Hong Kong Stablecoin Regulatory Consultation Summary: "Sandbox" Participants to be Announced; Issuers Must Set 100% Reserves; Providing Interest to Users is Prohibited

The Hong Kong Treasury and the HKMA yesterday released a consultation summary on the legislative proposal to implement a regulatory regime for issuers of fiat stablecoins in Hong Kong. The vast majority of respondents agreed that there is a need to introduce a regulatory regime for issuers of fiat stablecoins to properly manage potential monetary and financial stability risks and provide transparent and appropriate regulations. The Treasury and the HKMA will finalize the legislative proposal to implement the regulatory regime in response to the opinions and suggestions of the respondents and submit the draft bill to the Legislative Council as soon as possible; the HKMA is also processing the "sandbox" application of stablecoin issuers and will announce the list of participants in the near future. According to the consultation, most respondents support the total value of the reserve assets of fiat stablecoins and the requirement to maintain full reserves at all times. Some respondents raised the potential difficulties of real-time reconciliation and the need to replenish the reserve assets from time to time to ensure that the market value of the reserve assets is at least equal to the face value of the fiat stablecoins in circulation. The authorities responded that insufficient reserve assets may prevent stablecoin users from redeeming all stablecoins at face value, leading to bank runs, and believed that the circulating fiat stablecoins must be fully supported by reserve assets at all times. In the future, licensees of fiat stablecoins will need to demonstrate to the Monetary Authority that they have measures in place (such as excess reserves) to comply with the requirements. In addition, the consultation paper proposes that the issuer's minimum paid-up share capital should be at least 2% of the total amount of fiat stablecoins in circulation, or HK$25 million, whichever is higher. Some respondents believe that it is difficult to maintain sufficient capital in a timely manner based on the circulation of fiat stablecoins. The authorities will change the minimum paid-up share capital requirement to HK$25 million, or 1% of the circulation of its stablecoins, whichever is higher. The Monetary Authority still retains the flexibility and power to impose additional capital requirements when necessary. It is worth noting that many respondents provided opinions on the sale of fiat stablecoins issued outside Hong Kong, and some respondents suggested that the sale of fiat stablecoins issued outside Hong Kong to retail investors could be allowed under regulatory criteria or due diligence. The authorities responded that many fiat stablecoins are currently not regulated by any regulatory system, and the potential risks of stabilization mechanisms and public use may cause concern. If other jurisdictions have established equivalent systems, the authorities will consider establishing a formal regulatory cooperation mechanism, such as mutual recognition or a "passport" arrangement. In addition, the authorities still prefer to maintain the establishment of a physical company in Hong Kong as one of the licensing criteria. The HKMA also pointed out that there is no prohibition on issuers from providing promotional offers, but issuers are not allowed to arrange with third parties to provide interest to users of fiat stablecoins. (Ming Pao)