Key Points of the Hong Kong Stablecoin Regulation Draft

1. Legislative Background and Policy Objectives

With the development of virtual assets (Web3), stablecoins are playing an increasingly important role as payment mediums and financial tools in the financial system, bringing potential risks to financial stability.

The government believes it is necessary to establish a specialized regulatory system to protect user rights, maintain financial stability, and promote industry innovation and healthy development.

The draft regulation refers to the international standards of the Financial Stability Board (FSB) and adopts the principle of "same business, same risks, same rules."

II. Regulated Activities and Scope of Application

Regulated activities include: Issuing fiat-backed stablecoins in Hong Kong Issuing stablecoins overseas that are pegged to the Hong Kong dollar Actively promoting fiat-backed stablecoins to the public in Hong Kong Other important activities designated by the Monetary Authority

Issuing fiat stablecoins in Hong Kong

A stablecoin issued overseas but pegged to the Hong Kong dollar.

Actively promote fiat stablecoins to the Hong Kong public.

Other important activities designated by the Monetary Authority

Definition of stablecoin: A digital asset issued using cryptographic technology that references the value of one or more fiat currencies or assets, and can be used for payment, investment, and settlement purposes.

Exclusions: CBDC, limited-use tokens, securities, stored value payment instruments, bank deposits, etc.

III. Licensing System and Licensing Requirements

No individual or organization may issue, promote, or provide stablecoins without permission; violators may face fines of up to 5 million dollars and 7 years of imprisonment.

Applying for a license requires passing strict scrutiny, including capital requirements (such as HKD 25 million), internal controls, reserve management, anti-money laundering measures, etc.

The validity period of the license, renewal, revocation, changes, etc. are all clearly stipulated.

License holders must establish a physical company in Hong Kong and disclose company information for verification.

4. Reserve Assets and Risk Management

Reserve Requirements: It is necessary to hold an equivalent or excess amount of high-quality, highly liquid reserve assets to ensure that the stablecoin can be redeemed in full at any time. Reserve assets must be properly segregated, safeguarded, and disclosed regularly.

Must hold equivalent or excess high-quality, high-liquidity reserve assets to ensure stablecoins can be fully redeemed at any time.

Reserved assets must be properly segregated, safeguarded, and disclosed regularly.

Redemption Rights: Holders have the right to redeem stablecoins at face value, and redemption requests must not incur unreasonable fees and must be processed within a reasonable time.

Bankruptcy protection: In the event of liquidation by the licensee, reserve assets must prioritize safeguarding the redemption rights of holders.

5. Information Disclosure and Transparency

Regularly disclose information on operating conditions, reserve assets, significant changes, etc. to the Monetary Authority and the public.

Advertising and promotional activities must comply with strict regulations to prevent misleading or false statements.

6. Management, Custodians, and Intermediary Institutions Regulation

Senior management and controlling persons must be approved by the Monetary Authority.

The Monetary Authority may investigate licensees, request information, appoint statutory managers, etc.

The stablecoin custody service will consult separately and establish guidelines to ensure asset security.

Intermediary institutions (such as banks, licensed corporations by the Securities and Futures Commission, virtual asset trading platforms) can only offer licensed stablecoins to the public, and unlicensed ones can only be provided to professional investors.

VII. Law Enforcement, Penalties, and Cross-Border Cooperation

Regulatory Penalties: Operating without a license, selling stablecoins without authorization, etc., can result in fines of up to 5 million and imprisonment for 7 years. Fraud in stablecoin trading can result in fines of up to 10 million and imprisonment for 10 years. Inducing others to obtain stablecoins with false statements can result in fines of 1 million and imprisonment for 7 years.

Unlicensed operations and the sale of stablecoins by non-authorized institutions can result in fines of up to 5 million and imprisonment for 7 years.

Fraud in stablecoin trading could result in a maximum fine of 10 million dollars and imprisonment for 10 years.

Inducing others to obtain stablecoins and making false statements, punishable by a fine of 1 million and imprisonment for 7 years.

The Monetary Authority has the power to investigate, search, and impose regulatory penalties.

The regulations have extraterritorial effect and also regulate stablecoins issued overseas that are pegged to the Hong Kong dollar.

Strengthen law enforcement through international regulatory cooperation, banking systems, and other means.

8. Innovation and Industrial Development

The regulations include a "sandbox" mechanism that allows innovative projects to operate on a pilot basis under supervision, encouraging the application of new scenarios such as supply chains and cross-border payments.

Emphasize achieving a balance between financial stability and innovative development, avoiding unnecessary restrictions, and promoting sustainable development in the industry.

IX. Transition Arrangements and Appendix Specifications

Establish a compliance transition period for existing stablecoin issuers to ensure a smooth transition.

Appendix 2: Minimum Standards (Summary): Capital Adequacy, Reserve Management, Internal Control, Risk Management, Anti-Money Laundering, Information Technology Security, Business Continuity Management, Information Disclosure, etc.

Appendix 3: License Fees (Summary): Includes all types of fees for applying for licenses, renewals, changes, inquiries, etc., as specified by the Monetary Authority.

Other appendices cover details such as criminal offenses, transitional arrangements, and the establishment of tribunals.

10. Implementation and Promotion

Before the regulations take effect, there will be enhanced publicity and education to raise public awareness of stablecoins and their risks.

Establish a joint task force with agencies such as the police and the Securities and Futures Commission to actively monitor the market and prevent scams.

Summary

Hong Kong's Stablecoin Bill focuses on a rigorous licensing regime, clear reserve asset requirements, high transparency and strong enforcement powers, which not only protects users and financial stability, but also leaves room for innovation and industrial development. By taking into account international standards and local realities, the Ordinance will help strengthen Hong Kong's position as an international virtual asset and financial centre.