Hong Kong Proposes Regulatory Framework for Stablecoin Issuers

The Financial Services and the Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA) jointly initiated a public consultation today, seeking input on a legislative proposal aimed at overseeing stablecoin issuers.

According to the authorities, the government asserts that issuers of fiat-referenced stablecoins (FRS) should be subject to regulation. This stems from the pivotal roles stablecoins play in the Web3 and virtual asset (VA) ecosystems, coupled with the growing interconnection between the traditional financial system and VA markets. 

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To address potential threats to monetary and financial stability and ensure transparent safeguards amid the increasing prevalence of VAs, the government proposes including FRS issuers within the regulatory framework. This approach aligns with a risk-based and adaptive strategy.

The legislative proposal takes into account market and public feedback on last year’s “Discussion Paper on Crypto-assets and Stablecoins,” ongoing engagement with stakeholders, local market conditions, and applicable international standards.

Key Features of the Legislative Proposal

The legislative proposal incorporates several significant features. Firstly, it introduces a Licensing Regime, requiring FRS issuers to meet specific conditions to obtain a license from the Monetary Authority (MA). Secondly, FRS can only be offered by Specified Licensed Entities, and retail investors can only access FRS licensed by the MA. 

Thirdly, Advertising Restrictions are imposed, prohibiting the advertising of FRS issuance by unlicensed entities or non-specified licensed entities offering FRS. Fourthly, the proposal grants authorities the power to adjust stablecoin parameters and activities within the regulatory scope, taking into account the rapid development of the VA market. Lastly, a Transitional Arrangement will be established to facilitate the smooth implementation of the regulatory regime.

The HKMA will establish a sandbox arrangement to gather feedback on proposed regulatory requirements. This initiative aims to communicate supervisory expectations and compliance guidance to entities planning to issue FRS in Hong Kong. Further details about the sandbox setup will be announced separately.

Mr. Christopher Hui, Secretary for Financial Services and the Treasury, highlighted that the legislative proposal is a crucial step in facilitating Web3 ecosystem development in Hong Kong. He also noted that the licensing regime for VA trading platforms is set to be implemented in June.

Mr. Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, expressed support for financial innovation. He emphasized the importance of establishing regulatory guardrails and standards for the sustainable and responsible development of the virtual asset ecosystem.