Hong Kong Stablecoin Supervision Five Key Issues

Original author: Lawyer Jin Jianzhi

On December 27, 2023, in the last few days of 2024, the Hong Kong government is still working hard to become a global Web3.0 center. This time the goal is the regulation of stablecoins. Not to mention the huge advantages that stablecoins have over traditional payment methods, just looking at the mind-numbing financial statements of USDT issuer Tether (net profit in Q1 2023 is US$1.48 billion), one has to sigh that stablecoins are really good. Hong Kong The government thinks so too. In order to maintain Hong Kong’s status as an international financial center and promote the sustainable and responsible development of Hong Kong’svirtual assetsecosystem, the Hong Kong government has decided to advance and retreat together with stablecoins. , to endorse the issuance of stable coins in a regulatory manner. The Financial Services and the Treasury Bureau and the Hong Kong Monetary Authority jointly issued a public consultation document (hereinafter referred to as the "Stablecoin Consultation Document") to begin collecting opinions on legislative proposals for the supervision of stablecoin issuers.

In response to the stable currency consultation document, lawyer Mankiw Jin interpreted the key points of everyone's concern.

Will issuing stablecoins in Hong Kong be regulated?

Yes, but it is not necessary to apply for a license.

The Hong Kong government’s definition of stablecoin is “cryptographically protected digital form of value that meets but is not limited to the following description— 

(a) Expressed in the form of a unit of calculation or storage of economic value;

(b) As or intended to be As a publicly accepted medium of exchange for payment for goods or services, settlement of debts, and/or investment;

(c) Can be transferred and stored electronically or buying and selling;

(d) using distributed ledgers or similar technologies that are not solely controlled by the issuer; and

(e) Claims or appears to maintain a relatively stable value relative to a particular asset, group or basket of assets."

That is, ,As long as they are anchored to real-world assets and have the possibility of payment,virtual assets may be regarded as stablecoins by the Hong Kong government and follow the "same business According to the principle of "same risk, same supervision", all stablecoins will fall within the scope of supervision. Naturally, the first ones to bear the brunt are fiat currency stablecoins (including algorithmic stablecoins). However, as long as the issuance of stablecoins is not for the public, but only for professional investors, the relevant parties of the stablecoins do not need to apply for a license. However, it must be clearly stated that the stablecoins are not issued by licensed fiatcoins. Issued by the coin issuer.

Which regulatory authority is it?

Hong Kong Monetary Authority.

Following the mainstream international view, stablecoins are considered "commodities" rather than "securities" and are therefore not subject to supervision by the China Securities Regulatory Commission. In this regard, the Hong Kong government has also made it clear: “In order to prevent issuers of fiat-currency stablecoins from being supervised by multiple regulatory systems, it is now recommended that the issuance of fiat-currency stablecoins by licensed issuers will be excluded from certain regulatory systems, such as A regulatory system applicable to securities (including collective investment schemes) and stored value payment instruments."

Of course, the market is changing rapidly, and the Hong Kong government has not ruled out other financial regulations in the future. The possibility of institutions joining in the regulation of stablecoins. But in the foreseeable future, compared with multi-party supervision, a more realistic and flexible supervision is what the President of the Hong Kong Financial Supervisory Authority, Yue Weiman, calls the regulatory "Sandbox set up by the Hong Kong Financial Supervisory Authority. strong>”Arrangements. Because the regulatory sandbox “ensures financial stability without stifling innovation.”

Foreign entities have obtained licenses in other countries, do they still need to apply again?

Required.

As long as you carry out stable currency business in Hong Kong, you need to apply for a license from the Hong Kong Monetary Authority. First of all, none of the major countries and regions have issued effective laws and regulations on the issuance of stablecoins. Therefore, in the field of stablecoin supervision, there is no saying that a license has been obtained. Secondly, no country or region will give up its right to speak in the financial field. Even if the United States, the European Union, Japan, and Singapore issue stablecoin licenses in the near future, the Hong Kong government will not be exempted from the obligation to apply for a license in Hong Kong, and even It is also impossible to implement local simplified licensing procedures for foreign entities that have obtained relevant licenses in other countries or regions.

Can banks issue stablecoins?

Commercial banks can.

For the avoidance of doubt,digital legal currencies issued by or on behalf of the central bank, such as digital Hong Kong dollars, digital renminbi, etc. are not within the scope of supervision mentioned by the Hong Kong government this time. Commercial banks can issue stablecoins, and the supervision faced by commercial banks when issuing stablecoins is different from that of ordinary companies. The Stablecoin Consultation Document recommends that banks that issue stablecoins should not impose restrictions on their business activities, nor require banks to pay up registered capital. , because licensed banks are already subject to the banking regulatory system in these aspects, and their supervision is more stringent. But under such an arrangement, whether it is better to issue stable coins as a commercial bank or to set up a separate company to issue stable coins, which one can achieve regulatory benefits is a question worth pondering.

How much does compliance cost?

Quite high, but maybe it is still cost-effective compared with the income?

Specifically, for issuers who want to issue stablecoins to the public in Hong Kong, the following arethe main hard ones Compliance indicators:

• A Hong Kong The company has a registered office. Its chief executive, senior management team and key personnel must be resident in Hong Kong.

• Paid-inRegistered capital. Not less than HKD 25,000,000, or at least 2% of the face value of the stable currency in circulation.

• Full reserve support. The total value of reserve assets is at least equal to the face value of the circulating fiat stablecoins at any time.

• Complete risk control procedures. Including but not limited to external audits, independent custody, redemption policies, etc.

As for the cost of soft compliance indicators, everyone has a different opinion. For example, regarding restrictions on business activities, the stablecoin consultation document points out that issuers should not engage in lending and financial intermediary activities, nor should they engage in other regulated activities, such as the Securities and Futures Ordinance (Chapter 571), Mandatory Regulated activities specified in the Provident Fund Schemes Ordinance (Chapter 485) or the Insurance Ordinance (Chapter 41); issuers of fiat currency stablecoins must obtain approval from the Monetary Authority before commencing any new business. Whether it is more cost-effective to circumvent these soft compliance indicators through other legal or commercial arrangements depends on many factors.

Tether, the world’s largest stablecoin operator by market capitalization, has not yet responded to the stablecoin consultation document. But Circle, the operator of USDC, the world’s second-largest stablecoin, expressed support. Regardless of whether Tether supports it or not, if you want to continue doing stablecoin business in Hong Kong, you must support supervision. As for the degree of supervision, we can discuss it again before the boots are put on the ground.

So, compliant stablecoins are coming, will RWA tokenization be far behind?