Link to the original text of Hong Kong’s regulatory framework for crypto-stablecoins:
https://www.info.gov.hk/gia/general/202312/27/P2023122700267.htm
https://www.fstb.gov.hk/fsb/tc/publication/consult/doc/Stablecoin_consultation_paper.pdf
The Financial Services and the Treasury Bureau (Treasury Bureau) and the Hong Kong Monetary Authority (HKMA) jointly issued a public consultation document today (December 27) to collect opinions on legislative proposals for the supervision of stablecoin issuers.
In response to the important role of stablecoins in Web3 and the virtual asset ecosystem, and the increasingly close connection between the traditional financial system and the virtual asset market, the government believes that it is necessary to establish a regulatory system for issuers of fiat currency stablecoins. As virtual assets become more popular, regulating fiat stablecoin issuers through a risk-based and flexible approach can appropriately manage potential monetary and financial stability risks and provide transparency and appropriate regulations.
The legislative proposals have taken into account the market and public opinions collected from the "Discussion Paper on Crypto-Assets and Stablecoins" released by the HKMA last year, ongoing discussions with stakeholders, local market conditions and needs, and relevant international standards. The highlights are as follows:
(1) Implement the licensing system through the introduction of new legislation, requiring all eligible fiat stablecoin issuers to obtain a license from the Monetary Authority;
(2) Providing that only designated licensed institutions can provide services for purchasing legal currency stablecoins, and only legal currency stablecoins issued by licensed issuers can be sold to retail investors;
(3) Promotion is prohibited:
(i) Issuance of fiat stablecoins by non-licensed issuers;
(ii) Services for purchasing fiat stablecoins provided by non-designated licensed institutions;
(4) Give authorities the necessary power to adjust the scope of regulated stablecoins and activities in response to rapid changes in the virtual asset market;
(5) Provide transitional arrangements to promote the smooth implementation of the regulatory system.
The HKMA will also launch a "sandbox" arrangement to communicate regulatory expectations and provide compliance guidance to issuers who intend to issue fiat currency stablecoins in Hong Kong and to provide compliance guidance, while collecting their opinions on the proposed regulatory requirements to facilitate subsequent supervision. implementation of the system and ensuring that the system meets regulatory objectives. Details of the "Sandbox" will be announced separately.
Director of the Treasury Bureau Hui Ching-yu said: "With the implementation of the virtual asset trading platform licensing system in June this year, the legislative proposal to supervise the issuers of fiat currency stablecoins is another important measure to promote the development of Hong Kong's Web3 ecosystem. Regarding licensing and supervision and the implementation of enforcement arrangements to properly manage the actual and potential risks associated with the development of stablecoins in Hong Kong and to be consistent with international standards."
Yue Weiman, Chief Executive of the Hong Kong Monetary Authority, said: "We support financial innovation, but also believe that necessary regulatory regulations and standards need to be formulated to promote the long-term, sustainable and responsible development of the virtual asset ecosystem. Therefore, while we are launching public consultation A 'sandbox' arrangement will be launched as a channel for the HKMA and market participants interested in launching stablecoin issuance business in Hong Kong to exchange views to promote the implementation of the regulatory system."
legislative approach
1. After weighing the introduction of the proposed supervisory system by amending the Anti-Money Laundering Ordinance, the Payments Ordinance and formulating new legislation, the Treasury Bureau and the Hong Kong Monetary Authority recommend the formulation of new legislation based on the following considerations:
(a) Stablecoins and stored value instruments may have different characteristics. Therefore, it is more appropriate to formulate separate legislation to supervise issuers of fiat currency stablecoins rather than incorporating the relevant regulatory systems into the Payment Ordinance.
(b) New legislation seems more appropriate to deal with areas such as stablecoins that are still in their infancy. If necessary, the new legislation can also serve as the basis for extending the regulatory regime to other virtual asset activities in the future.
2. It is now recommended that issuers of fiat currency stablecoins be brought under the supervision of the Hong Kong Monetary Authority. As markets and international regulatory discussions continue to evolve, the government will continue to work with other financial regulators to assess the risks of other virtual assets and activities and consider their need to be included in regulations.
3. The Treasury Bureau and the Hong Kong Monetary Authority also note that under the proposed regulatory regime for fiat stablecoin issuers, regulated issuance activities may overlap with other financial regulatory regimes in Hong Kong. In order to avoid subjecting fiat stablecoin issuers to multiple regulatory regimes, it is now proposed that the issuance of fiat stablecoins by licensed issuers will be excluded from certain regulatory regimes, such as those applicable to securities (including collective investment schemes) and stored value facilities. Regulatory system.
Regulatory framework for fiat stablecoin issuers
1. Licensing system for fiat currency stablecoin issuers
1.1 It is now proposed that under the new licensing system for fiat currency stablecoin issuers, unless it is a company holding a license issued by the Monetary Authority, no one shall:
(1) Issue or show that you issue legal stablecoins in Hong Kong;
(2) Issue or appear to be issuing stablecoins that claim or appear to maintain a relatively stable value relative to the Hong Kong dollar;
(3) Actively promote the issuance of its legal currency stable currency to the Hong Kong public.
2. Licensing criteria and conditions
2.1 Reserve management and stabilization mechanism
(a) Full Reserve Backing : The issuer of a fiat stablecoin must ensure that the total reserve asset value of the fiat stablecoin is at least equal to the face value of the fiat stablecoin in circulation at all times. Given the fundamental difficulties in maintaining a robust stabilization mechanism for issuing fiat stablecoins whose values are derived through arbitrage or algorithms in the absence of valuable reserve assets, such issuers will not be licensed.
(b) Investment restrictions : Reserve assets must be of high quality, highly liquid, and involve minimal market, credit and concentration risks. The currency in which reserve assets are denominated should correspond to the currency referenced by the fiat stablecoin, and appropriate flexibility will be allowed subject to individual approval by the Monetary Authority. When deciding on the allocation of reserve assets, fiat stablecoin issuers should consider the liquidity needs of the relevant assets and how to ensure that relevant needs can be met when managing reserve assets and making relevant investments. Financial regulators must be able to satisfy themselves that the types of assets and allocations recommended for investment by fiat stablecoin issuers are appropriate. Therefore, issuers need to formulate investment policies and review their investment policies in a timely manner as the fiat currency stablecoin business gradually develops.
(c) Separation and safekeeping of reserve assets : Issuers of fiat stablecoins should establish effective trust arrangements to ensure that reserve assets are kept separate from other assets and used to meet redemption requirements, and to ensure that in the event the issuer becomes insolvent, Users’ legal rights and priority claims on reserve assets. The issuer must set up a separate account with a licensed bank or other custodian under arrangements satisfactory to the Monetary Authority to manage reserve assets. As part of the internal control measures and procedures, the issuer must establish effective internal control measures and procedures to protect reserve assets from operational risks (including the risk of theft, fraud and misappropriation).
(d) Risk management and control procedures : Issuers of fiat-currency stablecoins must formulate sound policies, guidelines and control measures to properly manage all investment risks related to reserve asset management, and ensure that there are sufficient funds and liquid assets to cope with the redemption of circulating fiat-currency stablecoins. Reply to the request. The issuer must adopt comprehensive liquidity risk management measures with clearly defined strategies and execution tools to deal with large-scale redemptions (i.e., runs or liquidity stress scenarios). The issuer should also conduct regular stress tests to monitor the adequacy and liquidity of reserve assets.
(e) Disclosure and reporting : Issuers of fiat stablecoins must regularly disclose to the public the total amount of fiat stablecoins in circulation, the market value of reserve assets and the composition of reserve assets. The issuer must, after consulting the Monetary Authority, appoint a qualified independent auditor to certify: (i) the composition and market value of reserve assets; (ii) the denomination of fiat stablecoins in circulation; (iii) during the period covered by the certification Whether the reserve assets on the last working day are sufficient to fully support the value of the circulating fiat currency stablecoin and have sufficient liquidity; and (iv) whether they have fully complied with the conditions set by the Monetary Authority for the management of its reserve assets. It is now recommended that issuers disclose the total amount of fiat stablecoins in circulation and the market value of reserve assets at least daily, disclose the composition of reserve assets at least weekly, and have relevant certification conducted by a qualified independent auditor at least monthly.
(f) Interest Payments Prohibited : Any income or loss from reserve assets, including but not limited to interest, dividends or capital gains or losses, accrues to the issuer. Referring to international regulatory practices, fiat stablecoin issuers are not allowed to pay interest to fiat stablecoin users.
(g) Effective stabilization mechanism : Regardless of whether the specific operating procedures of the stabilization mechanism of the fiat currency stablecoin are executed by a third party, the issuer must bear the ultimate responsibility for the effective operation of the stability mechanism of the fiat currency stablecoin it issues.
2.2 Redemption request
2.2.1 Users of fiat-currency stablecoins should have the right to redeem fiat-currency stablecoins at face value from the issuer of fiat-currency stablecoins, and have a claim against the reserve assets (and a claim against the issuer when the issuer cannot fulfill its redemption obligations) ). Redemption requests must be processed without unreasonable fees and within a reasonable time. The issuer may not impose unreasonable conditions on redemptions (such as a very high minimum threshold amount). Redemption fees must be clearly communicated to users and should be proportionate, and should not be so high as to prevent users from redeeming in disguise. The issuer must make payment in the fiat currency or currencies referenced when fulfilling a redemption request.
2.2.2 When fiat stablecoin users are unable to exchange fiat stablecoins into one or more legal currencies through other channels (for example, due to intermediaries or infrastructure operations being blocked), the issuer must ensure that it is directly provided to users in face value within a reasonable time. redemption.
2.2.3 The issuer must develop and maintain a contingency plan to still allow users to redeem fiat stablecoins in an orderly manner in the event that it is unable to fulfill redemption requirements (including when the issuer's license is suspended or revoked).
2.3 Restrictions on business activities
2.3.1 Issuers of fiat currency stablecoins must obtain approval from the Financial Controller before starting any new business. The issuer must also conduct a risk assessment and prove that it has sufficient resources to invest in the issuance of fiat stablecoins and maintain its operations, that the new business will not bring additional risks to it, and that it has risk management and control measures to ensure that new business activities will not affect its ability to perform its functions as an issuer.
2.3.2 The issuer may obtain approval to carry out activities ancillary to or incidental to the issuance of fiat currency stablecoins, such as providing wallet services for the fiat currency stablecoins issued by it to make the issuance and redemption process more convenient. When providing such wallet services, issuers should formulate corresponding policies and procedures for the segregation and custody of user assets, as well as the withdrawal and deposit of user assets.
2.3.3 For the avoidance of doubt, issuers should not engage in lending and financial intermediary activities, nor should they engage in other regulated activities, such as the Securities and Futures Ordinance (Chapter 571), the Mandatory Provident Fund Schemes Ordinance (Cap. 485) or regulated activities specified in the Insurance Ordinance (Cap. 41).
2.4 Have physical companies and offices in Hong Kong
The issuer of fiat currency stablecoins must be a company established under the laws of Hong Kong and have a registered office in Hong Kong. Its chief executive officer, senior management team and key personnel must be resident in Hong Kong and implement effective control over the issuance and related activities of its legal currency stablecoins. This requirement will enable the Monetary Authority to effectively regulate such entities.
2.5 Financial resource requirements
2.5.1 Issuers of fiat currency stablecoins must have sufficient financial resources to operate the fiat currency stablecoin issuance business, including meeting the minimum paid-up capital requirements. The purpose of this requirement is to ensure that the issuer has sufficient financial resources to maintain the issuer's operations and serve as a buffer against losses. After referring to international regulatory practices, we recommend that the minimum paid-up share capital is HK$25,000,000, or a fixed percentage of the face value of the circulating fiat stablecoin, whichever is higher. We recommend that this fixed percentage be set at 2%.
2.5.2 If the Monetary Authority considers it necessary, it may also impose higher levels of paid-up capital requirements on issuers through the licensing conditions under the system.
2.6 Disclosure requirements
2.6.1 A fiat stablecoin issuer must publish a white paper to disclose general information about the issuer, the rights and responsibilities of fiat stablecoin users, fiat stablecoin stabilization mechanisms, reserve asset management arrangements, and the technologies and risks used. Issuers must notify the Monetary Authority before publishing white papers and other related publications.
2.6.2 Issuers of fiat currency stablecoins must disclose redemption policies, clearly specifying the redemption procedures, redemption time limits, applicable fees, and the rights of fiat currency stablecoin users regarding redemption.
2.7 Governance, knowledge and experience
The controller, chief executive and directors of a fiat stablecoin issuer must be fit and proper, and their appointments, as well as changes in the issuer's ownership or management, must be approved in advance by the Monetary Authority. In addition, the issuer must establish a comprehensive control system for the appointment of senior management, as well as a robust corporate governance structure, and appoint personnel with the necessary knowledge and experience to effectively perform their duties.
2.8 Risk management regulations
Issuers of fiat stablecoins must develop appropriate risk management procedures and measures for their operations. These measures include adequate security and internal control measures to ensure the security and integrity of data and systems; effective fraud monitoring and detection measures; technology risk management measures; robust contingency arrangements to deal with disruptions to business operations; and Other operational and security measures commensurate with the scale and complexity of the business, etc. The issuer should also conduct risk assessments from time to time (at least once a year) to ensure that internal control measures, risk management and governance procedures are sound and effective.
2.9 Audit regulations
Issuers of fiat stablecoins are required to submit audited financial statements to the Monetary Authority annually. If required by the Monetary Authority, the issuer must submit a report prepared by an external independent auditor and evaluator to confirm the effective management and sound operation of the fiat currency stablecoin issuance business, such as whether the issuer is in reserve asset management, network security , and there are sufficient control systems in terms of the robustness of "smart contracts".
2.10 Anti-money laundering and terrorist financing regulations
Issuers of fiat stablecoins must ensure that the design and implementation of fiat stablecoin issuance has a sound and appropriate control system to prevent and combat activities that may involve money laundering and terrorist financing. The issuer must have a sound and appropriate control system in place to ensure that the company complies with the applicable provisions of the Anti-Money Laundering Ordinance and the rules and regulations of the Monetary Authority for the purpose of preventing, combating or detecting money laundering or terrorist financing. , guidelines or measures published in other forms. Relevant regulations include, but are not limited to, adequate customer due diligence measures for customers when issuing and redeeming fiat stablecoins, transaction monitoring and regulations regarding wire transfers ("Transfer Rules"), in order to comply with FATF standards and requirements under the Anti-Money Laundering Ordinance.
3. Other licensing matters
3.1 Eligibility for applying for a license
It is now recommended that all entities be eligible to apply for a fiat stablecoin issuer license as long as they meet the licensing criteria and conditions. Applicants for licenses need to go through a strict approval process, in which they need to prove that they meet the licensing criteria and conditions including but not limited to the above.
Taking into account that licensed banks are already subject to strict prudential regulatory requirements and are subject to the ongoing comprehensive supervision of the Monetary Authority, we propose that the licensing criteria (c) restrictions on business activities, (d) having physical companies and offices in Hong Kong and (e) ) financial resource requirements do not apply to fiat stablecoin issuers that are themselves licensed banks, as licensed banks are already subject to the banking regulatory regime in these aspects.
3.2 Continuous licensing conditions
In addition to setting licensing criteria, we recommend that the Monetary Authority be given the power to set, modify or cancel the continued licensing conditions for fiat stablecoin issuers. The Monetary Authority will determine such conditions as necessary. Such conditions may include, for example, requirements for reserve assets and restrictions on the types of services that the issuer can provide.
3.3 Issuance of more than one fiat currency stablecoin
We recommend that fiat stablecoin issuers obtain Monetary Authority approval before issuing any new fiat stablecoins under their license. The purpose of this regulation is to ensure that new fiat stablecoins will not affect the operation of existing fiat stablecoins.
3.4 Open license
We propose that the fiat stablecoin issuer license be made an open license, which would remain valid as long as the licensed issuer continues to operate and its license has not been revoked by the Monetary Authority (for example due to non-compliance or the issuer ceases operations).
3.5 Register of Licensees and License Fees
We recommend that fiat stablecoin issuers must display their license number on any advertising items and any software applications they provide to customers to make the public aware of their licensing status. The Monetary Authority will maintain a central register of licensees for public inspection.
We recommend giving the Monetary Authority the power to impose an annual license fee on fiat stablecoin issuers, including licensees who are themselves licensed banks.
4. Custody and purchase services for fiat stablecoins
Some stakeholders believe that virtual asset custody and purchase services should be subject to specific supervision. The Treasury Bureau, the Hong Kong Monetary Authority and the Securities and Futures Commission will work closely to assess the appropriate regulatory model for the relevant services.
As far as providing services for purchasing fiat stablecoins is concerned, we believe that the risks involved in fiat stablecoins issued by non-licensed issuers are not transparent, and therefore the above-mentioned fiat stablecoins are not suitable for public use. In order to protect fiat stablecoin users, it is now recommended that only licensed fiat stablecoin issuers, authorized institutions, licensed corporations and licensed virtual asset trading platforms can provide services for purchasing fiat stablecoins in Hong Kong, or actively provide services to the Hong Kong public People actively promote relevant services. When authorized institutions, licensed corporations and licensed virtual asset trading platforms provide this service, if the relevant fiat currency stablecoins are issued by non-licensed issuers, they can only be sold to professional investors and must be clearly stated The fiat stablecoin is not issued by a licensed fiat stablecoin issuer.
5. Violation of regulations and sanctions
It is suggested that the criminal offense sanction mechanism can deter similar violations of the regulations by industry participants. Relevant offenses include unlicensed issuance or display of the issuance of fiat-tender stablecoins in Hong Kong, issuance or display of the issuance of Hong Kong dollar stablecoins, active promotion of the issuance of fiat-tender stablecoins to the Hong Kong public, and issuing advertisements to promote unlicensed issuers. Issuing fiat stablecoins, refusing to produce documents at the request of the Monetary Authority, providing false information to the Monetary Authority or making false entries in documents, violating other conditions issued by the Monetary Authority on the licensing system for fiat stablecoin issuers, etc. According to our current recommendations, only licensed institutions listed in Section 7 can provide services for purchasing fiat stablecoins in Hong Kong. It is illegal to provide services for purchasing fiat stablecoins, and it is also illegal to advertise services for purchasing fiat stablecoins that are not provided by licensed institutions listed in Section 7. In determining the amount of fines and imprisonment terms applicable to relevant offenses under the proposed regulatory regime, we will make reference to the relevant provisions of the Anti-Money Laundering Ordinance, the Banking Ordinance, the Payments Ordinance and the Securities and Futures Ordinance.
In addition, we believe that a range of civil and supervisory sanctions should be introduced into the proposed regulatory regime so that the Monetary Authority can consider appropriate penalties based on the severity and duration of the breach. Proposed civil and regulatory sanctions include the following:
(a) Issue cautions, warnings, reprimands, and orders to take specified actions; regulatory sanctions include temporary suspension of license, revocation of license, revocation of license, or a combination of the above measures;
(b) A fine not exceeding HK$10,000,000, or a penalty equivalent to three times the amount of profit gained or loss avoided due to the violation, whichever is higher; or (c) a combination of the above measures.
