Hong Kong Set to License and Regulate Fiat-Referenced Stablecoins

New Regulatory Framework for FRS

Hong Kong has taken a significant step towards regulating the digital currency space. The Financial Services and the Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA) have published a consultation paper with groundbreaking proposals. These proposals primarily focus on the regulation and licensing of fiat-referenced stablecoins (FRS).

Consultation Period and Legislative Details

The consultation paper, released on December 27, initiates a dialogue that will continue until February 29, 2024. It outlines the need for a specific licensing regime for companies involved in the issuance of FRS in Hong Kong. The paper emphasises that any entity aiming to market FRS in Hong Kong must secure a license from the HKMA.

Licensing Criteria for Stablecoin Issuers

Obtaining a license from the HKMA comes with stringent criteria. These include ensuring that all circulating stablecoins are fully backed by reserves equal to their par value. The safekeeping and segregation of these reserve assets are essential requirements. Additionally, regular reporting and disclosure are mandated. Notably, algorithmic stablecoins are excluded from this licensing framework.

Operational Mandates for Issuers

For operational compliance, stablecoin issuers are required to establish a registered office in Hong Kong. This office must house a chief executive, a senior management team, and key personnel. The presence of these personnel in Hong Kong is a prerequisite for maintaining the license.

Christopher Hui, the Secretary for Financial Services and the Treasury, commented on the development. He said, “With the implementation of the licensing regime for VA trading platforms from June this year, the legislative proposal to regulate FRS is another important measure facilitating Web3 ecosystem development in Hong Kong.”

In a related development, the HKMA and the Securities and Futures Commission (SFC) announced their readiness to accept applications for various funds. These include Virtual Asset Spot exchange-traded funds (VA Spot ETFs), which will complement the existing crypto futures ETFs.

While this move by Hong Kong represents a structured approach to integrating stablecoins into the financial system, it also places significant operational and regulatory demands on issuers, potentially impacting the pace of innovation in the sector.