On 31 January 2023, the Hong Kong Monetary Authority (the HKMA) issued its consultation conclusions on the proposed regulatory regime for crypto-assets and stablecoins (the Conclusions). The Conclusions confirm the HKMA’s plan to implement a regulatory regime for stablecoins and specified stablecoin-related activities (the Regime). The Conclusions follow the HKMA’s discussion paper on crypto-assets and stablecoins released in January 2022, which sought the public’s feedback on the Regime and its guiding principles (please refer to our January 2022 blog for details).
Under the Regime, payment-related stablecoins will be subject to a licensing and supervisory regime overseen by the HKMA.
Summary of the feedback received
- There was broad consensus that the Regime should:
- adopt a risk-based and proportionate approach to regulation, giving priority to, and enhancing regulation for, areas which pose higher risks to monetary and financial stability; and
- maintain flexibility to adjust the Regime to cope with market and international regulatory developments.
- There were varied opinions on whether a licensee must be a Hong Kong-incorporated company, and whether certain types of crypto assets and stablecoins, given their characteristics, should be subject to regulation, if at all.
- There were also questions on the scope of the Regime, including as to what should constitute a “payment-related stablecoin”, and the applicability of the Regime to financial institutions that are already subject to regulation.
Key features of the Regime
What type of stablecoins will fall within the Regime?
- The HKMA will prioritise the regulation of stablecoins that reference one or more fiat currencies, including the Hong Kong dollar (In-scope Stablecoins), irrespective of the underlying stablisation mechanism. This is because In-scope Stablecoins are more likely to be used to make payments and have linkages with the traditional financial system, and therefore pose greater monetary and financial stability risks.
- The HKMA will retain flexibility to include other types of stablecoins in the Regime further down the line.
- The HKMA is further considering “guiding factors” that it would have regard to when deciding whether a particular stablecoin structure should be subject to the Regime. Further analysis and consultations will also be conducted to determine the types of structures that should be excluded from the Regime.
What activities will be regulated?
- Under the Regime, the following key activities related to an In-scope Stablecoin (each a regulated activity) will be subject to licensing and regulation, with flexibility to subject other types of activities to regulation in the future:
- Governance: Establishment and maintenance of the rules governing an In-scope Stablecoin arrangement;
- Issuance: Issuing, creating or destroying an In-scope Stablecoin;
- Stabilisation: Stabilisation and reserve management arrangements of an In-scope Stablecoin (whether or not such arrangements are provided by the issuer); and
- Wallets: Provision of services that allow the storage of the users’ cryptographic keys which enable access to the users’ holdings of an In-scope Stablecoin and the management of such stablecoins.
What will be the regulatory requirements?
- The HKMA proposes to develop appropriate regulatory requirements targeting each type of regulated activity, such that different types of regulated activities will be covered under different licenses, rather than a single license covering multiple regulated activities.
- Various regulatory requirements will be applied to regulated activities using a risk-based approach. These requirements will cover areas such as:
- ownership, governance and management, financial resources requirements, risk management, AML/CFT, user protection, and regular audits and disclosure requirements;
- maintenance of reserve assets and redemption, whereby the value of the reserve assets of an In-scope Stablecoin arrangement should meet the value of the outstanding stablecoins at all times. The reserve assets should be of high quality and liquidity to enable a stablecoin holder to redeem the stablecoin into the referenced fiat currency at par within a reasonable period. Stablecoins that derive their value based on arbitrage or algorithms will not be acceptable; and
- principal business restriction, whereby a regulated entity should not conduct activities that deviate from its principal business as permitted under its relevant license(s).
Who will require a license from the HKMA?
- Entities that:
- conduct a regulated activity in Hong Kong;
- actively market such activity to the Hong Kong public;
- conduct a regulated activity relating to a stablecoin pegged to the Hong Kong dollar; or
- the HKMA is of the view should be regulated, having regard to matters of significant public interest,
will be required to hold relevant license(s) under the Regime.
- The HKMA will assess and work with other stakeholders in the Hong Kong SAR Government and local financial regulators to address any issues of regulatory overlaps or gaps. It will also draw reference from the discussions of international regulatory bodies.
- The HKMA is considering whether to introduce a new legislation or amend existing legislation to implement the Regime, such as expanding the scope of the Payment Systems and Stored Value Facilities Ordinance.
- The HKMA will, in due course, conduct a more detailed consultation on the more granular details and requirements of the Regime which will feature in the draft legislation.
- The target implementation date of the Regime is 2023/24.
A comparison against Singapore’s proposed regulatory measures for stablecoins
In October 2022, the Monetary Authority of Singapore (the MAS) released a consultation paper on the proposed regulatory measures relating to stablecoins. The consultation period ended in December 2022. The key differences between the Regime and the MAS’ proposed regime are:
- Type of in-scope stablecoins: Only single currency-pegged stablecoins (SCS), where the value of SCS in circulation exceeds S$5 million will be regulated by the MAS. Non-SCS (e.g. algorithmic-based and multi-currency pegged stablecoins) will be treated as “digital payment tokens” or DPTs and will continue to be regulated under the Payment Services Act 2019 (the PS Act). In Hong Kong, a broader range of stablecoins, being those pegged to a single currency or a basket of currencies (including algorithmic-based stablecoins) will be subject to the HKMA’s proposed regulation.
- Stablecoin-related activities: In Hong Kong,issuance, governance, stabilization and wallet services of In-scope Stablecoins will each constitute a type of regulated activity. The MAS proposes to introduce only one type of regulated activity to regulate the issuance of a SCS (a “stablecoin issuance service”).
- Regulated entities: Under the proposed HKMA regime,entities that conduct or actively market a regulated activity in Hong Kong, etc., will require a license. Different types of regulated activities will be covered under different licenses. In contrast, the MAS intends to roll out a tiered licensing structure where entities who carry out a “stablecoin issuance service” (SCS issuers) will be subject to regulatory measures concerning asset backing, redemption policies and prudential requirements. Entities that carry out SCS-related activities (excluding a stablecoin issuance service) will be regulated as SCS intermediaries under the PS Act and subject to less onerous requirements than SCS issuers.
Please contact Etelka Bogardi (Etelka.Bogardi@nortonrosefulbright.com) or Conrad Lam (Conrad.Lam@nortonrosefulbright.com) if you wish to discuss any aspect of the Regime.
 Only SCS pegged to the Singapore dollar or a G10 currency can be issued.
 The regulated activity of “stablecoin issuance service” will regulate entities in Singapore that perform the function of controlling the total supply, minting and burning of a SCS.