Hong Kong consultation paper hints at new stablecoin regulation

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Hong Kong regulators have signaled an intent to approve fiat-referenced stablecoins (FRS), launching a consultation paper to seek the opinion of industry players and the general public.

According to the 30-page document, the Financial Services and Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA) are inching toward a robust regulatory framework for stablecoins. Both agencies are keen on establishing a licensing framework for FRS issuers, with the HKMA in charge of granting licensing.

Hong Kong’s proposed stablecoin regulation appears poised to restrict FRS to only professional investors in light of the associated risks. Other provisions to be included in the incoming rule book is the requirement for issuers to ensure full backing of all stablecoins in circulation while segregating reserve assets to protect consumers.

“The FRS issuer should put in place an effective trust arrangement to ensure that the reserve assets of the FRS are segregated from its other assets, and available to satisfy FRS holders’ redemption, as well as their legal rights and priority claim of reserve assets in the event an insolvency of the issuer,” read the consultation paper.

The FSTB and the HKMA are pushing issuers to establish liquidity risk management practices and make proper disclosures to regulators at regular intervals.

“It is proposed that the total amount of FRS in circulation and the value of reserve assets be disclosed at least daily, the composition of reserve assets be disclosed at least weekly, and attestation by the independent auditor be performed at least monthly,” read the joint consultation paper.

Under the proposed framework, FRS issuers will be barred from paying interest to users, with issuers urged to incorporate effective stabilization methods. However, the paper submitted that issuers of algorithmic stablecoins are less likely to obtain operational licenses from the HKMA.

To obtain operational permits, issuers are expected to set up shops in Hong Kong and have key personnel based in the city-state. In line with international best practices, minimum paid-up share capital will be pegged at HKD25,000,000 (US$3.1 million), but the central bank may reserve the right to impose a higher benchmark for applying firms.

According to the paper, firms will be given an “open-ended license,” with the HKMA holding the right to revoke its approvals for non-compliance.

Stablecoin regulations occupy centerstage

Hong Kong regulators have made public their resolve to establish proper stablecoin regulations following its streak of multiple industry-wide consultations. Seeking to proceed with an “agile and risk-based approach” for stablecoins, regulators say that the incoming rulebook will maintain Hong Kong’s status as a global financial center.

To prevent a repeat of the TerraUSD (UST) de-pegging and other high-profile industry
collapses, Hong Kong’s financial authorities are pinning their focus on proper reserve assets and a hard stance against algorithmic stablecoins.

“The reserve assets should be of high quality and high liquidity,” said the HKMA. “Stablecoins that derive their value based on arbitrage or algorithm will not be accepted.”

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