Hong Kong paves the way for financial innovation with stablecoin legislation

The Hong Kong Legislative Council officially passed the "Stablecoin Regulation Bill" on May 21, laying the foundation for a licensing system for fiat stablecoin issuers in Hong Kong. This move aims to improve the regulatory framework for virtual asset activities, ensuring financial stability while promoting financial innovation. The Hong Kong SAR government expects the regulation to take effect within this year.

Currently, regulators have conducted preliminary oversight and testing of the operating plans of three issuers in the sandbox. The chairman of the "Stablecoin Regulation Bill" committee, legislator Qiu Dagen, expressed support for promoting the establishment of stablecoins pegged to the Hong Kong dollar and the Renminbi, in order to strengthen Hong Kong's role as a digital bridge connecting the mainland with other countries. He also urged the government to remain flexible during the licensing process and expedite the approval process.

Key Points of the New Regulations

The newly passed regulations clarify three types of activities that require a license application:

1. Issue fiat stablecoin in Hong Kong
2. Issuance of Hong Kong dollar stablecoin in Hong Kong or outside Hong Kong
3. Actively promote the issuance of its fiat stablecoin to the public in Hong Kong.

The regulations put forward four important requirements for issuers:

1. Reserve assets must consist of high-quality, highly liquid assets, such as cash, bank deposits, government bonds, etc.
2. Holders of stablecoins have the right to redeem stablecoins at face value without any fees.
3. Comply with anti-money laundering, risk management, information disclosure, and audit requirements.
4. Stablecoin trading must be conducted on licensed virtual asset trading platforms.

The issuer must also meet certain financial requirements, including a minimum capital of 25 million HKD. The license does not have a fixed term, unless revoked or the issuer loses its qualification.

To protect investors, the regulations stipulate that only designated licensed institutions may sell fiat stablecoins in Hong Kong, including stablecoin issuers licensed by the Financial Management Commissioner, banks, institutions holding a Type 1 license issued by the Securities and Futures Commission, and licensed virtual asset trading platforms.

The regulations also establish strict penalty mechanisms, such as a fine of 5 million HKD and seven years of imprisonment for operating without a license or illegally selling stablecoins.

Industry Participation and Future Outlook

Currently, the Hong Kong Monetary Authority has launched a stablecoin issuer sandbox, with the first three participating institutions approved to enter in July 2024. These institutions include a consortium formed by Standard Chartered Hong Kong, ANX Group, and Hong Kong Telecommunications, as well as JD Coinchain Technology (Hong Kong) and Yuan Coin Innovation Technology.

It is worth noting that a certain technology group recently released multiple job postings related to RWA, explicitly requiring product design to achieve seamless integration with its stablecoin and digital yuan. This indicates that with the implementation of the legislation, the company's stablecoin project may soon be launched.

After the new regulations come into effect, stablecoin issuers who have already engaged in related activities in Hong Kong will be given a 6-month transition period, allowing them to apply for a license within the first 3 months after the licensing system is implemented.

Member of the Legislative Council, Mr. Qiu Dagen, stated that he supports the inclusion of the Renminbi in the locally issued stablecoin system, believing that this will help Hong Kong become a digital bridge connecting the mainland and other countries, attract more blockchain projects and institutional investors, and accelerate the internationalization process of the Renminbi.

Under the global trend of de-dollarization, the Renminbi stablecoin is expected to become a new choice for trade, investment, and reserves in multiple countries, enhancing the status of the Renminbi in international trade and as a safe haven.

Member of Parliament Qiu Dagen urged the government to maintain an open and flexible attitude in its licensing policy, allowing more capable and resourceful institutions to participate in competition. He emphasized that through healthy competition, Hong Kong has the opportunity to develop an internationally accepted stablecoin market, potentially involving currencies other than the US dollar, which is of great significance to Hong Kong's financial development.

With the implementation of regulatory systems for virtual asset trading platforms and stablecoin issuers, the Hong Kong Monetary Authority stated that the government will continue to support the development of the virtual asset industry. Next, the government will launch a consultation on over-the-counter trading and custody services for virtual assets and will issue a second policy declaration on the development of virtual assets.