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Major banks, fintechs and digital asset firms are watching lawmakers in Hong Kong closely as the financial centre moves towards its first bill to regulate stablecoin issuance.
Two Hong Kong financial service regulators have confirmed that they are preparing a bill on stablecoin issuance that will be introduced to the Legislative Council later this year.
The Financial Services and the Treasury Bureau will lead on legislation and the Hong Kong Monetary Authority (HKMA) will draft licensing and supervisory guidelines to assist firms in their compliance with the new requirements.
The two authorities announced the plans in a published last week, having opened a on a proposed regulatory framework for stablecoin issuers in December last year.
During the two-month consultation period, the regulators received 108 responses from a range of banks, fintechs, auditors, law firms, retailers, trade associations and digital asset firms.
According to the HKMA, the vast majority of respondents agreed with the authorities plans to introduce new legislation to regulate stablecoin issuance in Hong Kong.
Respondents also agreed that stablecoin issuance should be excluded from Hong Kongs existing regulatory frameworks for securities and stored-value facilities (SVFs).
Local presence and licence needed
The upcoming legislation will be built around specific licensing requirements for firms that plan to issue fiat-referenced stablecoins in Hong Kong and market these stablecoins to the Hong Kong public.
Companies wishing to apply for such a licence will need to be incorporated in Hong Kong; those incorporated elsewhere will need to establish a local subsidiary.
Key management personnel, including the CEO and alternative CEO, will also need to be based in Hong Kong.
Despite calls for a more flexible approach to overseas-incorporated firms, the HKMA said that a local presence is crucial to ensure effective supervision and to respond to challenges such as insolvency.
The regulator also noted that similar rules currently apply to licensed deposit-taking institutions in Hong Kong, also known as authorised institutions (AIs), and holders of SVF licences.
Once the legislation comes into effect, it will become an offence to issue or market any unlicensed fiat-referenced stablecoin in Hong Kong.
Capital requirements
The HKMA did budge slightly on its initial proposal for capital requirements for prospective stablecoin issuers.
In the consultation last year, the regulator suggested that firms should hold HKD25m ($3.2m) in paid-up share capital or 2 percent of the par value of all stablecoins in circulation, whichever is greater.
Following pushback from firms, this proposal has been reduced to HKD25m ($3.2m) in share capital or 1 percent of the par value of all outstanding stablecoins.
That being said, the Monetary Authority will retain flexibility and power to impose additional paid-up share capital requirements as licensing conditions where necessary, the regulator added.
Reserves and redemptions
The legislation will mandate that fiat-referenced stablecoins are backed one-to-one by high-quality, liquid reserves at all times.
Issuers that wish to hold reserves denominated in currencies other than HKD will need to obtain additional approval from the HKMA.
This may also come with additional reserve requirements, such as over-collateralisation, to mitigate foreign exchange and other risks.
High-quality reserve assets, as assessed by international standards, are likely to include:
The HKMA is likely to mandate that issuers segregate their own assets from reserves, and that reserves are held by an independent trustee.
This will ensure that stablecoin users have legal rights and priority claims to the reserves should an issuer fail.
Prior to any implementation, we would expect a stablecoin issuer to submit a draft of the relevant trust deed together with a draft of an independent legal opinion for the HKMAs review, it said.
Disclosure, reporting and other lines of business
Finally, issuers are likely to face a monthly attestation requirement, conducted by an independent auditor.
Some respondents complained that monthly attestations will be too frequent, due to the cost implications, but the HKMA said the measure is necessary to instil public confidence.
The regulator also confirmed that stablecoin issuers will be prohibited from paying interest on stablecoin holdings or dealing in credit provision or other lending activities.
However, issuers will be allowed to operate proprietary digital wallet services, and may be able to carry out other lines of business, subject to HKMA approval.
