Hong Kong is beginning a consultation period on a new regulatory regime for stablecoin issuers in the city, the Hong Kong Monetary Authority (HKMA) announced Wednesday.
The HKMA released a thirty-page consultation paper for public comment until Feb. 24. Under the framework outlined in the paper, stablecoin issuers operating in Hong Kong would need to obtain a license from the monetary authority.
The consultation paper says stablecoin issuers should have “full backing” for all their circulating stablecoins. Notably, Terra’s algorithmic UST stablecoin was only partially backed before collapsing in mid-2022. The HKMA said UST’s de-peg “highlighted the urgency” of having stablecoin regulation in place.
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The HKMA said the new regulatory regime is needed because stablecoins are a “key channel” where crypto-related risks could spill over to the traditional financial system.
Stablecoins are a major source of liquidity in crypto, as they present investors with an on-ramp from fiat currency. The total market capitalization of stablecoins crossed $130 billion after reaching a low of roughly $123 billion in August, according to DeFiLlama.
The paper also says issuers need to regularly disclose their reserve assets to the public, and stablecoin company executives must be “fit and proper persons.” Changes in management would require consent from the monetary authority.
Hong Kong has been active in crypto regulation this year, hoping regulatory clarity would make it a global hub for crypto. The city has seen multiple exchanges, including Huobi, open trading in Hong Kong this year.
In early October, Hong Kong’s financial regulators tightened controls on retail crypto trading amid fallout from allegations of fraud by the trading platform JPEX. Around the same time, a city official said Hong Kong does not allow retail trading of stablecoins as it awaits a regulatory regime for the assets.
Hong Kong’s regulations are geared towards fostering virtual asset innovations in Hong Kong “in a sustainable manner, while actual and potential risks from the perspectives of monetary and financial stability, consumer protection, as well as money laundering and terrorist financing, can be identified and properly addressed,” the HKMA said.
A regulatory framework for stablecoins in Hong Kong has been in the works since January 2022. The HKMA said it would be separately releasing details for a “sandbox” implementation of the regulations where market participants could communicate with the regulator as it implements its new requirements.
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Source: https://blockworks.co/news/hong-kong-stablecoin-regulation