Hong Kong proposes licenses should be required for stablecoin issuers

Hong Kong has proposed that stablecoin issuers should be required to obtain a license in the city as part of its legislative proposal to oversee the industry.

In a consultation paper jointly published today by the Hong Kong Monetary Authority — the city’s de facto central bank — and the Financial Services and the Treasury Bureau, the authorities said that a stablecoin issuer would be required to obtain a license from the HKMA “if it issues a stablecoin that references the value of one or more fiat currencies in Hong Kong.”

Under the proposed regime, such a licensee must be locally incorporated with its management presence and needs to put in place an effective stabilization mechanism, “such as maintaining a pool of high-quality and highly-liquid reserve assets with proper custody arrangement,” the HKMA said.

“Only stablecoins issued by licensed issuers could be offered to retail investors,” the regulator added.

The HKMA said it published the latest consultation paper after it “took into account” the feedback collected from the public for a relevant discussion paper it released in January 2022. It also plans to roll out a “sandbox” for those interested in issuing stablecoins in Hong Kong, with details to be announced soon.

The authorities will collect public feedback on the legislative proposal until Feb. 29, 2024.

More powers sought

The legislation proposal also suggested that the authorities should be granted “necessary powers” to “adjust the parameters of in-scope stablecoins and activities.”

Considering the potential impact of a default or failure of a fiat-referenced stablecoin issuer on the financial system, “it is proposed that the [HKMA] be empowered to intervene in the operations of a licensee where the circumstances so warrant,” the document said.

Johnny Ng, a Hong Kong lawmaker, expressed concerns in a post on X, saying that the regulators should consider the fact that some major global stablecoins are already circulating in the market.

“If these global stablecoin companies do not apply [for a license] in Hong Kong within the specified period, relevant regulatory authorities should consider how such international stablecoins could be traded on licensed exchanges in Hong Kong,” Ng said. “Otherwise, it may affect the overall operations and trading volume of crypto transactions, leading to unintended consequences in the market.”

More regulatory clarity

Unlike its neighboring Chinese mainland’s broader crackdown on cryptocurrency trading and mining, Hong Kong has rolled out the welcome mat for crypto firms this year — even going so far as encouraging banks to work with them. In June, Hong Kong officially started its crypto licensing regime for virtual asset trading platforms, allowing licensed exchanges to offer retail trading services.

Last week, the HKMA and the Securities and Futures Commission said in a joint circular that they’re prepared to start accepting applications for spot crypto exchange-traded funds (ETFs). Some industry leaders have said that Hong Kong could be one of the earliest front-runners in Asia to allow spot bitcoin ETFs if the U.S. approves such ETFs.