Conclusion of discussion paper on crypto-assets and stablecoins

Following the issuance of a discussion paper on a proposed new regulatory regime for crypto-assets and stablecoins in January 2022, the Hong Kong Monetary Authority (HKMA) has now published a conclusion paper in this context. Therein, the HKMA briefly describes the feedback it has received to its discussion paper and its way forward in this matter.
To recall, in its consultation the HKMA sought highly general feedback, e.g. on the appropriateness to introduce a regulatory regime at all or on the risks crypto-assets pose to the financial system and should thus be regulated. Additionally, the HKMA sought views on
– the approach the HKMA’s may take to supervise in-scope firms;
– the scope of the new regime (which assets should be covered);
– potential licensing requirements for crypto-asset service providers; and
– additional rules that may be implemented to further protect the financial system and investors (e.g. relating to AML/CFT, capital requirements, or governance requirements).
In its conclusion paper, the HKMA now states that broadly speaking most respondents saw the need to implement such regime, although respondents strongly recommended a risk-based approach towards regulating crypto-assets or stable coin-related market players, taking into consideration international standards. Also, there was a broad consensus among respondents on a new licensing regime for market players depending upon their specific business activities. Questions primarily arose as to the scope of the regime (which activities should be covered).
Having considered this feedback, the HKMA has now outlined a „preliminary“ framework for regulation which will be consulted on in due course. This framework consists of the following key pillars:
1. The HKMA will at first only regulate stablecoins that have a fiat currency tied to them;
2. The new regime will permit sufficient flexibility to scope in further assets and currencies;
3. The HKMA will primarily regulate activities pertaining to the issuance or destruction of stablecoins, activities relating to the governance of stablecoins, and activities concerning wallets (e.g. custody services);
4. Any activity that is in-scope of the new regime (see point (3)) will require a license;
5. Additionally, firms will have to obtain a license when simply marketing stablecoins in Hong Kong or when performing any stablecoin-related activities where the stablecoin references the Hong Kong dollar; and
6. the value of a stablecoin will have to be fully backed by the referenced fiat currency.
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The HKMA expects the new crypto-assets and stablecoins regulatory regime to come into force by 2023/24.