On January 12, 2022, the Hong Kong Monetary Authority (HKMA) issued a Discussion Paper regarding expanding Hong Kong’s regulatory framework for stablecoins, or what the HKMA calls “payment-related stablecoins”.
These are cryptocurrency assets backed by actual fiat currencies. In the Paper, the HKMA analyzes the current regulatory framework’s adequacy at the time of its writing when taking into account the increasing and widespread use of cryptocurrency assets like stablecoins in financial markets both within Hong Kong and outside of it. The Paper’s authors assess the challenges this proliferation presents.
It then goes on to offer eight questions for the financial industry to consider, such as the scale of any newly proposed regulatory framework for stablecoins.
While the HKMA acknowledges crypto-asset activity doesn’t necessarily pose any present risk to the stability of worldwide financial markets, its increasing prevalence could well do so in the future.
The Authority expressed particular concern about the growing exposure of both retail and institutional investors to the asset class as a complement or alternative to traditional ones.
The HKMA projects such a shift will lead to an increasing interconnectedness between crypto-assets and the mainstream monetary system. The Authority also expresses concern in the Paper about how easy it is to anonymously transfer crypto assets, making them more vulnerable to illicit uses, such as to launder money and finance terrorism.
Perceived Risks of Stablecoins
The HKMA identifies several key risks it hopes to alleviate with the newly proposed regulations. These include:
- Payment integrity during operational failures and disruptions in markets where stablecoins are regularly accepted for payment
- How to protect users who lack means of recourse from the risks of stablecoin disruptions or failures
- Stability of banks if they start increasing their stablecoin exposure, especially if considered a valid alternative to bank deposits
- Monetary supply threats to interbank HKD supply and demand from issuing and redeeming HKD-backed stablecoins
Questions for Hong Kong Crypto Regulators to Consider
In the Paper, the HKMA poses the following eight questions to consider in developing a new regulatory framework for crypto assets.
- Should regulations apply to all stablecoins or only payment-related ones that pose a higher danger to Hong Kong’s monetary policy and financial markets?
- What kinds of activities involving stablecoins should be regulated, such as reserves management, custody and administration or insurance and redemption?
- What requirements and authorization should regulations impose on new stablecoins licensees, such as regards liquidity, management and ownership, backing asset reserves and risk management, governance and controls?
- Who would the requirement to obtain a stablecoin license cover, such as Hong-Kong incorporated entities or foreign groups and companies?
- When should they establish this new regulatory regime?
- Should new regulations require stablecoin issuers to be Authorized Institutions under the Banking Ordinance?
- Should the Authority consider regulating unbacked crypto assets in the future?
- What should prospective and current entities and other parties in the stablecoin ecosystem do to prepare for the launch of the new regulatory regime?
The HKMA has set a March 31, 2022 deadline for responses and expects to initiate this new regulatory oversight sometime in 2023-2024.
This post is also available in: English