Introduction

On 12 January 2022, The Hong Kong Monetary Authority (the “HKMA“) published the Discussion Paper on Crypto-assets and Stablecoins (the “Paper”) with a view to gathering the public’s responses towards the regulatory regime for cypto-assets, in particular payment-related stablecoins, in Hong Kong. The Paper focuses on the adequacy of the existing regulatory framework of crypto-assets in financial market and sets out the HKMA’s views on how to expand such regulatory framework.

The discussion questions

The Paper posed a list of questions inviting the public’s input while setting out HKMA’s own views. The key questions are summarised below.

Should the HKMA regulate activities relating to all types of stablecoins?

The first question raised by the HKMA was whether it should regulate activities regarding all types of stablecoins, or give priority to payment-related stablecoins which pose higher risks to the monetary and financial systems. In this regard, the HKMA recommended a risk-based approach, under which it intends to focus on activities related to payment-related stablecoins at this stage. In particular, the HKMA will place its attention to asset-linked stablecoins rather than algorithm-based stablecoins at this stage, given the former’s prevalence in the market and its potential to develop into a widely used and acceptable means of payment, which gives rise to a higher possibility of being incorporated into the mainstream financial system. That said, the HKMA emphasised that it does not rule out the possibility of regulating other types of stablecoins in the future and will build in flexibility in the regime to ensure that adjustments could be made readily when necessary.

What types of stablecoin-related activities should fall under the regulatory ambit?

The second question concerns the types of activities to be regulated by the HKMA. With reference to a list of activities of a stablecoin arrangement and associated vulnerabilities identified by the Financial Stability Board, the HKMA proposed that the following activities will need to be licensed:

1.      issuing, creating or destroying stablecoins;

2.      managing reserve assets to ensure stabilisation of the stablecoin value;

3.      validating transactions and records;

4.      storing the private keys providing access to stablecoins;

5.      facilitating the redemption of stablecoins;

6.      transmission of funds; and

7.      executing transactions in stablecoins.

It should be noted that the above list is not exhaustive and may be subject to further expansion.

Who will need a licence under the intended regulatory regime?

In relation to the intended coverage of the licensing requirement under the regulatory regime to be established, the HKMA is of the view that only an entity incorporated in Hong Kong which holds a relevant licence granted by the HKMA shall be allowed to carry out the activities described above in Hong Kong or actively market the same as a business to the public of Hong Kong. Accordingly, a foreign company seeking to carry out the above activities will need to incorporate a company under the Hong Kong law in order to be entitled to apply to the HKMA for a licence. A mere Hong Kong branch or office of a foreign corporation will not suffice.

When will the new risk-based regime on stablecoins be established?

Regarding the timeline, the HKMA will take into account the feedback to the Paper and aim to introduce the new regime no later than 2023/2024. In this regard, the HKMA noted that there are multiple financial regulatory regimes in Hong Kong which are administered by different financial regulators. The HKMA will therefore work closely with other stakeholders and financial regulators, as well as relevant interested parties, to identify areas for further collaboration in the course of developing its own regulatory regime and avoid regulatory arbitrage.

Would the HKMA regulate unbacked crypto-assets?

This question is posed in view of the growing linkage of unbacked crypto-assets with the mainstream financial system and the risk to financial stability. In this regard, the HKMA opines that there is a need to continue monitoring the various risks that may be posed by them and take action as necessary. The HKMA will soon provide authorised institutions with more detailed regulatory guidance in relation to their business interface with and provision of intermediary services to customers related to crypto-assets.

Conclusion

Given the increasing linkage of crypto-assets with traditional financial system, the HKMA expects that it will pose greater risks along with its development. An appropriate regulatory regime is therefore necessary to safeguard the users and the financial system. The deadline for submitting responses to the Paper is 31 March 2022 and current or prospective players of the stablecoins ecosystem are encouraged to voice out their opinions.