How is Hong Kong going to regulate stablecoins?

At the end of January, the Hong Kong Monetary Authority (HKMA) said that if companies want to obtain stablecoin licenses, they may require companies to continue to operate their main business and have a local subsidiary entity in Hong Kong.

stable currency

The HKMA’s current position is that stablecoins should be fully backed by high-quality liquid assets (they haven’t elaborated), and convertible into par-par reference fiat currencies. In this mode, cryptocurrencies and arbitrage are not allowed.

The debacle of Terraform Labs and Terra’s algorithmic stablecoin last year prompted regulators around the world to focus on regulating stablecoins.

Hong Kong’s stablecoin regulations could come into effect as early as this year. The proposed regime would apply to entities actively marketing or operating in Hong Kong. Correspondingly, issuers will need more licenses.

When asked whether non-Hong Kong stablecoin issuers like Tether would adapt to the upcoming regime, a representative of the HKMA said:

“The regulatory treatment of different types of virtual assets will depend on factors such as their actual structure and operational details. We will continue to discuss with the industry a risk-based, pragmatic and flexible approach to the regulation of stablecoins. The regulator will further discuss the specific details.” Consultation.”

Wallet providers currently have a “service provider or trust” license, but under the new regime they may require a stablecoin wallet license.

Issuers of widely used stablecoins such as Tether may have to establish affiliated entities here.

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The HKMA is likely to ease its stance as it struggles to welcome talent and maintain its status as an international financial centre.

The HKMA focuses on ensuring the stability of Hong Kong’s financial system, but also plays a different role in promoting the economy.

Cryptocurrency companies aren’t the only ones getting involved in the advisory. It is not surprising that traditional banks, virtual banks (already vying for retail customers) and companies involved in cross-border trade payments are all feeding agencies back to regulators.

There are also questions about “how stablecoins can be used to facilitate the next era of payments,” said Ken Lo, chief strategy officer at HKbitEX, referring to the strength of the city’s commercial and wholesale banking business. .

Michael Wong, a partner at Dechert Law Firm, said that judging from the previous discussions with the HKMA on the private equity fund system, the regulator will “operate” for the entire industry from a business-friendly standpoint, while also proceeding from the perspective of protecting investors . .

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“If they want to do something good for the industry, they really shouldn’t require the issuer to be connected to Hong Kong. It’s a simple registration process in Hong Kong as a non-Hong Kong company,” Wong said.

Requiring a foreign institution that has issued a stablecoin to set up an establishment in Hong Kong, which then issues the stablecoin, would complicate matters.

Legally speaking, investors holding stablecoins issued by a Hong Kong entity can only focus on that entity and not other entities.

Liquidity can also be an issue. Dechert senior partner Jason Chan said that if only a small market uses a stablecoin issued by a Hong Kong issuer, it could affect trading pairs.

industryMain business

The HKMA’s current stance means exchanges must separate their virtual asset business from their stablecoin business.

Companies will incur additional costs based on quarantine requirements. Tim Byun, Global Government Relations Officer at OKX, said:

“Every time you want to transact, say, 0.1 bitcoin, you have to pay gas back and forth to the custodian.”

According to Byun, there are other ways to protect users and ensure exchanges don’t run fractional reserve systems, from which they can temporarily borrow client funds.

He pointed out that OKX uses Merkle trees and promised to conduct an audit this year.

“Swiftly shifting the entire crypto industry to the traditional stock world like a beard on a woman’s chin.”

  • MATIC shares fall 6% as Polygon lays off 20% of staff
  • Terra’s lawsuit could be a sample roadmap for the SEC to ‘hack’ other stablecoins
  • Dramatic BUSD lays groundwork for stablecoin market overhaul

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According to Coindesk

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