Amid a global lack of direction for regulating stablecoins, Hong Kong is leading the charge for a tighter legal framework for the asset class.
Local news outlet The Standard reported that the Hong Kong Monetary Authority (HKMA) has launched a public consultation to explore new possibilities for stablecoin regulation in the region. The consultation process is expected to draw opinion from academia, digital currency operators, and the general public till Q3 of 2023.
Hong Kong’s Undersecretary for Financial Services and the Treasury, Joseph Chan Ho-lim, revealed that the consultation will form the basis of a new stablecoin framework to be released in 2024. Attempts at policing stablecoins in Hong Kong have been underway since 2022, with the publication of a discussion paper to cross-pollinate ideas.
Following the de-pegging of algorithmic stablecoin TerraUSD (UST) from the U.S. dollar, Hong Kong regulators upped the ante for regulations, publishing a new report on stablecoins in early 2023. According to the paper, the region’s central bank will adopt a “risk-based and agile approach” for regulating the asset class to avoid a disruption of the financial system.
While still subject to change, details in the HKMA’s discussion paper suggest that all stablecoins must be pegged to fiat currencies or high-liquidity assets, eliminating algorithmic stablecoins. The paper also suggests that stablecoin issuers will be regulated in the same manner as banks which would bring them firmly within the purview of the HKMA.
The regulator confirmed that regulating the industry will align with the principle of “same activity, same risk, and same regulation” to achieve uniformity across the board.
The HKMA played a key role in the Financial Stability Board’s (FSB) stablecoin guidelines and regulations in 2022. Despite the intent of regulating stablecoins, the HKMA is also keen on floating a central bank digital currency (CBDC) after early probes yielded positive results.
Series of regulations
Hong Kong’s plans to regulate stablecoins follow the region’s new guidelines for retail digital currency investors. On June 1, retail investors were allowed to trade major digital currencies on licensed exchanges in the country amid the operation of a new licensing regime for service providers.
The region’s push to become a digital currency powerhouse has not gone unnoticed, with nearly 100 global firms considering setting up shops in Hong Kong. Experts say the region merely serves as a regulatory sandbox for mainland China as Chinese banks extend financial services to incoming firms.
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