Cat Brother Wu talks about blockchain

On May 21, 2024, the Hong Kong Legislative Council officially passed the Stablecoin Issuers Bill in its third reading, which provides the first complete regulatory framework for stablecoins.

Hong Kong's Legislative Council has passed the Stablecoin Bill, setting out the complete regulatory framework for stablecoins, which will come into effect later this year.

The Bill, which was tabled by the Hong Kong Monetary Authority (HKMA), provides for three types of stablecoin-related activities that will require a license: issuing legal currency stablecoins in Hong Kong; issuing Hong Kong dollar stablecoins in or outside Hong Kong; and engaging in any activity that promotes the issuance of its legal currency stablecoins to the Hong Kong public.

To apply for a license, any individual or entity must submit a formal application to the HKMA. The HKMA will then review and decide whether the applicant meets the minimum standards listed in Schedule 2 of the Ordinance. These standards relate to capital strength, risk management, corporate governance structure, internal control system, and other relevant aspects.

The license will remain valid until it is revoked by the HKMA, or the applicant is liquidated or has its registration with the Hong Kong Companies Registry revoked. However, if the licensee does not meet the minimum standards or has major problems, such as being unable to fulfill its repayment obligations, improper governance, or major violations, the HKMA may revoke or suspend its license and, if necessary, send a statutory administrator to take over the business to protect the public interest.

The HKMA will also set up a "registration list of licensees" where members of the public can check which entities are authorized and qualified to operate.

The Bill also sets out offenses related to engaging in regulated stablecoin activities without a license, such as selling designated stablecoins without authorization, which will carry a maximum penalty of HK$5 million and seven years' imprisonment. Summary offenses will carry a maximum penalty of HK$500,000 and two years' imprisonment, while a maximum penalty of HK$100,000 per day may be imposed for continuing offenses.

Other key points include:

* 100% Reserve and Segregated Custody: Licensed issuers must maintain a robust stablecoin mechanism to ensure that reserve assets are composed of high-quality, highly liquid assets and are equal to the denomination of fiat stablecoins in circulation at all times. These reserve assets must be properly separated and kept from the issuer’s own assets to ensure the safety of funds.

* Unconditional redemption mechanism: Stablecoin holders have the right to redeem stablecoins at par from the issuer. Redemption requests must be free of any fees and must be processed within a reasonable time.

* Strict compliance framework: Licensed issuers must comply with a series of stringent regulatory requirements, including anti-money laundering (AML), risk management, full disclosure of information and qualified auditors to ensure transparency and soundness of operations.

Hong Kong Financial Services and the Treasury Bureau Director Paul Hui said the government is keen to develop digital assets and Web3 in a balanced and orderly manner.

"The introduction of a licensing system for stablecoins is a crucial step in this direction. It aims to provide a clear regulatory framework for the issuance, operation and promotion of stablecoins, fostering a favorable environment for innovation while safeguarding the interests of investors and the stability of the financial system."

The government is committed to maintaining close dialogue with industry stakeholders throughout the implementation of the licensing regime.

In addition to legislating on the stablecoin licensing system, the Hong Kong Monetary Authority also launched a sandbox for stablecoin issuers in 2024. Ho Hong-che, head of the Digital Finance Department of the Hong Kong Monetary Authority, revealed that the authorities had received more than 40 sandbox applications and accepted a total of 3 groups of participants into the sandbox. The 3 groups of sandbox participants are: 1. A group composed of Standard Chartered Hong Kong, Animoca Brands, and Hong Kong Telecom; 2. JD Coin Chain Technology (Hong Kong); 3. Yuanbi Innovation Technology.

Yuanbi Technology pointed out that the "Draft" lists four important requirements for issuers: First, in terms of reserves, licensees must maintain a robust stablecoin mechanism to ensure that the reserve assets of stablecoins are composed of high-quality and highly liquid assets, and are equal to the denomination of the circulating legal currency stablecoins at any time, and are properly separated and kept. Second, stablecoin holders have the right to redeem stablecoins at face value from the issuer. The redemption request must be free of charge and must be processed within a reasonable time. Third, it meets a series of requirements for combating money laundering, risk management, disclosure, and auditing appropriate persons. Fourth, transactions must be conducted on licensed virtual asset trading platforms.

The ordinance is expected to take effect this year, and the Hong Kong government said it would give the industry enough time to understand the requirements under the licensing system. The licensing system also has a transitional period arrangement so that the industry can apply for a license and make appropriate business arrangements in accordance with the requirements of the ordinance.

Hong Kong's move to regulate stablecoins comes