Hong Kong Takes Aim at Stablecoins With New Regulatory Regime

According to a statement from the city's financial regulator, Hong Kong is setting its sights on a regulatory regime for stablecoins by 2024.

Hong Kong is working on a framework to govern the issuance, trading, and use of stablecoins. The framework will be based on the SFC's existing regulatory framework for securities and derivatives and will consider international standards, according to TechCrunch.

Stablecoins are cryptocurrencies pegged to a fiat currency, such as the US dollar or the euro. They are designed to be more stable than other cryptocurrencies, such as Bitcoin, which are subject to wild price swings.

HK's move to regulate stablecoins is a sign of the growing importance of these digital assets. Stablecoins are increasingly being used for payments, trading, and lending. They are also being seen as a potential way to tap into the growing market for decentralized finance (DeFi).

The New Framework

The framework is expected to be a major step forward in developing stablecoins in Hong Kong. It will provide much-needed clarity and certainty for businesses and investors and help promote innovation in the sector.

The collapse of TerraUSD (UST) and the implosion of FTX have led the U.S. government to take a tougher stance against the cryptocurrency business. Still, the Chinese crypto community cheers Hong Kong's expanding policy elaboration on the emerging asset class.

(Photo: Wikimedia Commons / Edwin.images) Photo of a businessman holding his hands to his head with crypto medallions and downward trending graphs in the background. This is an image used to represent the concept of a cryptocurrency market crash.

Stablecoin regulation in Hong Kong has been long overdue. The HKMA published a discussion paper on stablecoins and digital assets in January 2022. A "risk-based and agile approach" would be used to regulate stablecoins, the HKMA stated in the discussion paper's conclusion, which was published in January 2023

The HKMA assisted in creating regulatory standards and recommendations on stablecoins, particularly those of the Financial Stability Board, while working on the city's crypto regulations in 2022.

In the web3 space, the FSB has been called the "de facto leader" in establishing worldwide crypto standards. The FSB is an organization that oversees and provides recommendations regarding the global financial system.

The discussion paper's suggested regulations are open to revision, but they provide a preliminary understanding of the city's approach to stablecoin legislation.

For starters, the HKMA suggested prioritizing the creation of a framework for stablecoin regulation, starting with the regulation of stablecoins tied to fiat currencies because they are more likely to provide immediate hazards to financial stability.

The report also asserts that high-quality, high-liquidity assets must fully back stablecoins. It is impossible for tokens like UST, which are algorithmically stabilized, to be acknowledged as stablecoins because they rely on arbitrage or algorithms to determine their value.

The paper asserts that stablecoin holders should be able to convert their stablecoins into fiat money within a reasonable time.