Hong Kong's Stablecoin Regulatory Framework and Key Requirements

According to PANews, Hong Kong has recently released a summary of its stablecoin regulatory consultation and announced the sandbox applicants, drawing the Web3 community into discussions about HKD stablecoins and Web3 payments. In a significant article, HKMA Deputy President Chen Weimin clarified that entering the 'sandbox' is not a prerequisite for applying for a stablecoin issuer license in the future. Even institutions already in the 'sandbox' must submit a formal application once the regulatory framework is implemented if they wish to obtain a license. To issue fiat-backed stablecoins in Hong Kong, issuers must adhere to specific rules and core elements post-issuance. The Hong Kong office head of Mankun Law Firm, Bai Zhen Jen, provided an analysis of these requirements. As the digital currency market expands and matures, Hong Kong, as an international financial center, has implemented several measures to ensure the compliance, safety, and transparency of its stablecoin market. The HKMA's latest regulatory framework draft offers comprehensive guidance to ensure that stablecoin issuance and operations meet the highest regulatory standards. These measures aim to create a highly secure and transparent stablecoin market, protecting investors' interests and providing a solid foundation for fintech innovation. With these regulations gradually taking effect, Hong Kong is poised to become a global leader in the stablecoin market, setting new standards for digital currency regulation. The core elements of Hong Kong's stablecoin regulation include the following: **FRS Issuance License Rules**: The HKMA has set clear regulatory standards by defining fiat-referenced stablecoins (FRS) and the qualifications for their issuers. To become an FRS issuer, one must obtain a license in Hong Kong. Specific requirements for the license application include: - **Reserve Assets**: Requirements for the quantity, composition, quality, liquidity, custody, segregation, location, management, and disclosure of reserve assets supporting FRS. Algorithmic fiat-referenced stablecoins are not accepted. - **Redemption Process**: Ensuring holders can redeem FRS at face value in the reference currency, typically within one business day, without unreasonable conditions or excessive fees. - **Localization Requirements**: FRS issuers must be Hong Kong companies with senior management and key personnel residing in Hong Kong. - **Business Activity Restrictions**: Limiting FRS issuers from engaging in activities unrelated to FRS issuance. - **Financial Resource Requirements**: The issuer's paid-up capital must be the higher of HKD 25 million or 1% of the circulating FRS's face value. - **Suitability Requirements**: Involved personnel must have sufficient relevant knowledge and experience. - **Other Requirements**: Anti-money laundering/anti-terrorist financing requirements, white paper and other disclosure requirements, risk management, and audit requirements. **FRS Issuer Requirements**: In addition to licensing requirements, FRS issuers must adhere to strict rules during issuance, including: - An FRS issuer can issue multiple FRS under its existing license without establishing separate entities or undergoing additional application processes. However, issuers must provide reasons for issuing multiple FRS, explain their usage, and obtain prior consent from the HKMA before issuing new FRS. - FRS issuers must keep reserve assets in licensed banks in Hong Kong to provide better user protection in case of business disruption or failure. - FRS users must be able to redeem their FRS on a 'timely' basis, typically within one business day. If difficulties arise, prior approval from the HKMA is required. - FRS issuers can offer marketing incentives to promote their FRS but are prohibited from paying interest directly or through third parties to FRS users. Through these detailed regulations, Hong Kong aims to establish a highly secure, transparent, and well-regulated stablecoin market environment. These measures not only enhance market stability and investor protection but also promote fintech innovation and healthy market development. For stablecoin issuers, understanding and complying with these stringent regulatory requirements is crucial for sustainable business development and maintaining market competitiveness.