Regulators in Hong Kong start developing regulatory regime for crypto assets and stablecoins

The Hong Kong Monetary Authority (HKMA) published a conclusion paper (36-page/817KB) in January, setting out its response to last year’s consultation on the plans. The regulator plans to take further steps on setting up the regime, with implementation targeted for 2023 or 2024.

As reported by the HKMA, there seems to be a broad consensus that the HKMA should regulate stablecoins with a risk-based and agile approach – an approach that has time and again been emphasised and adopted by the HKMA. The essence of this approach is that regulatory requirements should be proportionate to the risks posed by the financial activities concerned.

The proposed regime

Considering the latest international recommendations and feedback received, we expect the new regulatory regime will have the following key emphases.

Emphasis on payment-related stablecoins

It is expected that one of the priorities will be on the regulation of stablecoins that purport to reference fiat currencies. These stablecoins are more likely to be used in payments and have linkages with the traditional financial system, thereby creating higher and more imminent monetary and financial stability risks than other types of stablecoins or other crypto assets.

Initial activities to be regulated

Based on HKMA’s proposal, it is expected that the regulation will target activities including the setting up and maintaining of rules governing stablecoin arrangements; the issuing, creation or destroying of stablecoins; the stablisation and managing of stablecoin reserve; and the wallet arrangement for storing users’ cryptographic keys to stablecoins. Other stablecoin-related activities not set out in HKMA’s list may not be captured in the proposed regulatory scope at the initial stage. 

It is expected that entities that conduct such stablecoins-related activities in Hong Kong SAR or actively market such regulated activities to the public of Hong Kong SAR will need to apply for a relevant licence.

Given the multiple activities that may take place in respect of a stablecoin arrangement, the HKMA is more inclined to develop appropriate regulatory requirements targeting each type of activity. In other words, it is likely that there will be different types of regulated activities covered by different licenses, rather than one single type of licence covering various activities.

Other areas

While the HKMA will continue to formulate the exact and detailed regulatory requirements, it has also expressed that it would further consider other appropriate regulatory requirements in areas such as ownership, governance and management, financial resources requirements, risk management, anti-money laundering and counter-terrorist financing (“AML/CFT”), user protection, and regular audit and disclosure requirements.

In January 2022, the HKMA published a discussion paper (34-page / 975KB) on putting in place a regulatory regime for payment-related stablecoins. Most responders among the total 58 submissions think that the HKMA should regulate stablecoins with a risk-based and flexible approach; and the HKMA should adopt an approach which is in line with global standards.

Co-written by Sara Chan of Pinsent Masons.