Hong Kong to increase digital asset regulation in next 18 months, with focus on stablecoins

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Hong Kong could be set to introduce enhanced digital asset regulations within the next 18 months, according to a Legislative Council member. The move would be part of the jurisdiction’s push to become a global hub for financial technology.

“The digital asset industry has made significant progress in the past few years, but we are still in a very early stage,” said David Chiu, a member of the Legislative Council of the Hong Kong Special Administrative Region, before outlining the city’s strategic plans to attract tech talent, build supportive infrastructure and establish robust supervision.

Speaking at the third annual Foresight Conference in Hong Kong on August 11, Chiu said, “We should establish a sound exchange system and soon introduce legislation related to stablecoins.” He also emphasized that the initiative is crucial for the technology industry over the next five to 10 years.

Stablecoins—a type of digital asset designed to have a relatively stable price, typically by being ‘pegged’ to the price of a fiat currency—appear to be a regulatory priority for Hong Kong, as they are with many jurisdictions.

The urgency is often due to the utility and widespread nature of stablecoins, particularly Tether (USDT) and Circle’s USDC, as well as a perceived heightened systemic risk to traditional finance spaces.

According to Chiu, the Hong Kong government aims to enhance the supervision and enforcement of legislation related to digital asset financial products, including stablecoins, within the next year and a half. Sandbox tests have already been carried out to establish the best form this impending legislation should take.

Stablecoin regulation

Hong Kong has been working on stablecoin regulations for the past few years. The Hong Kong Monetary Authority (HKMA)—the jurisdiction’s central banking institution—first issued a related discussion paper in 2022. A year later, it published its final recommendations calling for an “agile and risk-based approach.”

In June 2023, the central bank pledged to finalize the framework by the end of 2024. To achieve this, the government began conducting consultations, with the expectation of releasing the final guidelines later this year.

Last September, the HKMA announced a second round of consultations for a stablecoin regulatory framework.

After concluding the consultation period, the HKMA indicated plans to move forward with a regime that would require issuers of fiat currency-backed tokens to obtain a license from the central bank.

“In view of the rising interconnectedness between the traditional financial system and the virtual asset markets, the HKMA is currently formulating a regulatory regime for stablecoin issuers in Hong Kong,” stated the HKMA in March.

It announced that “with a view to facilitating the subsequent implementation of the regime, the HKMA has launched a sandbox arrangement to facilitate the exchange of views between the HKMA and the industry on the proposed regulatory requirements.”

The Sandbox

In his 2024 budget presentation, Hong Kong financial secretary Paul Chan touched on stablecoins, revealing plans to launch a stablecoin sandbox to support issuers.

“The HKMA will soon roll out a “sandbox” for entities interested in issuing stablecoins to conduct trials, under manageable conditions, on the issuance process, business models, investor protection and risk management system,” said Chan.

In July, the HKMA announced the first participants in the stablecoin issuer sandbox.

The participants included a company linked to a significant Chinese e-commerce retailer, a local fintech firm, and a coalition of Standard Chartered Bank, Animoca Brands, Hong Kong Telecommunications, and Jingdong Coinlink Technology, which plans to issue a 1:1 stablecoin linked to the Hong Kong dollar.

Watch: Stablecoins with Daniel Lipshitz