablecoins or other crypto-assets. Major jurisdictions also note the importance of building in appropriate flexibility in the regulatory regime to adjust the regulatory scope to cope with the rapidly moving market and international regulatory developments. 

1.4. By the end of the feedback period on 31 March 2022, the HKMA received 58 submissions. Respondents generally indicated their support for the HKMA’s proposal of bringing stablecoins into the regulatory perimeter. Taking into account the latest international recommendations and feedback received, the HKMA will further proceed with putting in place a regulatory regime. The proposed key parameters of such a regime are summarised as follows: 

1.5. A more detailed consultation, with more granular information about the regulatory regime, will be conducted in due course. 

1.6. As regards the wider crypto-asset space, and on the basis of the “Policy Statement on Development of Virtual Assets in Hong Kong” issued by the Hong Kong SAR Government on 31 October 2022, the HKMA will continue its ongoing discussion with other stakeholders in the Hong Kong SAR Government and financial regulators, and actively participate in relevant international fora. The HKMA embraces financial innovations and encourages institutions to explore the potential of distributed ledger technology (“DLT”) to support the responsible development of virtual asset ecosystem in Hong Kong. At the same time, we will also work with the HKSAR Government and financial regulators to prioritise regulatory efforts using a risk-based, “same activity, same regulation” approach and drawing reference from applicable international standards. Specifically, the HKMA will continue to monitor market developments and the risks that different categories of crypto-asset may pose to monetary and financial stability, as well as actively participate in the relevant international regulatory discussions, with a view to working with the HKSAR Government and financial regulators to consider the appropriate treatment for the wider crypto-asset space. 

1.7. As a related matter, the HKMA notes that the activities being proposed to be regulated under the aforesaid stablecoin regime might overlap and/or have interface with other financial regulatory regimes in Hong Kong, e.g. the licensing regime for virtual asset service providers (“VASP”) to be administered by the Securities and Futures Commission (“SFC”). The HKMA will conduct further assessment and continue to work with other stakeholders in the HKSAR Government, local financial regulators as well as relevant stakeholders when formulating the details of the regime in order to avoid regulatory arbitrage, identify and address regulatory overlaps or gaps and mitigate the risks arising from different activities. 

1.8. This feedback conclusion is organised as follows: Chapter 2 provides a background of the paper and Chapter 3 sets out recent notable market and regulatory developments. Chapter 4 provides a summary of major comments received in respect of the Discussion Paper and the HKMA’s response to a number of key issues. Chapter 5 sets out the proposed next steps. 

Read More: Conclusion of Discussion Paper on Crypto-assets and Stablecoins 

 




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