Hong Kong Releases Framework for Cryptocurrency Stablecoin Regulation: What Details Are Worth Noting?
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Hong Kong Releases Framework for Cryptocurrency Stablecoin Regulation: What Details Are Worth Noting?
The Financial Services and the Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA) jointly issued a public consultation document on December 27 to solicit opinions on legislative proposals for regulating stablecoin issuers.
Navigating Web3 tides with focused insightsEditor: Excerpt from Wu Shuo Blockchain
The Financial Services and the Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA) jointly issued a public consultation paper on December 27, seeking views on legislative proposals to regulate issuers of fiat-backed stablecoins.
Given the important role of stablecoins in the Web3 and virtual asset ecosystem, and the increasingly close link between traditional financial systems and virtual asset markets, the government considers it necessary to establish a regulatory regime for fiat-backed stablecoin issuers. As virtual assets become more widespread, regulating fiat-backed stablecoin issuers through a risk-based and flexible approach can appropriately manage potential monetary and financial stability risks while providing transparency and appropriate safeguards.
The legislative proposals take into account market and public feedback collected from the HKMA's discussion paper on "Crypto Assets and Stablecoins" published last year, ongoing stakeholder consultations, local market conditions and needs, as well as relevant international standards. The key elements are as follows:
(1) Introducing a new law to implement a licensing regime requiring all qualifying fiat-backed stablecoin issuers to obtain a license from the Monetary Authority;
(2) Requiring that only designated licensed institutions may provide services for purchasing fiat-backed stablecoins, and only fiat-backed stablecoins issued by licensed issuers may be sold to retail investors;
(3) Prohibiting promotion of:
(i) Issuance of fiat-backed stablecoins by unlicensed issuers;
(ii) Services for purchasing fiat-backed stablecoins provided by non-designated licensed institutions;
(4) Granting authorities with necessary powers to adjust the scope of regulated stablecoins and activities in response to rapid changes in the virtual asset market;
(5) Providing transitional arrangements to facilitate smooth implementation of the regulatory regime.
The HKMA will also launch a “sandbox” arrangement to communicate regulatory expectations and provide compliance guidance to potential issuers with concrete plans to issue fiat-backed stablecoins in Hong Kong, while collecting their feedback on proposed regulatory requirements to facilitate the subsequent implementation of the regulatory framework and ensure alignment with regulatory objectives. Further details on the sandbox will be announced separately.
Financial Secretary Christopher Hui said: "Following the implementation of the virtual asset exchange licensing regime in June this year, these legislative proposals to regulate fiat-backed stablecoin issuers represent another significant step toward fostering the development of Hong Kong’s Web3 ecosystem. The implementation of licensing, supervision, and enforcement arrangements will properly manage actual and potential risks associated with the development of stablecoins in Hong Kong and align with international standards."
HKMA Chief Executive Eddie Yue said: "We support financial innovation, but we also believe it is essential to establish necessary regulatory frameworks and standards to promote long-term, sustainable, and responsible development of the virtual asset ecosystem. Therefore, while launching this public consultation, we are introducing a 'sandbox' channel to enable communication between the HKMA and market participants intending to launch stablecoin issuance businesses in Hong Kong, facilitating the implementation of the regulatory regime."
Legislative Approach
1. After evaluating options including amending the Anti-Money Laundering Ordinance, the Payment Systems and Stored Value Facilities Ordinance (PSVFO), or enacting new legislation, the FSTB and HKMA recommend enacting a new law based on the following considerations:
(a) Stablecoins and stored value facilities may have different characteristics. Therefore, establishing separate legislation to regulate fiat-backed stablecoin issuers is more appropriate than incorporating the regulatory regime into the PSVFO.
(b) Enacting new legislation appears better suited for emerging areas like stablecoins. If needed, such legislation could also serve as a foundation for expanding regulation to other virtual asset activities in the future.
2. It is currently proposed to bring fiat-backed stablecoin issuers under HKMA supervision. As markets and international regulatory discussions continue evolving, the government will cooperate with other financial regulators to assess risks posed by other virtual assets and activities and consider whether they should be brought under regulation.
3. The FSTB and HKMA also note that under the proposed regulatory regime for fiat-backed stablecoin issuers, regulated issuance activities may overlap with other existing financial regulatory regimes in Hong Kong. To avoid subjecting fiat-backed stablecoin issuers to multiple overlapping regulations, it is proposed that licensed issuers’ issuance of fiat-backed stablecoins be excluded from certain existing regulatory regimes—for example, those applicable to securities (including collective investment schemes) and stored value facilities.
Regulatory Framework for Fiat-Backed Stablecoin Issuers
1. Licensing Regime for Fiat-Backed Stablecoin Issuers
1.1 Under the proposed licensing regime, no person shall, unless licensed by the Monetary Authority:
(1) Issue or purport to issue fiat-backed stablecoins in Hong Kong;
(2) Issue or purport to issue stablecoins that claim or appear to maintain a relatively stable value against the Hong Kong dollar;
(3) Actively promote the issuance of its fiat-backed stablecoins to the Hong Kong public.
2. Licensing Criteria and Conditions
2.1 Reserve Management and Stability Mechanism
(a) Full reserve backing: A fiat-backed stablecoin issuer must ensure that at all times the total value of reserve assets equals or exceeds the face value of outstanding fiat-backed stablecoins. Given the fundamental difficulty in maintaining a robust stabilization mechanism for fiat-backed stablecoins whose value is derived via arbitrage or algorithms without meaningful reserve assets, such issuers would not qualify for licensing.
(b) Investment restrictions: Reserve assets must be high-quality and highly liquid, involving minimal market, credit, and concentration risks. The currency denomination of reserve assets should correspond to the currency referenced by the fiat-backed stablecoin; limited flexibility may be allowed in individual cases with approval from the Monetary Authority. When determining asset allocation, issuers must consider liquidity needs and ensure reserve management and investments meet these requirements. The Monetary Authority must be satisfied that the types and mix of assets proposed for investment are appropriate. Issuers must therefore develop an investment policy and review it periodically as their business evolves.
(c) Segregation and custody of reserves: Issuers must establish effective trust arrangements to ensure reserve assets are segregated and held separately from other assets, used solely to meet redemption obligations, and that users have legal rights and priority claims over reserve assets in case of issuer insolvency. Reserves must be managed through independent accounts held at licensed banks or with other custodians approved by the Monetary Authority. As part of internal control procedures, issuers must implement effective safeguards to protect reserve assets against operational risks, including theft, fraud, and misappropriation.
(d) Risk management and control procedures: Issuers must establish sound policies, guidelines, and controls to properly manage investment risks related to reserve asset management and ensure sufficient funds and liquid assets to meet redemption demands. Comprehensive liquidity risk management measures must be implemented, clearly defining strategies and tools for handling large-scale redemptions (e.g., bank runs or liquidity stress scenarios). Regular stress testing must be conducted to monitor adequacy and liquidity of reserve assets.
(e) Disclosure and reporting: Issuers must regularly disclose to the public the total amount of outstanding fiat-backed stablecoins, the market value of reserve assets, and the composition of reserves. They must appoint qualified independent auditors, after consulting the Monetary Authority, to verify: (i) the composition and market value of reserve assets; (ii) the face value of outstanding fiat-backed stablecoins; (iii) whether reserve assets were fully sufficient and sufficiently liquid to back outstanding stablecoins as of the last business day of the audit period; and (iv) full compliance with the Monetary Authority’s conditions on reserve asset management. It is proposed that issuers disclose the total amount and market value of outstanding stablecoins daily, disclose reserve composition weekly, and undergo monthly verification by qualified independent auditors.
(f) Prohibition on paying interest: Any income or loss from reserve assets—including but not limited to interest, dividends, or capital gains or losses—belongs to the issuer. Following international regulatory practice, fiat-backed stablecoin issuers must not pay interest to users.
(g) Effective stabilization mechanism: Regardless of whether the specific operation of the stabilization mechanism is performed by third parties, the issuer bears ultimate responsibility for its effective functioning.
2.2 Redemption Requirements
2.2.1 Users of fiat-backed stablecoins must have the right to redeem them at par value from the issuer and hold claims over reserve assets (and, if the issuer fails to fulfill redemption obligations, claims against the issuer itself). Redemption requests must be processed within a reasonable time frame and without unreasonable fees. The issuer must not impose unreasonable conditions (e.g., excessively high minimum redemption thresholds). Redemption fees must be clearly communicated to users and proportionate, not so high as to effectively deter redemptions. Payments upon redemption must be made in one or more fiat currencies referenced by the stablecoin.
2.2.2 When users cannot convert fiat-backed stablecoins into one or more fiat currencies through other channels (e.g., due to disruptions in intermediaries or infrastructure), the issuer must ensure direct redemptions at par value within a reasonable timeframe.
2.2.3 The issuer must establish and maintain contingency plans to allow orderly redemption of fiat-backed stablecoins even if it becomes unable to meet redemption obligations—including when its license is suspended or revoked.
2.3 Restrictions on Business Activities
2.3.1 Before commencing any new business activity, the issuer must obtain prior approval from the Monetary Authority. The issuer must conduct a risk assessment demonstrating adequate resources dedicated to issuing and operating fiat-backed stablecoins, showing that the new activity does not introduce additional risks and that risk controls are in place to ensure it does not impair the issuer’s ability to perform its core functions.
2.3.2 Approval may be granted for ancillary or incidental activities related to issuing fiat-backed stablecoins, such as providing wallet services for issued stablecoins to facilitate issuance and redemption processes. In offering such wallet services, the issuer must establish corresponding policies and procedures regarding segregation, custody, and safekeeping of user assets.
2.3.3 For clarity, issuers must not engage in lending or financial intermediary activities, nor undertake other regulated activities under laws such as the Securities and Futures Ordinance (Cap. 571), Mandatory Provident Fund Schemes Ordinance (Cap. 485), or Insurance Ordinance (Cap. 41).
2.4 Physical Presence in Hong Kong
The issuer must be a company incorporated under Hong Kong law with a registered office in Hong Kong. Its CEO, senior management team, and key personnel must reside in Hong Kong and exercise effective oversight over the issuance and related activities. This requirement enables effective supervision by the Monetary Authority.
2.5 Financial Resource Requirements
2.5.1 The issuer must possess sufficient financial resources to operate its fiat-backed stablecoin issuance business, including meeting a minimum paid-up capital requirement. This ensures the issuer has adequate financial buffers to sustain operations and absorb potential losses. Drawing on international regulatory practices, we propose a minimum paid-up capital of HK$25 million or a fixed percentage (proposed at 2%) of the face value of outstanding fiat-backed stablecoins, whichever is higher.
2.5.2 The Monetary Authority may, via licensing conditions, require higher levels of paid-up capital where deemed necessary.
2.6 Disclosure Requirements
2.6.1 The issuer must publish a whitepaper disclosing general information about itself, user rights and responsibilities, the stablecoin’s stabilization mechanism, reserve asset management arrangements, technology used, and associated risks. The issuer must notify the Monetary Authority before publishing the whitepaper or any related materials.
2.6.2 The issuer must disclose its redemption policy, clearly outlining procedures, timelines, applicable fees, and user rights regarding redemptions.
2.7 Governance, Knowledge, and Experience
Controllers, CEOs, and directors of the issuer must be fit and proper persons. Their appointments, as well as changes in ownership or management, require prior approval from the Monetary Authority. Additionally, the issuer must establish comprehensive control mechanisms for senior management appointments and maintain a robust corporate governance structure staffed by individuals with the requisite knowledge and experience to discharge their duties effectively.
2.8 Risk Management Requirements
The issuer must establish appropriate risk management procedures and measures for its operations. These include adequate security and internal controls to safeguard data and system integrity; effective fraud monitoring and detection systems; technology risk management; robust contingency plans for business disruptions; and other operational and security measures commensurate with the scale and complexity of the business. The issuer must conduct regular risk assessments—at least annually—to ensure internal controls, risk management, and governance procedures remain sound and effective.
2.9 Audit Requirements
The issuer must submit audited financial statements to the Monetary Authority annually. Upon request, the issuer must provide reports prepared by external independent auditors and assessors confirming effective management and sound operation of the stablecoin issuance business—for example, whether adequate controls exist over reserve asset management, cybersecurity, and smart contract robustness.
2.10 Anti-Money Laundering and Counter-Terrorist Financing Requirements
The issuer must ensure that the design and implementation of fiat-backed stablecoin issuance include sound and appropriate controls to prevent and combat money laundering and terrorist financing. The issuer must have robust and appropriate control systems to comply with applicable provisions under the Anti-Money Laundering Ordinance and measures issued by the Monetary Authority in the form of rules, regulations, or guidance aimed at preventing, combating, or detecting money laundering or terrorist financing. These include, but are not limited to, conducting adequate customer due diligence during issuance and redemption, transaction monitoring, and compliance with wire transfer rules ("Travel Rule") to meet FATF standards and requirements under the Anti-Money Laundering Ordinance.
3. Other Licensing Matters
3.1 Eligibility to Apply for a License
It is proposed that any entity meeting the licensing criteria and conditions be eligible to apply for a fiat-backed stablecoin issuer license. Applicants must undergo a rigorous review process demonstrating compliance with the criteria outlined above.
Given that licensed banks already adhere to stringent prudential regulations and are subject to comprehensive, ongoing supervision by the Monetary Authority, we propose that licensing criteria relating to (c) business activity restrictions, (d) physical presence in Hong Kong, and (e) financial resource requirements do not apply to licensed banks acting as stablecoin issuers, as they are already regulated under the banking regime in these aspects.
3.2 Ongoing Licensing Conditions
In addition to initial licensing criteria, we propose granting the Monetary Authority power to set, modify, or cancel ongoing licensing conditions for fiat-backed stablecoin issuers. Such conditions will be determined based on necessity—for example, specifying reserve asset requirements or limiting service categories the issuer may offer.
3.3 Issuing Multiple Fiat-Backed Stablecoins
We propose that before issuing any new fiat-backed stablecoin under its license, the issuer must obtain approval from the Monetary Authority. This ensures that new stablecoins do not adversely affect the operation of existing ones.
3.4 Open-Ended Licenses
We propose that licenses for fiat-backed stablecoin issuers be open-ended, remaining valid indefinitely as long as the licensee continues operations and has not had its license revoked by the Monetary Authority (e.g., due to violations or cessation of business).
3.5 Public Register and Licensing Fees
We propose that fiat-backed stablecoin issuers display their license number on all advertising materials and software applications provided to customers, enabling public verification of their licensed status. The Monetary Authority will maintain a central register of licensees accessible to the public.
We also propose empowering the Monetary Authority to levy annual licensing fees on fiat-backed stablecoin issuers, including those that are licensed banks.
4. Custody and Purchase Services for Fiat-Backed Stablecoins
Some stakeholders have suggested that custody and purchase services for virtual assets should be specifically regulated. The FSTB, HKMA, and Securities and Futures Commission (SFC) will work closely together to assess suitable regulatory models for these services.
Regarding services for purchasing fiat-backed stablecoins, we consider the risks associated with stablecoins issued by unlicensed entities to be opaque and unsuitable for general public use. To protect users, only licensed fiat-backed stablecoin issuers, authorized institutions, licensed corporations, and licensed virtual asset trading platforms should be permitted to provide or actively promote such purchase services to the Hong Kong public. Authorized institutions, licensed corporations, and licensed VATPs offering such services must sell stablecoins issued by unlicensed issuers only to professional investors and must clearly state that the stablecoin is not issued by a licensed fiat-backed stablecoin issuer.
5. Offences and Sanctions
Criminal sanctions are proposed to deter industry participants from violating the regulations. Relevant offences include issuing or purporting to issue fiat-backed stablecoins in Hong Kong without a license, issuing or purporting to issue Hong Kong dollar-pegged stablecoins, actively promoting unlicensed stablecoin issuance to the Hong Kong public, advertising unlicensed stablecoin issuance, refusing to produce documents upon request by the Monetary Authority, providing false information or making false entries in documents, and breaching other conditions set by the Monetary Authority under the licensing regime. Under current proposals, only licensed institutions listed in Section 7 may provide purchase services for fiat-backed stablecoins in Hong Kong. Therefore, providing such services without being a listed licensed institution constitutes an offence, as does advertising such services offered by non-listed institutions. When setting penalty amounts and terms of imprisonment for regulatory breaches, reference will be made to relevant provisions in the Anti-Money Laundering Ordinance, Banking Ordinance, Payment Systems and Stored Value Facilities Ordinance, and Securities and Futures Ordinance.
Additionally, we propose introducing a range of civil and regulatory sanctions under the proposed regime, allowing the Monetary Authority to impose appropriate penalties depending on the severity and duration of the violation. Proposed civil and regulatory sanctions include:
(a) Reprimands, warnings, censures, or orders to take specified actions; regulatory sanctions may include temporary suspension, suspension, or revocation of license, or a combination thereof;
(b) A fine of up to HK$10 million, or three times the profit gained or loss avoided due to the violation, whichever is higher; or (c) a combination of the above measures.
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