Author | Cat Brother Wu talks about blockchain
Draft Introduction
On May 21, 2024, the Hong Kong Legislative Council officially passed the Stablecoin Issuers Bill in its third reading, which provides the first complete regulatory framework for stablecoins. After the implementation of the Ordinance, three types of stablecoin-related activities must obtain a license: first, issuing legal currency stablecoins in Hong Kong; second, issuing Hong Kong dollar stablecoins in or outside Hong Kong; third, actively promoting the issuance of its legal currency stablecoins to the Hong Kong public. The Ordinance is expected to take effect this year.
In terms of applying for a license, the Ordinance stipulates that any individual or entity wishing to issue or operate a "designated stablecoin" in Hong Kong must submit a formal application to the Hong Kong Monetary Authority (hereinafter referred to as HKMA). HKMA will review and determine whether the applicant meets the minimum standards listed in Schedule 2 (such as capital strength, risk management, corporate governance structure, internal control system, etc.). For example, in terms of qualification review, it is stipulated that the licensee must have sufficient financial resources and liquid assets, including a licensee with a share capital of at least HK$25 million.
The license does not have a fixed validity period and will remain valid unless it is revoked or the licensee is liquidated or has its registration with the Hong Kong Companies Registry revoked. However, if the licensee does not meet the minimum standards or has major problems, such as being unable to fulfill its repayment obligations, improper governance or major violations, the HKMA may revoke or suspend its license and, if necessary, send a statutory administrator to take over the business to protect the public interest. The HKMA will also set up a "registration list of licensees" where the public can check which entities are authorized and qualified to operate.
According to Caixin, citing a speech by Hong Kong Financial Services and the Treasury Bureau Director Paul Hui in the Legislative Council, the Bill stipulates that only designated licensed institutions are allowed to sell legal currency stablecoins in Hong Kong, and only legal currency stablecoins issued by licensed issuers can be sold to retail investors. The above-mentioned designated licensed institutions that can sell stablecoins in Hong Kong include: stablecoin issuers licensed by the Monetary Authority, banks, institutions issued by the Hong Kong Securities and Futures Commission with a Type 1 license (securities trading), and virtual asset trading platforms licensed in Hong Kong.
In addition, the draft also stipulates that engaging in regulated stablecoin activities without a license or selling designated stablecoins without authorization is a criminal offense, with a maximum fine of HK$5 million and imprisonment for 7 years. If it is a summary conviction, the penalty is a fine of HK$500,000 and imprisonment for 2 years, and a maximum fine of HK$100,000 per day may be imposed for continued violations.
Other key points include:
● 100% Reserve and Segregated Custody: Licensed issuers must maintain a robust stablecoin mechanism to ensure that reserve assets are composed of high-quality, highly liquid assets and are equal to the denomination of fiat stablecoins in circulation at all times. These reserve assets must be properly separated and kept from the issuer’s own assets to ensure the safety of funds.
● Unconditional redemption mechanism: Stablecoin holders have the right to redeem stablecoins at par from the issuer. Redemption requests must be free of any fees and must be processed within a reasonable time.
● Strict compliance framework: Licensed issuers must comply with a series of stringent regulatory requirements, including anti-money laundering (AML), risk management, full disclosure of information and qualified auditors to ensure transparency and soundness of operations.
Related News
In addition to legislating on the stablecoin licensing system, the Hong Kong Monetary Authority also launched a sandbox for stablecoin issuers in 2024. Ho Hong-che, head of the Digital Finance Department of the Hong Kong Monetary Authority, revealed in February this year that the authorities had received more than 40 sandbox applications and accepted a total of 3 groups of participants into the sandbox. The 3 groups of sandbox participants are: 1. A group composed of Standard Chartered Hong Kong, Animoca Brands, and Hong Kong Telecom; 2. JD Coin Chain Technology (Hong Kong); 3. Yuanbi Innovation Technology. Yuanbi Technology pointed out that the "Draft" lists four important requirements for issuers: First, in terms of reserves, licensees must maintain a robust stablecoin mechanism to ensure that the reserve assets of stablecoins are composed of high-quality and highly liquid assets, and are equal to the denomination of the circulating legal currency stablecoins at any time, and are properly separated and kept. Second, stablecoin holders have the right to redeem stablecoins at face value from the issuer. The redemption request must be free of charge and must be processed within a reasonable time. Third, it meets a series of requirements for combating money laundering, risk management, disclosure, and auditing appropriate persons. Fourth, transactions must be conducted on licensed virtual asset trading platforms. The ordinance is expected to take effect this year, and the Hong Kong government said it would give the industry enough time to understand the requirements under the licensing system. The licensing system also has a transitional period arrangement so that the industry can apply for a license and make appropriate business arrangements in accordance with the requirements of the ordinance.
Shen Jianguang, vice president of JD Group, said on April 21 that JD's stablecoin has entered the Hong Kong "sandbox" testing phase and is expected to be launched globally in the future. He pointed out that the stablecoin business is developing rapidly, and JD's issuance of stablecoins aims to enhance global supply chains and cross-border payment capabilities. Shen Jianguang emphasized that stablecoins must ensure compliance in any country or region and must act in accordance with the regulatory principles of different countries or regions.
Hong Kong Legislative Council member Wu Jiezhuang tweeted that it is expected that by the end of this year, institutions can apply to the Hong Kong Monetary Authority to become compliant stablecoin issuers, and stablecoins must use legal currency as the underlying asset. Wu Jiezhuang pointed out that the passage of the law is the starting point for building Web3 infrastructure, and the subsequent application of stablecoins in physical retail, cross-border trade and other fields should be further promoted. He also suggested considering releasing stablecoin interest to enhance market appeal. Wu Jiezhuang suggested that assets including offshore RMB as the underlying asset can also be discussed and considered, and the interest obtained through investment can be considered to be delivered directly to stablecoin holders in the future.
After the Hong Kong Legislative Council passed the Stablecoin Bill in the third reading, HashKey Chain announced that it will provide full-stack support for Hong Kong stablecoins and RWA projects that can serve as their reserve assets, accelerating the construction of on-chain infrastructure for stablecoin issuance, circulation and management. At the same time, HashKey Chain will also launch a wear-free, 1:1 on-chain stablecoin swap tool to promote the widespread application of stablecoins in real financial scenarios.
OSL Group, a licensed virtual asset trading platform in Hong Kong, expressed great concern and active support for this matter, believing that at a critical moment when the global traditional financial system is facing a reshaping, this will have a profound impact on the development of the digital asset market and provide strong development momentum. Gary Tiu, Executive Director and Head of Regulatory Affairs of OSL, said, "OSL Group actively participates in the discussion of Hong Kong's stablecoin policy formulation, witnessing and promoting the formation of the stablecoin framework. The regulations set a unified standard for the development of the industry, which will help improve transparency and long-term stability."
