On 12 January 2022, the Hong Kong Monetary Authority (“HKMA”) issued a discussion paper on crypto-assets and stablecoins (the “Discussion Paper”), inviting views on potential regulatory approaches until 31 March 2022.
Background to the Discussion Paper
The HKMA has been reviewing the regulatory treatment of crypto-assets locally and is paying particular attention to factors such as the public’s confidence, safety, efficiency, soundness of payment systems, and the protection of users. This Discussion Paper mainly considers with the adequacy of the existing regulatory framework in response to the challenges arising from the growing use of stablecoins and other types of crypto-assets in the financial markets.
What are crypto-assets and stablecoins?
As stated in the Discussion Paper, a crypto-asset refers to “a type of private digital asset that depends primarily on cryptography and distributed ledger or similar technology”. This includes but is not limited to stablecoins, utility tokens and non-fungible tokens.
Stablecoins are generally considered as a sub-set of crypto-assets that is commonly pegged to an underlying asset such as securities or fiat currencies. It is perceived to be developing into a commonly acceptable means to store value and/or make payments, and thus, has a higher potential for being incorporated into the mainstream financial system. The HKMA identifies these as “payment-related stablecoins” that are unlike “non-payment related stablecoins”, which are mainly used for speculative investment purposes.
The HKMA is of the view that stablecoins bear the following list of key risk/issues:-
- Financial stability risk
- Monetary stability risk
- Settlement finality risk
- User protection
- Financial crime and cyber risks
- International compliance with relevant standards and best practices
- The need to update our regulatory regime
Discussion questions
The table below summarises the eight discussion questions put forward by the HKMA in the Discussion Paper for the public’s consideration, along with their views. These questions serve as a practical starting point to invite views.
| Discussion Question | HKMA’s views |
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1. Should we regulate activities relating to all types of stablecoins or give priority to those payment-related stablecoins that pose higher risks to the monetary and financial systems while providing flexibility in the regime to make adjustments to the scope of stablecoins that may be subject to regulation as needed in the future? |
HKMA intends to focus on activities related to payment-related stablecoins at this stage, in particular, asset-linked stablecoins, as it has a higher potential for being incorporated into the mainstream financial system.
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2. What types of stablecoin-related activities should fall under the regulatory ambit, e.g. issuance and redemption, custody and administration, reserves management?
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The following non-exhaustive list of activities: i. issuing, creating or destroying stablecoins: the activity of minting and burning of stablecoins ii. managing reserve assets to ensure stabilisation of the stablecoin value: the activity of managing the reserve assets that are backing the value of the stablecoins and providing custody/trust for these assets iii. validating transactions and records: the activity of authorising or verifying the validity of transactions and records iv. storing the private keys providing access to stablecoins: the activity of safe-keeping of keys used to digitally sign transaction instructions on behalf of stablecoin holders v. facilitating the redemption of stablecoins: the activity of facilitating the stablecoin holders to redeem stablecoins for fiat currencies or other assets vi. transmission of funds: the activity of ensuring the correct and final settlement of transactions to minimise default risk of counterparties vii. executing transactions in stablecoins: the activity of conducting transactions on behalf of others |
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3. What kind of authorisation and regulatory requirements would be envisaged for those entities subject to the new licensing regime? |
HKMA intends to apply the following high-level regulatory requirements using a risk-based approach as opposed to a one-size-fits-all manner: i. Authorisation requirements ii. Prudential requirements, including adequate financial resources and liquidity requirements iii. Fit and proper requirements on management and ownership iv. Maintenance and management of reserves of backing assets v. Systems, controls, governance and risk management requirements vi. AML/CFT requirements vii. Redemption requirements viii. Financial reporting and disclosure ix. Safety, efficiency and security requirements x. Settlement finality |
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4. What is the intended coverage as to who needs a licence under the intended regulatory regime?
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HKMA is of the view that no person shall carry out the activities described in Q2 above in Hong Kong or actively market to the public of Hong Kong unless it is an entity incorporated in Hong Kong and holds a relevant licence granted by the HKMA. A foreign company/group will need to incorporate a company under Hong Kong law, and the Hong Kong-incorporated company would be the entity to apply to the HKMA for a licence and hold that licence. |
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5. When will this new, risk-based regime on stablecoins be established, and would there be regulatory overlap with other financial regulatory regimes in Hong Kong, including but not limited to the SFC’s VASP regime, and the SVF licensing regime of the PSSVFO? |
HKMA envisages that it will issue further documents on specific aspects of the regulatory framework in 2022/23. It aims to introduce the new regime no later than 2023/24. |
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6. Stablecoins could be subject to run and become potential substitutes of bank deposits. Should the HKMA require stablecoin issuers to be Authorised Institutions (“AIs”) under the Banking Ordinance, similar to the recommendations in the Report on Stablecoins issued by the US President’s Working Group on Financial Markets? |
The HKMA will draw reference from the relevant international standards and recommendations such as those put forth by the FSB and the BIS for stablecoins.
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7. Would the HKMA also have plans to regulate unbacked crypto-assets given their growing linkage with the mainstream financial system and risk to financial stability? |
The HKMA, in discharging its functions of maintaining the monetary, financial and banking stability of Hong Kong, will soon provide AIs with more detailed regulatory guidance in relation to AIs’ business interface with and provision of intermediary services to customers related to crypto-assets. |
| 8. For current or prospective parties and entities in the stablecoins ecosystem, what should they do before the HKMA’s regulatory regime is introduced? |
The HKMA encourages current or prospective players in the stablecoins ecosystem to respond to this paper and submit relevant views, so that they can take the feedback into account when formulating the regulatory framework. |
Given the rise of cryptocurrency in the recent years and especially since the Covid-19 pandemic, these regulatory proposals are much welcome—not only will it ensure that users will have some protection when engaging in crypto-asset-related activities in the future, it also reflects that Hong Kong’s financial regulatory landscape is catching-up with the constantly-evolving technological world.
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