Hong Kong's Financial Services and Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA) have jointly unveiled new regulatory measures for fiat-referenced stablecoin (FRS) issuers operating within and beyond the territory. The initiative aims to create a structured and secure environment for stablecoins, reflecting their increasing use among Hong Kong residents as an alternative to the local currency.

In a recent press release, the HKMA outlined a comprehensive regulatory framework for stablecoin issuers. This framework will affect both domestic and international stablecoin providers, requiring them to adhere to new standards designed to enhance transparency and protect consumers.

Key Regulatory Requirements:

Physical Presence: Foreign stablecoin providers must establish a physical presence in Hong Kong and maintain custody reserves with local banks. This measure is intended to ensure that stablecoins are fully backed by reserves held in the region, maintaining a 1:1 backing ratio for each issued token.

Interest Prohibition: Issuers are prohibited from paying interest to stablecoin holders. This rule aims to avoid any potential risks associated with interest-bearing models.

Licensing for Foreign Entities: Non-Hong Kong incorporated companies seeking to operate in the city will need to set up a subsidiary. This stipulation is part of a broader strategy to increase oversight and accountability.

Eddie Yue, Chief Executive of the HKMA, emphasized the importance of a well-regulated environment for the stablecoin sector:

“We believe that a well-regulated environment is conducive to the sustainable and responsible development of the stablecoin ecosystem in Hong Kong.”

Motivations Behind the Regulation:

The surge in stablecoin issuers has prompted the HKMA to act, particularly following the collapse of Terraform Labs and its algorithmic UST stablecoin in 2022. The HKMA's new regulations aim to protect citizens from similar financial disruptions and provide a safeguard against potential instability in the stablecoin market.

Regulatory Context and Recent Developments:

Hong Kong has been proactive in its regulatory stance, having previously announced in February 2023 that stablecoin providers must obtain licenses and comply with new regulations. This move reflects a broader effort to maintain financial stability and attract reputable stablecoin issuers to the region.

Additionally, Hong Kong's regulatory landscape has been evolving with efforts to crack down on unlicensed crypto firms. In July 2024, the Hong Kong Securities and Futures Commission (SFC) added seven unlicensed crypto firms to its alert list following the expiration of a registration deadline. This enforcement action has led to reactions within the crypto industry and prompted a review of the country’s crypto regulations.

Looking Ahead:

The HKMA's proposed framework is designed to foster a secure and transparent stablecoin market while ensuring that Hong Kong remains an attractive jurisdiction for stablecoin issuers. As the regulatory landscape continues to evolve, the HKMA remains committed to enhancing the stability and integrity of the financial system in Hong Kong.