Tech
Hong Kong Loosens Some Stablecoin Rules, Launches Limited Trials With 3 Industry Players
“The sandbox allows us to better understand the business models of stablecoin issuers, as well as better develop the regulatory framework,” said Darryl Chan, deputy CEO of the HKMA.
The sandbox trials are ready to start immediately, according to the HKMA, and will be conducted with a limited number of customers. Stablecoins will not be made available to the public during this time.
Since the Securities and Futures Commission (SFC) Last year it began regulating virtual assets, which include traditional cryptocurrencies such as BitcoinAnalysts said Hong Kong regulators have sought to strike a balance between protecting investors’ interests and creating a favorable regulatory environment that remains attractive to companies.
The rules from December’s proposal on stablecoins that remain in place include a requirement that stablecoins be fully backed by reserve assets “at all times” and that issuers publish monthly confirmation of those assets by an independent auditor.
Regulators have also said that foreign issuers hoping to offer stablecoins in Hong Kong must set up a local subsidiary with key management personnel based in the city. Some in the industry have previously expressed concern that this could discourage global players.
However, the HKMA has relaxed some of its previously proposed rules. It will reduce the minimum paid-up equity requirement from 2% to 1% of the value of its stablecoins in circulation, with a minimum of HK$25 million (US$3.2 million).
However, these rules are even stricter than those proposed by Singapore. The Monetary Authority of Singapore requires stablecoin issuers to have a core capital of SG$1 million (US$745,446) or 50 percent of annual operating expenses.
Ernest Ho, head of the HKMA’s digital finance division, said Hong Kong is among the first to regulate stablecoin issuers, with the EU and Japan also having regulatory frameworks in place. Singapore and the UK are preparing regulations, while the US has no regulation in the sector so far.
In concluding its consultation, the HKMA also addressed a number of concerns about the clarity of its language. It has provided more regulatory guidance on what constitutes eligible reserve assets, as well as how and where they should be held, said Andrew Fei, a partner at King & Wood Mallesons in Hong Kong.
Issuers, for example, would have to keep their capital reserves at banks licensed in Hong Kong, according to the HKMA. But it is open to considering arrangements on a case-by-case basis, it said.
The changes demonstrate that the city’s regulators are trying to “strike the right balance” between providing strong investor protections and offering more clarity and guidance to potential issuers, Fei said.
However, companies still face significant challenges in complying with the regulations, as they require significant resources to cover legal, technical and operational costs, said Jason Jiang, senior researcher at OKG Research.
“There are still significant financial pressures for many small and medium-sized institutions,” Jiang said. “So it is predictable that although fiat-referenced stablecoins have attracted a lot of attention and many companies have participated in the consultation, not many will ultimately apply for licensing and issue stablecoins.”
Successful licensed companies will also face the challenge of finding appropriate application scenarios, he added. If Hong Kong simply replicates existing stablecoin business models, those tokens may struggle to establish a competitive advantage, Jiang said.
A final draft of the stablecoin regulation bill will be submitted to the Legislative Council by the end of the year, according to the HKMA. Regulators also plan to establish separate guidelines to address money laundering risks associated with stablecoins.
Once the rules are in place, approved stablecoin issuers can sell their tokens on virtual asset platforms licensed by the SFC. Issuers that remain unlicensed by the HKMA can still sell to professional investors with portfolios of at least HK$8 million, Chan said.