Hong Kong relaxes some stablecoin rules, launches limited trials with 3 industry players

Hong Kong regulators have decided to keep many tough requirements set out last year in a proposal for regulating stablecoins, but made some concessions following public feedback, just ahead of launching stablecoin sandbox trials in pursuit of becoming a hub for cryptocurrency business.

After concluding a consultation period for proposed stablecoin rules released in December, Hong Kong regulators plan to move forward with that regime largely intact, requiring issuers of fiat currency-backed tokens to obtain a licence from the Hong Kong Monetary Authority (HKMA), the HKMA and the Financial Services and the Treasury Bureau said in a joint statement on Wednesday.

On Thursday, the HKMA also announced the first batch of stablecoin issuers admitted into a sandbox, first announced in March, for trialling these tokens in different scenarios. Jingdong Coinlink Technology, RD InnoTech, and a joint venture from Standard Chartered Bank, Animoca Brands, and Hong Kong Telecommunications will conduct limited scale tests of stablecoins in e-commerce payments, cross-border trade settlements, and tokenised assets trading.

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"The sandbox enables us to understand the business models of stablecoin issuers better, as well as to develop the regulatory framework better," said Darryl Chan, deputy CEO of HKMA.

The sandbox trials are set to start immediately, according to the HKMA, and will be conducted with a small number of customers. Stablecoins will not be made available to the public during this period.

Since the Securities and Futures Commission (SFC) last year started regulating virtual assets, which include traditional cryptocurrencies such as bitcoin, Hong Kong regulators have been trying to walk a fine line between protecting investor interests and creating a favourable regulatory environment that remains attractive to businesses, analysts said.

Rules from the December stablecoin proposal that remain in place include a requirement that stablecoins be fully backed by reserve assets "at any given point in time", and that issuers publish monthly confirmation of those assets from an independent auditor.

The regulators also maintained that overseas issuers hoping to offer stablecoins in Hong Kong must establish a local subsidiary with key management personnel based in the city. Some in the industry previously expressed concern that this would deter global players.

However, the HKMA has relaxed some of the previously proposed rules. It will reduce the minimum paid-up share capital requirement from 2 per cent to 1 per cent of the value of its stablecoins in circulation, with a minimum of HK$25 million (US$3.2 million).

These rules are still more stringent than what Singapore has proposed, though. The Monetary Authority of Singapore requires that stablecoin issuers have a base capital of SG$1 million (US$745,446) or 50 per cent of annual operating expenses.

Ernest Ho, division head of the digital finance division of HKMA, said Hong Kong is among the first to regulate stablecoin issuers, with the EU and Japan also having the regulatory framework in place. Singapore and the UK are in the process of preparing regulations, while the US so far has no regulation in the sector.

In its consultation conclusion, the HKMA also addressed a number of concerns regarding the clarity of its language. It provided more regulatory guidance on what constitutes eligible reserve assets, as well as how and where they should be held, said Andrew Fei, a partner at King & Wood Mallesons in Hong Kong.

Issuers, for instance, should keep their reserve assets with licensed banks in Hong Kong, according to the HKMA. But it is open to considering arrangements on a case-by-case basis, it said.

Such changes show that the city's regulators are seeking to "strike an appropriate balance" between strong investor protection and offering greater clarity and guidance to potential issuers, Fei said.

Companies still face significant challenges in complying with the rules, though, as they require substantial resources to cover legal, technical and operational costs, said Jason Jiang, a senior researcher at OKG Research.

"There remains significant financial pressures for many small and medium-sized institutions," Jiang said. "So it's foreseeable that even though fiat-referenced stablecoins have drawn high attention and many firms to participate in the consultation, not many will eventually apply for the licence and issue stablecoins."

Successfully licensed firms will also face the difficulty of finding appropriate application scenarios, he added. If Hong Kong merely replicates existing business models of stablecoins, those tokens may have a hard time establishing a competitive advantage, according to Jiang.

A finalised bill for regulating stablecoins will be submitted to the Legislative Council later this year, according to the HKMA. Regulators also plan to set out separate guidelines to address money laundering risks related to stablecoins.

Once the rules are set, approved stablecoin issuers can sell their tokens on virtual asset platforms licensed by the SFC. Issuers who remain unlicensed by the HKMA can still sell to professional investors with portfolios of at least HK$8 million, Chan said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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