Hong Kong’s New Stablecoin Regulations
Stablecoins are backed by a specified asset or basket of assets to maintain a stable value, usually pegged to a country’s currency, such as the US dollar. This stability contrasts with other crypto assets, which lack backing and are more volatile.
Hong Kong is not the first jurisdiction to propose a regulatory regime for stablecoins. However, its approach might become the most impactful.
This assertion may seem unusual given that the European Union, the United Kingdom, Singapore, and Japan have already made regulatory proposals. The United States also has a relatively loose, permissive regime. So, why is it significant if a city of 7.5 million people follows suit?
There are two main reasons:
- Unique Nature of the Hong Kong Currency: The most popular stablecoins, like Bitfinex’s Tether and Circle’s USDC, are pegged to the US dollar, showing a strong global demand for offshore dollars (or digital Eurodollars). The Hong Kong dollar is also pegged to the US dollar. Therefore, a Hong Kong dollar-related stablecoin is effectively a digital Eurodollar, unlike digital Singapore dollars, euros, yen, or sterling.
- HKMA’s Unique Position: Unlike other monetary authorities, the Hong Kong Monetary Authority (HKMA) has stablecoin reserves management embedded in its operations. The HKMA has maintained the Hong Kong dollar’s peg to the US dollar for forty years, despite financial crises and attacks by international hedge funds.
Given Hong Kong’s unique position, how will the HKMA’s proposed guidelines impact the stablecoin landscape? The key is reserves management.
On July 17, 2024, the Financial Services and the Treasury Bureau (FSTB) and the HKMA issued the consultation conclusions on the legislative proposal for regulating fiat-referenced stablecoin (FRS) issuers in Hong Kong. The consultation, which ended in February 2024, received 108 submissions from various stakeholders, with a majority supporting the introduction of a regulatory regime for FRS issuers to manage monetary and financial stability risks.
Secretary for Financial Services and the Treasury, Mr. Christopher Hui, stated, “In addition to the existing regulatory regime for VA trading platforms, the establishment of a licensing regime for FRS issuers will further strengthen the VA regulatory framework in Hong Kong in line with international standards and effectively mitigate possible financial stability risks associated with FRS issuance activities.”
The FSTB and the HKMA are now finalizing the legislative proposal, aiming to introduce a bill into the Legislative Council soon. Additionally, the HKMA is processing applications for a stablecoin issuer sandbox, which will help understand the business models of stablecoin issuers and refine the regulatory framework.
Hong Kong’s approach, emphasizing robust reserves management and leveraging its unique currency peg, positions it to significantly influence the global stablecoin market.