Reed Smith Client Alerts

Key takeaways

  • Issuers of fiat-referenced stablecoin in Hong Kong will need a licence from HKMA
  • Overseas issuers will be caught if their stablecoin references the HK$ or if they actively market to the Hong Kong public
  • Regulatory regime sets relative standards requiring capital of HK$25 million, Hong Kong presence and robust controls. Stablecoins that derive their value from arbitrage or algorithms are unlikely to meet standards

Hong Kong

In line with the Hong Kong government’s ambition to be a virtual asset hub, having introduced a regulatory regime for virtual asset exchanges, it is now inviting public comments on a regulatory regime for stablecoins. The announcement and consultation paper, issued 27 December 2023, can be found via the PDF.

Please see our previous client alert for more on the topic.

Below are some key features of this highly anticipated development.

Who is the regulator?

This will be the Hong Kong Monetary Authority (HKMA), Hong Kong’s de facto central bank, that currently regulates banks, stored value facilities (SVF) providers, certain payment systems and money brokers. This makes sense, as stablecoins share numerous common features with SVFs1 and the HKMA has had many years of experience regulating SVFs.

Definitions of stablecoin

  • This is proposed to be defined as a cryptographically secured digital representation of value that, among other things:
    • is expressed as a unit of account or a store of economic value;
    • is used or intended to be used as a medium of exchange, for payment for goods or services, discharge of a debt and/or investment;
    • can be transferred, stored or traded electronically;
    • uses a distributed ledger or similar technology; and
    • purports to maintain a stable value with reference to a specified asset or basket of assets.
  • For now, the proposal is to regulate stablecoins referencing one or more fiat currencies (fiat-referenced stablecoins or FRS)2. Issuers of FRS will need a licence from the HKMA. In terms of compliance, issuers should expect a robust framework, covering the handling and segregation of reserve assets, committing to sufficient financial resources and internal controls and being subject to the HKMA supervision and investigation regime.
  • The definition disregards the stablisation mechanism, so theoretically a stablecoin that derives its value from arbitrage or an algorithm is still caught. However, the HKMA has stated that such issuers are unlikely to meet the proposed licensing criteria, especially on reserves management. Unfortunately, this will be a disappointment to many stablecoin issuers.