On 27 December 2023, the Financial Services and the Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA) jointly issued a public consultation paper on their legislative proposal to regulate issuers of stablecoin.

The Hong Kong Government has decided that, in light of the important roles played by stablecoins in the Web3 and virtual asset ecosystem and the growing interconnectedness between the traditional financial system and virtual asset markets, a regulatory regime should be introduced for fiat-referenced stablecoin (FRS) issuers. Financial products and instruments that are already regulated under existing regulatory regimes in Hong Kong, such as deposits, authorised funds, authorised structured products, float stored in stored value facilities and central bank digital currencies will be excluded from the proposed regulatory regime.

The proposed legislation follows an earlier round of consultation on cryptoassets and stablecoins by the HKMA which concluded in January 2023 (please see our previous update). Key aspects of the proposal in the present consultation paper include:

  • Introducing a new piece of legislation to implement a licensing regime requiring all FRS issuers that meet any of the following conditions to be licensed by the HKMA, issuers who: (i) issue an FRS in Hong Kong; (ii) issue an FRS referencing the Hong Kong dollar; or (iii) actively market their issuance of FRS to the Hong Kong public.
  • Providing that FRS can be offered only by licensed virtual asset trading platforms and licensed corporations licensed by the Securities and Futures Commission, HKMA-licensed FRS issuers and HKMA-licensed banks (collectively, specified licensed entities), and only FRS issued by HKMA-licensed issuers can be offered to retail investors.
  • Prohibiting the advertising of (i) FRS issuance by unlicensed entities, or (ii) non-specified licensed entities’ offering of FRS.
  • Providing the necessary powers for the authorities to adjust the parameters of in-scope stablecoins and activities in light of the rapid development of the virtual asset market.

A transitional arrangement to facilitate the implementation of the regulatory regime.

The HKMA also plans to introduce a sandbox arrangement for communicating supervisory expectations and guidance on compliance to entities having a genuine interest in, and a reasonable plan on, issuing FRS in Hong Kong. The sandbox arrangement will also enable those entities to provide their feedback on the proposed regulatory requirements, with a view to facilitating the subsequent implementation of the regulatory regime and ensuring that it is fit for purpose.  Details of the sandbox arrangement will be announced separately.

The consultation is open until 29 February 2024.