Specified stablecoins
The Stablecoins Bill regulates stablecoins (hereinafter referred to as specified stablecoins) that purport to maintain a stable value with reference wholly to:
- one or more official currencies;
- one or more units of account or stores of economic value specified by the HKMA; or
- a combination of (1) and (2) above.
The Stablecoins Bill excludes certain financial products and instruments that are already subject to existing regulatory regimes – such as bank deposits, securities, futures contracts, float stored in stored value facilities (SVFs), SVF deposits and digital representations of value issued by governments or central banks – from the definition of specified stablecoins.
Issuance of specified stablecoins
Under the Stablecoins Bill, a person carries on a regulated stablecoin activity and is required to obtain a licence from the HKMA if such person:
- issues or holds oneself out as issuing a specified stablecoin in Hong Kong;
- issues or holds oneself out as issuing in any place outside Hong Kong a specified stablecoin that purports to maintain a stable value with reference (wholly or partly) to Hong Kong dollars; or
- actively markets, whether in Hong Kong or elsewhere, its issuance of a specified stablecoin to the public of Hong Kong.
The Stablecoins Bill sets out the licensing conditions and requirements. For instance, a licensee must maintain a pool of reserve assets for each type of specified stablecoin, the market value of which must at all times be at least equal to the par value of the outstanding specified stablecoins of the type in circulation. A licensee must also provide each holder of the specified stablecoins issued by the licensee with the right to redeem them, without any unduly burdensome conditions and unreasonable fees.
Offering of specified stablecoins
The Stablecoins Bill also regulates the offering of specified stablecoins. Only HKMA-licensed specified stablecoin issuers, authorised institutions, licensed virtual asset trading platforms and licensed corporations regulated by the Securities and Futures Commission can offer specified stablecoins in Hong Kong or actively market such offerings to the Hong Kong public.
Further, specified stablecoins issued by HKMA-licensed issuers can be offered to retail investors, while specified stablecoins not issued by HKMA-licensed issuers can only be offered to exempted persons designated by the HKMA or the Financial Secretary.
Extraterritorial reach
Another noteworthy aspect of the Stablecoins Bill is its extraterritorial effect. The HKMA is empowered to designate individuals outside Hong Kong or entities incorporated or established outside Hong Kong as “designated stablecoin entities” if they issue specified stablecoins outside Hong Kong or provide services to a stablecoin payment system (whether in Hong Kong or elsewhere) and in the HKMA’s opinion such issuance or provision of services are, or are likely to become, material to the monetary or financial stability of Hong Kong or the functioning of Hong Kong as an international financial centre.
Such designated stablecoin entities must, among other things:
- maintain appropriate and adequate financial resources;
- have in place and implement appropriate and adequate arrangements to monitor and enforce compliance with the operating rules by the entity; and
- have in place and implement appropriate and adequate systems of control for reserve management, disclosures and risk management about the issue of specified stablecoins by the entity or the provision of services by the entity to a stablecoin payment system.
Consumer protection
To further protect consumers in stablecoin transactions, the Stablecoins Bill introduces additional offences that can affect a range of market participants such as advertisers, investors, advisers and others.
For instance, it is an offence if a person, directly or indirectly, in a transaction involving a specified stablecoin: (1) employs a device, scheme or artifice with intent to defraud or deceive; or (2) engages in an act, practice or course of business that is fraudulent or deceptive, or would operate as a fraud or deception. It is also an offence if a person makes a fraudulent misrepresentation or reckless misrepresentation to induce another person to enter into a specified stablecoin transaction.
Conclusion
The Stablecoins Bill marks a pivotal moment in Hong Kong’s approach to regulating digital currencies. By establishing a comprehensive framework that includes licensing criteria and requirements, offering and marketing restrictions, consumer protection measures and the functions and powers of the HKMA, the Stablecoins Bill can create a secure environment for stablecoin transactions.
On 18 December 2024, the Stablecoins Bill was introduced into the Legislative Council of Hong Kong for the first reading, and is expected to be operational in the coming months. The successful implementation of the Stablecoins Bill could pave the way for a more robust and secure digital currency landscape in Hong Kong and beyond.
