After extensive consultation with the financial industry, the Hong Kong Monetary Authority (HKMA) says it will regulate stablecoins that reference one or more fiat currencies given the higher and more imminent monetary and financial stability risks that stablecoins may pose.
In a consultation paper issued this week, the HKMA clarified that the value of the reserve assets of a stablecoin arrangement should meet the value of the outstanding stablecoins at all times. This means that the regulator is disallowing stablecoins that derive their value based on arbitrage or algorithms for now.
The regulator did not provide further details on the governance, issuance, stabilization and wallet usage of these stablecoins. However, the HKMA noted that it was not ruling out regulating other crypto assets, especially unbacked ones, sometime in the future.
Earlier this week, the authority detailed its findings in a report after consulting the financial industry in Hong Kong about how best to regulate crypto assets and stablecoins in the city. It received feedback from 58 entities and concluded that the majority of interested parties were supportive of the regulation of stablecoins using “a risk-based and agile approach”.
“Following consideration of the broad support from the respondents on the proposed risk-based approach and the advanced stage of international recommendations for stablecoins, the HKMA will prioritize the regulation of stablecoins at this stage and monitor the interconnectedness between other crypto assets and the mainstream financial system,” the report states. “The HKMA will take the latest market situation and international discussion into account in considering whether and, if so, how other crypto assets should also be regulated.”
The discussion around digital asset regulation in Hong Kong comes at a time of rife negative sentiment around crypto development, following the closure of crypto exchange FTX in November 2022 and the collapse of TerraUSD in May 2022. And, for example, bitcoin, the top cryptocurrency by market cap, has seen its value drop by about 40% compared with the same period last year.
“An appropriate regulatory environment will help address financial stability risks possibly posed by stablecoins and promote the orderly and sustainable development of the industry,” states Eddie Yue, chief executive of the HKMA. “We expect to implement the regulatory arrangements in 2023-24.”
The proposed HKMA regulations are part of a wider scheme to make Hong Kong Asia’s digital asset hub and help lure business away from regional rival Singapore, which has introduced its own cryptocurrency financial measures over the past year.
Last November 2022, Hong Kong’s financial secretary Paul Chan stressed the need for the city and its financial industry to stay relevant in the adoption of virtual assets and other areas of financial innovation. “Indeed, we have also proposed a number of projects, including the tokenized offering of a new tranche of green bonds for institutional investors,” Chan said at the time. “We recognize that virtual assets, cryptos, are unstoppable new financial innovations.”