14 questions to understand the legislative implementation proposals for the Hong Kong Stablecoin Issuer Regulatory System

Source: AiYing Compliance

Yesterday, the Hong Kong Treasury and the Hong Kong Monetary Authority jointly issued a consultation summary on the legislative proposals for implementing a regulatory system for issuers of fiat stablecoins in Hong Kong. Aiying made the following summary of the time nodes for the implementation of Hong Kong's stablecoin policy to facilitate everyone's understanding of the current stage of this policy:

• January 2022: The Hong Kong Monetary Authority (HKMA) published a discussion paper on crypto assets and stablecoins, inviting industry and public comments.

• January 2023: The HKMA published a consultation summary of the discussion paper, summarizing the feedback received and clarifying the initial direction of the regulatory framework.

• 27 December 2023: The Financial Services and the Treasury Bureau (FSTB) and the HKMA jointly released a consultation paper on the proposed regulatory regime for stablecoin issuers to further solicit public and industry views .

• 29 February 2024: Deadline for public submissions .

• 12 March 2024: The HKMA announced the “Stablecoin Issuer Sandbox” policy, allowing stablecoin issuance to be tested within the regulatory sandbox .

• 17 July 2024: The consultation summary was released, summarizing public views and feedback, and proposing legislative proposals for the implementation of a regulatory regime for stablecoin issuers in Hong Kong .

• The next stage will be to submit it to the Legislative Council for deliberation and issue relevant guidelines.

Today, Aiying will take you through the "Consultation Summary of Legislative Proposals for the Implementation of a Regulatory System for Stablecoin Issuers in Hong Kong" released yesterday. During the consultation process, the HKMA and the Treasury Bureau received a total of 108 opinions from different stakeholders. They came from groups such as industry practitioners, financial institutions, professional associations and groups, academia and research institutions, and personal opinions. Through this week's article "Hong Kong Monetary Authority and the Treasury Bureau: Stablecoin License Regulatory Guidelines and Recommendations" and this consultation summary, we can roughly predict the stablecoin license guidance requirements that will be submitted to the Legislative Council for deliberation later. The following are the main content questions of this consultation sorted out by Aiying:

1. Coverage

Q1: Do you agree with the definitions of "stablecoin" and "fiat stablecoin"?

• Most respondents supported the existing definition, but suggested further refinement in the definition, such as clarifying the difference between "stablecoins" and other types of crypto assets, and clarifying how fiat stablecoins are linked to fiat currencies.

Q2: What are your opinions on the scope of regulated stablecoin activities?

• Respondents believe that the issuance of fiat stablecoins should be regulated as they have the greatest impact on financial stability. At the same time, some respondents suggested clarifying the specific scope of "issuance", such as the specific definition of issuance, circulation and redemption.

II. Legislative Approach

Q3: Do you agree to enact new legislation to implement a regulatory regime for issuers of fiat currency stablecoins and to cover other virtual asset activities as required in the future?

• Most respondents supported the adoption of new legislation to regulate the issuance of fiat currency stablecoins to avoid duplication and conflict with existing regulatory regimes. At the same time, some suggested that the new legislation should have a certain degree of flexibility so that more types of virtual asset activities can be covered in the future.

Q4: Do you agree to exclude the issuance of fiat currency stablecoins from certain regulatory regimes, such as those related to securities and stored value payment instruments, to avoid fiat currency stablecoin issuers being regulated by multiple regulatory regimes?

• Most respondents believe that fiat stablecoin issuers should be prevented from being subject to excessive regulatory overlap, which can reduce compliance costs and complexity and ensure the effectiveness and pertinence of supervision.

III. Regulatory framework for fiat stablecoin issuers

Q5: What are your opinions on the proposed licensing system for fiat stablecoin issuers?

• Most respondents agree that issuers need to be regulated through a licensing system to ensure that they have sufficient credibility and capabilities. At the same time, some people suggest clarifying the meaning of "active marketing" to avoid ambiguity in legal interpretation.

Q6: What are your opinions on the proposed licensing criteria and conditions?

• Respondents support the establishment of licensing criteria, including full reserve backing, investment restrictions, segregation and custody of reserve assets, risk control procedures, disclosure and auditing. They support strict licensing conditions, believing that this will help ensure the stability and transparency of issuers and prevent potential financial risks.

Q7: What are your opinions on empowering the Monetary Authority to set additional licensing conditions?

• Most respondents believe that the Monetary Authority should have the power to impose additional conditions on issuers based on market conditions and specific circumstances to enhance regulatory flexibility and adaptability.

IV. Custody and purchase services for fiat stablecoins

Q8: What are your opinions on the proposed arrangements for the purchase of fiat stablecoins?

• Respondents believe that the sale and service of fiat stablecoins should be restricted to qualified licensed institutions only, while some suggest that more types of institutions should be allowed to apply for licenses to promote market competition and innovation.

V. Power of the authorities to revise the system

Q9: Do you support giving the authorities the necessary powers to adjust the scope of regulated stablecoins and activities?

• Respondents believe that giving the authorities the power to adjust the scope of regulation will help to respond to market changes and emerging risks in a timely manner and ensure the effectiveness and forward-looking nature of the regulatory system.

Q10: Are the proposed criteria and factors that the authorities may consider when exercising their powers relevant and appropriate?

• Respondents generally believed that the criteria and factors that the authorities should consider when exercising their powers are relevant and appropriate, and help ensure the rationality and transparency of decision-making.

VI. Supervisory Powers of the Monetary Authority

Q11: What are your views on the proposed supervisory powers of the Monetary Authority over licensees?

• Respondents believed that the Monetary Authority should have broad supervisory powers to ensure that licensees comply with regulatory requirements and protect the stability of the financial market and the rights of users.

VII. Investigative Powers of the Monetary Authority

Q12: What are your views on the proposal to give the Monetary Authority the power to investigate licensed fiat stablecoin issuers?

• Respondents generally supported that the Monetary Authority should have the power to investigate licensed issuers to ensure that they comply with regulatory requirements and market norms.

VIII. Violations of Regulations and Sanctions

Q13: What are your views on the violation of regulations and the sanction mechanism, especially the relevant sanctions, fines, and the appeal mechanism?

• Respondents believe that a clear criminal and civil penalty mechanism should be established to punish illegal acts and serve as a warning. At the same time, it is recommended to clarify the specific scope and degree of punishment to ensure the operability of the law.

IX. Transitional Arrangements

Q14: What are your opinions on the proposed transitional arrangements?

• Respondents believe that reasonable transitional arrangements should be established to allow existing issuers to adapt to new regulatory requirements. Some people suggest extending the non-violation period to ensure that the industry has enough time to adjust and comply.