Hong Kong to introduce stablecoin bill to regulate virtual tokens

The Hong Kong government has published a stablecoin bill in the gazette, bringing the proposed regulatory framework one step closer to becoming law. The city seeks to strike a balance between financial stability and consumer safety while pursuing its virtual asset agenda.

On the other hand, China continues to prioritize digital assets that can be controlled. The Chinese authorities, then and now, regard decentralized digital currencies as more destructive than beneficial. 

The risk stems from crypto’s capacity to hide capital outflows, which Chinese policymakers wish to discourage rather than encourage, as well as its role in money laundering.

China is, however, gradually opening up to crypto under its jurisdiction.

The publication of the stablecoin bill follows a public consultation held in July by the city’s financial affairs office, the Hong Kong Monetary Authority (HKMA), and industry players. Three stablecoin issuers were admitted in July to test its use in various settings.

The HKMA will be granted the authority to supervise, investigate, and enforce the regime in order to ensure its effective implementation. The government has announced that the Stablecoins Bill will be introduced into the Legislative Council for a first reading on December 18.

Stablecoin introduction in Hong Kong – Details

Under the proposed regulatory system, issuers of fiat-referenced stablecoins and [other] tokens that claim to maintain a stable value with the Hong Kong dollar will be required to get a license from the HKMA. According to their statement, licenses are also required to publicly sell the issuance of these tokens.

Christopher Hui Ching-yu, Secretary for Financial Services and the Treasury, said in a statement, “The legislative proposal is essential for Hong Kong in fulfilling our obligations as a member of the Financial Stability Board.”

 He added, “This risk-based proposal aims to promote a robust regulatory environment, which is in line with Hong Kong’s approach to virtual-asset development.”

The draft includes information regarding the definition of stablecoins, the licensing application procedure, and transitional arrangements for current stablecoin issuers, among other things. It also prohibits certain activities, such as using misrepresentation to persuade another individual to acquire a stablecoin.

According to Andrew Fei, a partner at the law firm King & Wood Mallesons, the framework provides more detail in nearly 300 pages compared to the 30-page consultation document. 

He explained with an example that the proposed definition of a stablecoin is “future-proof and comprehensive.” According to him, it encompasses stablecoins that operate on a distributed ledger as well as those that operate on any comparable information repository.

In order to fulfill its obligations, a licensed issuer must possess sufficient financial resources and liquid assets, in addition to comprehensive risk-management strategies. For instance, the minimum paid-up capital is the equivalent of US$3.2 million (HK$25 million).

The impact of legalizing stablecoins in Hong Kong

Lawrence Chu, co-founder of IDA, a Hong Kong-based Web3 digital asset company, believes that the legal framework will provide major opportunities.

He said, “Stablecoins can provide cost-effective and efficient cross-border transactions, offering businesses 24/7 digital payment services.”

Lawrence Chu further stated that the integration of Hong Kong dollar-backed stablecoins into the financial system will enhance the city’s reputation as an international digital asset hub and facilitate cross-border trade.

Their aim is that as the globe explores transactions in the Web3 ecosystem, there will be more usage and larger transactions completed or paid for with stablecoins. As a result, Hong Kong regulators are concerned about potential dangers to financial system stability.

Hong Kong has also been marked as one of the first countries to regulate stablecoin issuers, following initiatives by the European Union and Japan. Singapore and the United Kingdom are amid developing regulations, whilst the United States currently has no restrictions in place.

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