Hong Kong's New Stablecoin Rules Aim to Strengthen Market Integrity

This law marks a step toward building Hong Kong into a hub for digital finance. Under this rule, institutions may apply for licenses before year-end to issue stablecoins.

Hong Kong's Stablecoin Bill has passed its final vote and the law is now in place, according to a post by Johnny Ng Kit-chong.

The Hong Kong Stablecoin Bill, which will allow institutions to apply for licenses to issue stablecoins by year-end, is part of broader efforts to turn Hong Kong into a hub for digital finance. The goal is to attract international players and expand blockchain applications in the region.

Hong Kong's stablecoin rules provide clear guidelines for the issuance and management of specified stablecoins. A specified stablecoin maintains its value by reference to fiat currency or other stable assets.

Stablecoins backed by central banks or covered by existing rules, such as those relating to collective investment schemes or futures contracts, are not included. Only stablecoins pegged to official currencies fall under this regulatory framework, which aims to safeguard the interests of stablecoins' token holders and ensure that stablecoin operations are transparent.

Regulators are keen to avoid the risks posed by unbacked or poorly managed tokens. They emphasize that any entity wishing to issue stablecoins must first obtain approval from the monetary authority before commencing such activities.

Unlicensed parties are prohibited from offering, applying for, or advertising any services relating to specified stablecoins to the public.

Moreover, any person who is granted a license to issue stablecoins must register as a corporation and maintain strong financial reserves. Specifically, a licensed issuer must hold readily available liquid assets in an amount not less than the total value of the stablecoins that it has issued at all times.

These reserve assets must be capable of being converted into usable cash quickly and without loss or material depreciation. Furthermore, these assets must be kept separate and distinct from any other assets of the corporate issuer.

The rules are designed to protect stablecoins' token holders in the event that an issuer faces insolvency. Issuers must also comply with reporting requirements, such as submitting detailed financial reports to the regulator regularly.

In addition, a person who is granted a license to issue stablecoins must enable the stablecoins to be redeemed by token holders on fair and clear terms. In insolvency situations, token holders can access the reserve assets in proportion to their respective stablecoins' token holdings.

Issuers must also publish white papers detailing their operations, risk management practices, and risk control measures relating to the issuance and management of specified stablecoins. These documents must explain the procedures for redeeming stablecoins and managing reserve assets clearly.

Issuers must alert the regulator without delay about any material changes in their organization or management. They also need approval before appointing or terminating any key senior executive in their firm. This focus on transparency aims to maintain holders' confidence in stablecoins' issuers' practices.

Regulators can require extra disclosures if risks appear significant in any situation. The monetary authority has the power to grant, suspend, or revoke licenses, appoint managers to manage the affairs of a licensed person, and investigate any suspected illegal activity or potential legal breaches.

Penalties may apply for serious violations of the stablecoin provisions. The law sets up a Stablecoin Review Tribunal to review and determine any appeal relating to a decision, direction, or refusal by the monetary authority.

Parties unhappy with tribunal rulings can appeal to the local court of appeal. This layered review system seeks to keep decisions accountable and transparent.

Strong oversight aims to reinforce trust in the stablecoin issuance process. Transparent enforcement helps protect market integrity and consumer interests effectively.

Passing this law would open up potential initiatives, according to Johnny Ng.

"It feels surreal to announce that the Hong Kong Stablecoin Bill has passed its final vote and become law!" shared Johnny Ng Kit-chong, a Hong Kong legal professional.

"This legislation marks a significant step toward realizing the vision of establishing Hong Kong as a leading hub for digital finance. The law provides a clear regulatory framework for institutions to apply for licenses to issue specified stablecoins by year-end.

"This move will not only attract international players in the digital asset space but also foster the growth of blockchain applications and use cases in Hong Kong. As the legal and regulatory landscape evolves, we can expect to see more diverse and innovative use cases emerging in the months and years to come."

The new framework could facilitate Hong Kong's crypto adoption across various market sectors. Clear laws help investors feel more secure about using virtual asset offerings.

Global companies interested in stablecoin services may choose Hong Kong as a base. Small startups might face high compliance costs under stringent regulations.

Still, a strong legal foundation can improve trust and reduce overall financial risks. Experts compare this model favorably with other Asia Pacific regulatory systems. As Hong Kong finalizes these rules, it could lead the region in virtual asset growth.