Hong Kong’s top financial regulator has proposed fresh regulations prohibiting algorithmic stablecoins and noting that, henceforth, all stablecoin issuers will be required to obtain mandatory licensing. Organizations that engage in regulated cryptocurrency activity in Hong Kong must apply for a license to offer stablecoin services.
Algorithmic stablecoins were not included in the guiding principles of the Hong Kong Monetary Authority’s (HKNA) future regulatory framework. Instead, all stablecoin issuers must constantly support their values with underlying reserve assets, according to the senior financial regulator.
On January 31, the HKNA released the consultation conclusion to the discussion paper on cryptocurrencies and stablecoins, summarizing the input from 58 submissions.
The regulator confirmed a risk-based and agile approach, which is essential for the developing crypto industry, in its conclusion. The regulatory arrangements are expected to be in place in 2023-2024, either as new legislation or changes to existing laws.
HKMA Chief Executive Eddie Yue stated:
“We will also engage with stakeholders and market participants. We expect to implement the regulatory arrangements in 2023/24.”
The report states that algorithms or stablecoins that derive their value from arbitrage will not be permitted and holders of stablecoins should be able to exchange them for the linked fiat currency at par within a reasonable period.
Issuers conducting business directly in Hong Kong and firms actively promoting their products to Hong Kong users must comply with the new licensing process.
The HKNA aims to create a comprehensive regulatory framework for stablecoins based on the principles of full backing and redemption at par, and companies must stick to their core competencies.
Initially, some stablecoin-related activities, such as buying or exchanging a stablecoin for fiat money and operating centralized stablecoin lending services, may not be included in the regulatory scope, as the regulation would concentrate on areas such as issuance, governance, and stabilization.
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