Stablecoins face uncertain future in Hong Kong as new regulation reveals…

• The Hong Kong Monetary Authority has concluded its discussion paper on crypto-assets and stablecoins.
• The regulator has clarified that Hong Kong will not permit algorithmic stablecoins. 

The Hong Kong Monetary Authority (HKMA) has laid out its plans for regulating stablecoin issuers. According to a press release by the regulator earlier today, entities operating stablecoin services in Hong Kong will require mandatory licensing. 

Feedback from Ripple, Binance and Circle

The regulator made its announcement after considering the feedback received from 58 submissions in response to its discussion paper on crypto and stablecoins. Several crypto firms were involved in the feedback, including Binance, Circle, Ripple Labs, Matrixport, Animoca Brands and Symphony Digital.

The HKMA will focus on supervising the governance, issuance and stabilization of fiat-backed stablecoins. Moreover, it will require issuers to maintain reserves that match the amount of crypto in circulation. The reserves must be of high quality and high liquidity, with the value of the assets meeting the value of the outstanding stablecoins at all times.

HKMA says no to algorithmic stablecoins

According to the HKMA, algorithmic stablecoins, i.e. the ones that derive their value from arbitrage or algorithms, will not be accepted. The regulator intends to develop a comprehensive regulatory framework for stablecoins, with full backing and redemption as part of the key principle. This framework will also restrict companies from deviating from their main business. For example, wallet operators will not engage in lending activities.

The regulatory arrangements could be either new legislation or amendments to existing laws. The government could implement it in 2023- 24 after considering feedback, market developments, and international discussions. 

Stablecoin reserves have come under increased regulatory scrutiny since the disclosure in 2021 that much of Tether’s [USDT] reserves, the largest by market capitalization, were unsecured short-term debt. The US, the European Union, and Japan are also working on controls for these coins’ issuers.

Eddie Yue, Chief Executive of the HKMA, said:

“An appropriate regulatory environment will help address financial stability risks possibly posed by stablecoins, and promote the orderly and sustainable development of the industry.”