The Hong Kong Monetary Authority (HKMA) is planning to regulate stablecoins and may require entities that issue stablecoins to establish a locally incorporated entity in Hong Kong. The proposed regulations will apply to entities that actively operate or market in Hong Kong, and could potentially increase the number of licenses required for issuers.
Uncertainty Surrounding Non-Hong Kong Stablecoin Issuers
The HKMA’s position on non-Hong Kong stablecoin issuers, such as Tether, remains unclear. A representative from the HKMA stated that “regulatory treatment for different types of virtual assets would depend on, among other things, their actual structures and operational details.” Under the new regime, wallet providers may need a stablecoin wallet license, and issuers of widely-used stablecoins like Tether may have to set up a locally incorporated entity.
Balancing Financial Stability and Economic Growth
The HKMA is primarily focused on ensuring Hong Kong’s financial system stability, but it also plays a role in promoting the economy. Crypto companies were not the only participants in consultations, as traditional banks and virtual banks also gave feedback to the regulator. HKbitEX Chief Strategy Officer Ken Lo pointed out the potential for “how stablecoins can be used to facilitate the next era of payment,” highlighting the strength of wholesale and commercial banking in the city.
Relaxing Regulations for Foreign Entities
The HKMA may relax its stance on requiring foreign entities that have already issued stablecoins to set up a locally incorporated entity in Hong Kong due to the city’s efforts to attract talent and maintain its position as an international financial center. Requiring foreign entities to set up an entity in Hong Kong and issue stablecoins from that entity could create complications, and liquidity might also be an issue.
Segregation Requirement for Exchanges
Under the HKMA’s current position, exchanges will need to segregate their virtual asset business from their stablecoin business. This segregation requirement would result in additional costs for companies. Other measures are available to protect consumers and ensure exchanges aren’t operating a fractional reserve system, where they lend out customers’ funds.
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