Hong Kong Treasury Department: Stablecoin issuance persons must comply with full reserve, redemption service, and governance requirements

Source | Ta Kung Pao

Editor | Blog

On July 16, 2024, Ta Kung Pao published an article, and the Financial Services and the Treasury Bureau of Hong Kong (i.e. the Treasury Bureau of Hong Kong) issued a notice, stating that it will soon release a summary of the stablecoin issuer regulatory system consultation, and a draft regulation for the Legislative Council to consider.

Authorities said there will be corresponding transitional arrangements for existing stablecoin issuers. Experts believe that the SAR government’s risk-based and pragmatic approach to regulation is the right way to improve market clarity and security.

The Financial Bureau stated that, given the important role of Fiat Currency Stable Coin in the Web3 and virtual asset ecosystem, as well as the increasingly close connection between the TradFi system and the virtual asset market, the special zone government needs to establish a regulatory system for the issuers of Fiat Currency Stable Coin to regulate it in a risk-based and pragmatic manner. The three main requirements include reserve management and stability mechanisms (such as requiring issuers to ensure that Fiat Currency Stable Coin is fully supported by high-quality and highly liquid reserve assets), redemption requirements, and regulatory requirements for governance, knowledge, and experience.

Transition arrangements will be provided for existing issuers

The Treasury Bureau has also proposed that only licensed Fiat Currency stablecoin issuers, banks, licensed corporations, and licensed virtual asset trading platforms can sell Fiat Currency stablecoins in Hong Kong or actively promote related services to the Hong Kong public. For existing stablecoin issuers, the proposed regulatory regime will also have corresponding transitional arrangements. The Treasury Bureau also hopes that the regulatory regime for Fiat Currency stablecoin issuers, which is appropriate and in line with international regulatory recommendations, can provide sufficient protection for users and address potential risks that may arise in currency and financial stability, enabling the sustainable and responsible development of the virtual asset ecosystem in Hong Kong.

OSL’s CFO Hu Zhenbang said that some of the most popular USD-pegged stablecoins in the market, including USDC and USDT, have been widely used as a digital asset payment tool globally, especially in Southeast Asia, the Middle East, and Africa. However, there are many doubts in the market about the issuers, including the asset reserves, investment activities, solvency, as well as the efficiency of minting and redemption.

If the issuer of the stablecoin accepts regulation by the regulatory authorities in Hong Kong, it can effectively ensure the financial and market transparency of the issuer, ensure solvency and Liquidity, and connect to traditional Financial Institution, providing assurance to investors and promoting global application of the product.

Deloitte China’s digital asset Hong Kong managing partner, Lu Zhihong, said that the feature of Stable Coin is price stability. In addition to being seen as a safe-haven asset by investors, Stable Coins are also crucial in the Web3 ecosystem. They have become an important alternative tool in global transactions due to their fast transaction speed, low cost, and 24/7 availability. Furthermore, they do not involve a ‘middleman’ in their blockchain function, so many institutions use Stable Coins as a payment tool and consider them an ideal choice for international remittances and cross-border transactions.

Clear Rules to Support the Development of Virtual Assets in Hong Kong

It can be seen from this that the importance of regulated stablecoins is self-evident. Although stablecoins are very important for the development of virtual assets in Hong Kong, if they are implemented too hastily, it will have a counterproductive effect. Because the lack of clear regulation will lead to uncertainty and may hinder potential users.

Lu Zhihong made an analogy, just like a regulated casino, customers can exchange funds for chips at the casino, and at the same time, they can ensure that their chips can be exchanged for cash at any time. However, if there are some unregulated casinos, customers’ chips cannot be exchanged for cash, which will cause market chaos. The government’s regulation based on risk and pragmatic approach is the right way to improve market transparency and security, ensuring that these digital assets remain linked to legal tender and that issuers have sufficient reserves to meet investor redemptions, in order to protect investors’ interests.