Hong Kong Proposes Legislation to Regulate Stablecoin Issuers in Virtual Asset Ecosystem

Bits Logics Team . 27th Dec 2023
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  • FSTB and HKMA have announced a public consultation on a legislative proposal aimed at regulating issuers of stablecoins in Hong Kong. 
  • The move comes in response to the increasing significance of stablecoins in the Web3 and virtual asset (VA) ecosystems.
  • The proposed regulatory regime is designed to bring fiat-referenced stablecoin (FRS) issuers under a risk-based and agile framework.

In a joint effort, the Financial Services and Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA) have announced a public consultation on a legislative proposal aimed at regulating issuers of stablecoins in Hong Kong. 

According to the announcement, the move comes in response to the increasing significance of stablecoins in the Web3 and virtual asset (VA) ecosystem, coupled with the growing interconnectedness between traditional financial systems and VA markets.

Recognizing the pivotal role stablecoins play, the proposed regulatory regime is designed to bring fiat-referenced stablecoin (FRS) issuers under a risk-based and agile framework. The objective is to effectively manage potential monetary and financial stability risks while establishing transparent and suitable guardrails, especially given the rising prevalence of virtual assets.

The legislative proposal incorporates feedback from stakeholders and the public, responding to the “Discussion Paper on Crypto-assets and Stablecoins” issued by the HKMA last year. It also considers ongoing engagement exercises, local market conditions, and applicable international standards.

Key features of the proposed legislation include:

a. Introduction of a new licensing regime mandating that FRS issuers meeting specific conditions obtain a license from the Monetary Authority (MA).

b. Requirement that FRS can only be offered by specified licensed entities, and only those licensed by the MA can offer FRS to retail investors.

c. Prohibition of advertising FRS issuance by unlicensed entities or non-specified licensed entities offering FRS.

d. Provision of necessary powers for authorities to adjust parameters of in-scope stablecoins and activities, considering the rapid development of the VA market.

e. Implementation of a transitional arrangement to ease the shift to the regulatory regime.

The HKMA will introduce a sandbox arrangement to communicate supervisory expectations and compliance guidance to entities interested in issuing FRS in Hong Kong. This initiative aims to gather feedback on proposed regulatory requirements, ensuring the regulatory regime is well-suited and effective.

Commenting on the proposal, Mr. Christopher Hui, the Secretary for Financial Services and the Treasury, highlighted the importance of these measures in facilitating the development of the Web3 ecosystem in Hong Kong. Mr. Eddie Yue, Chief Executive of the HKMA, emphasized the support for financial innovation while underscoring the need for regulatory guardrails to enable the sustainable and responsible development of the virtual asset ecosystem.

The proposed regulatory regime follows the implementation of the licensing regime for virtual asset trading platforms in June, further solidifying Hong Kong’s commitment to staying at the forefront of financial innovation and compliance with international standards.