While the Western world debates how to regulate stablecoins, Hong Kong is forging ahead with a regulatory framework for cryptocurrencies pegged to traditional financial assets.
The Hong Kong Monetary Authority (HKMA) is in the process of seeking comments from the public regarding stablecoins and aims to introduce a regulatory framework by the end of 2024, said the city’s Undersecretary for Financial Services and the Treasury, Joseph Chan Ho-lim, according to local media.
While the U.S. government is toughening its stance on the crypto industry in the wake of TerraUSD (UST)’s collapse and FTX’s implosion, the crypto community in China is heralding Hong Kong’s increasing policy clarification regarding the nascent asset class.
On June 1, Hong Kong officially set in motion a new crypto regulatory regime in which exchanges must obtain licenses in order to operate in the city. Under the new framework, licensed exchanges will be able to let retail investors trade certain major cryptocurrencies, which have been speculated to be Ether and Bitcoin.
The policy development is a major milestone for the region that has ventured in the opposite direction as mainland China, where crypto trading is illegal. The welcoming stance o Hong Kong, some have argued, is a result of the historical role the city has played as a sandbox for the rest of China.
Hong Kong’s stablecoin regulation has been a long time coming. In January 2022, the HKMA issued a discussion paper on crypto-assets and stablecoins. Then in January 2023, the HKMA published the conclusion to the discussion paper, which confirmed that the HKMA would take a “risk-based and agile approach” in regulating stablecoins.
As it worked on the city’s own crypto regulations during 2022, the HKMA also participated in developing regulatory standards and recommendations on stablecoins, especially those of the Financial Stability Board. The FSB is an international body that monitors and makes recommendations regarding the global financial system, and in the web3 realm, it has been described as the “de facto leader” in framing global crypto rules.
The proposed rules laid out in the discussion paper are, of course, subject to change, but it offers an early glimpse into the city’s stance on stablecoin regulation. For one, the HKMA proposed to prioritize the development of a regulatory framework for stablecoins as a means of payment and start with regulating stablecoins pegged to fiat currencies, since they are more likely to pose imminent financial stability risks.
In addition, the paper maintains that stablecoins must be fully backed by high-quality and high-liquidity assets at all times. Stablecoins that derive their value based on arbitrage or algorithm will not be accepted, which effectively rules out algorithmically stabilized tokens like UST. Stablecoin holders should also be able to redeem the stablecoins into fiat currencies within a reasonable period, the paper says.