Hong Kong Now Required License For Stablecoin As HKMA Rejects Algorithmic Ones

Key Points:

• Hong Kong regulators stated that it will establish a framework to regulate stablecoins, which are cryptocurrencies whose value is tethered to other assets.
• The Monetary Authority also stated that algorithmic stablecoins such as terraUSD will not be approved under the proposed regulatory regime.

Hong Kong’s top financial regulator stated on Tuesday that it will require stablecoin issuers to be licensed and will not allow algorithmic stablecoins. To offer stablecoin services, entities engaging in regulated activity in Hong Kong will need to get a license.

Following a response to a discussion paper published last year, the Hong Kong Monetary Authority (HKMA) spelt forth its regulatory proposals. Based on the 58 responses, the regulator stated that it will establish a framework to regulate stablecoins, which are cryptocurrencies whose value is tethered to other assets.

To begin, the HKMA intends to oversee the governance, issuance, and stabilization of fiat-backed stablecoins, for which issuers must keep reserves equal to the amount of cryptocurrency in circulation.

Since 2021, when the issuer of the largest stablecoin by market value, Tether, announced that part of its reserves was made up of unsecured short-term debt, stablecoin reserves have been under intense regulatory scrutiny around the world. Controls for stablecoin issuers are also being developed by major economies such as the United States, the European Union, and Japan.

The value of the reserve assets of a stablecoin arrangement should meet the value of the outstanding stablecoins at all times. The reserve assets should be of high quality and high liquidity. Stablecoins that derive their value based on arbitrage or algorithm will not be accepted. Stablecoin holders should be able to redeem the stablecoins into the referenced fiat currency at par within a reasonable period.

The report said

The HKMA will consider feedback received, recent market developments, and international discussions when developing specific regulatory arrangements. They will also interact with market participants and stakeholders, while anticipating putting the regulatory arrangements in place in 2023/24.

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