HKMA and FSTB Announce Licensing Regime for Stablecoin Issuers

The Hong Kong Monetary Authority (HKMA) and the Financial Services and Treasury Bureau (FSTB) have made the first move in the regulation of such tokens by unveiling a new licensing framework for fiat-pegged stablecoins. 

Meanwhile, the new framework was revealed after the two-month consultation that closed in February and attracted 108 submissions from industry players and institutes.

The new rules now state that any and all FRS issuers are to be licensed by the HKMA. The licensing criteria include factors like the language used in marketing, the target population, and the domain names to check whether an entity is actively promoting FRS to the Hong Kong public. Stablecoin issuers must also ensure that full backing of reserve assets is maintained at all times to avoid potential runs and to ensure stability of the ecosystem.

Industry Reaction to the Regulatory Framework

The survey highlighted that there was a good understanding of the need for regulation in the sector, as most of the respondents endorsed the measures. The regulators also stressed that the stablecoins should have full backing of reserve assets to avoid situations when the stablecoins are fiat-referenced. They pointed out that lack of adequate reserves may contribute to runs on stablecoins, and thus the stability of the entire system.

In the new framework, the HKMA is also handling applications for a sandbox programme for stablecoin issuers. Launched in March this year, it is a policy for the establishment of innovation sandbox to prepare the legal framework for the future. Details of the participants in the sandbox program are expected to be made known in the coming weeks.

Market Impact and Global Context

The new rules are expected to bring in more stablecoin issuers to Hong Kong. Vincent Chok, CEO of First Digital, highlighted that there is a clear market interest and demand for the licensing process of cryptocurrencies, with this new regulation being in line with the positive trends in the cryptocurrency market.

Concurrently, spot Bitcoin ETFs in Hong Kong and Australia have attracted quite a bit of investment. Hong Kong-based Bitcoin ETFs added 28.6% more Bitcoin to their portfolios in the period between June 21 and July 13, holding 4,941 BTC in total. 

These events take place against the background of the global market changes such as a large-scale sale by the German government and the renewed interest in the global BTC ETF market, which has 1.05 million BTC now.

The Future of Crypto Regulation in Hong Kong

The Hong Kong authorities continue the work on the bill’s preparation and plan to submit it to the Legislative Council as soon as possible. This approach is in line with the overall plan of Hong Kong to become the cryptocurrency and blockchain hub with adequate protection of consumers and financial stability.

The enhancement of a complete set of rules and regulation in stablecoins may provide a model to other jurisdictions. In this way, the Hong Kong model might become a reference point for other jurisdictions, as the authorities have focused on the development of innovation while maintaining control over the industry. This action may lead to other regions creating similar frameworks which will create a safer environment for the digital assets.