Hong Kong regulators propose tougher rules for sale of stablecoins to retail investors

Hong Kong regulators are proposing tougher legislation that requires stablecoin issuers to obtain a licence from the city’s de facto central bank before serving retail customers, as the Asian financial hub continues to develop its rules for the virtual-asset industry.

Issuers of stablecoins that aim to “maintain a stable value with reference to one or more fiat currencies” will need to be licensed by the Hong Kong Monetary Authority (HKMA) if they want to sell to retail investors in Hong Kong, according to a new consultation paper the HKMA launched on Wednesday with the Financial Services and the Treasury Bureau (FSTB).

Companies without a licence will not be able to issue such fiat-referenced stablecoins (FRS) in Hong Kong, will not be able to issue a stablecoin pegged to the value of the Hong Kong dollar or actively market their FRS to the Hong Kong public, the consultation paper states.

The legislative proposal comes as Hong Kong steps up efforts to become a virtual asset and Web3 hub, while implementing guardrails for the volatile sector, which has seen several cryptocurrency firm collapses over the past two years.

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“The TerraUSD collapse in 2022 highlighted the urgency to have such a regime in place sooner rather than later,” the regulators say in the paper, referring to the algorithmic stablecoin pegged to the US dollar that collapsed in May last year, setting off a global cryptocurrency rout.

Stablecoins that derive their value from an algorithm, such as TerraUSD, will fall under Hong Kong’s new regime, but “it will be highly unlikely that such an issuer” will meet the HKMA’s proposed criteria and be able to obtain a licence, according to the consultation paper.

Under the new regime, FRS issuers will need to meet a broad range of requirements, including ensuring that the value of their reserve assets is “at least equal” to the par value of the stablecoin in circulation at all times, and establishing segregated accounts for reserve assets.

They also need to ensure that reserve assets “be of high quality and high liquidity”, and allow holders of the stablecoin to be able to redeem their FRS on a timely basis, according to the consultation paper.

The proposal requires that licensed stablecoin issuers have a robust stabilisation mechanism, without elaborating on one that qualifies. Stablecoin issuers would also need to apply for a licence within three months of the regulation taking effect.

Retail investors in Hong Kong will only be able to buy stablecoins from specific licensed platforms and entities, such as centralised cryptocurrency exchanges licensed by the Securities and Futures Commission, according to the paper.

Licensed issuers must also be a company incorporated in Hong Kong with a registered office and chief executive based in the city, the regulators say.

In the case of popular global stablecoins such as Tether and USDC, if they do not accept audit requirements from Hong Kong regulators and have no intention of applying for a licence in Hong Kong, they will be deemed unlicensed and unregulated.

These stablecoins will not be allowed to be sold to Hong Kong’s retail investors through the city’s licensed platforms, Daryl Ho, executive director of monetary management at the HKMA, said on Wednesday at a press briefing on the paper.

However, these unlicensed stablecoins will still be available to professional investors, the consultation paper states.

The HKMA and FSTB will seek public comment on the proposals until the end of February 2024. They did not offer a timeline for when the legislation will be passed and take effect.

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