In December 2023, Hong Kong unveiled a consultation paper outlining a legislative proposal to regulate stablecoin issuers within its jurisdiction. Full proposal
It defines a stablecoin as “one that purports to maintain a stable value concerning one or more fiat currencies (fiat-referenced stablecoin, FRS). Issuers of FRS that derives value from arbitrage or algorithm are not allowed to apply for licenses.
The stablecoin should use DLT or similar technology that is not solely controlled by the issuer. FRS issuers are prohibited from paying interest to users or engaging in lending, financial intermediation and other regulated activities.
Any issuer of FRS pegged to the Hong Kong dollar and marketed to the public in Hong Kong is required to be licensed by the Hong Kong Monetary Authority (MA), which is the de facto central bank. Financial institutions already regulated in Hong Kong such as banks can issue FRS without a license but it can only be offered to institutional investors.
The issuer must be incorporated in Hong Kong, maintain a physical office there, and have key personnel and senior management based locally. FRS issuers must seek consent from MA for their senior management personnel, meet minimum paid-up capital requirements, and disclose reserve assets and other information daily, and weekly, as well as have information audited by an independent auditor monthly.
It took MA two years to issue this legislative proposal for stablecoins. Before this, MA initiated a discussion paper for feedback in January 2022. This proposal does not specify the timeline to officially pass and implement this legislation. As indicated in the proposal, MA will be the authority to oversee all matters related to stablecoins.
What will this legislation mean to existing stablecoins already active in the region, such as Tether or USDC?
Tether, originally from Hong Kong and headquartered in BVI, is widely adopted in Hong Kong and many other countries. Tether is a popular exchange on-ramps/off-ramps medium, as well as an unofficial currency exchange vehicle. Hong Kong’s regulated exchanges such as HashKey Exchange offer USDT/HKD pair. Besides, some exchanges support P2P buy/sell USDT services, e.g. Binance and ByBit.
If Tether chooses not to pursue a license in Hong Kong, what would happen to it? Will regulated exchanges stop listing it? Will P2P buy/sell activities in Hong Kong become illegal?
If Hong Kong retail users are not allowed to use Tether by the regulated exchanges in Hong Kong or cannot access it via the P2P channel, they don’t lack choices outside of Hong Kong. Plus on some platforms users of Tether can earn interest when they are not trading, something MA will not allow for regulated stablecoins.
Circle may view the regulation of stablecoins as a competitive advantage it could gain over Tether. This past July, Circle expressed interest in pursuing a license to issue stablecoins in Japan. Japan’s stablecoin bill will take effect in July 2024.
In the end, the retail users, whom Hong Kong’s regulator tries to protect, will ultimately make their own choices, until a globally coordinated regulatory infrastructure and joint efforts are established to limit their options.