Source: Ta Kung Pao

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On July 16, 2024, Ta Kung Pao published an article that the Hong Kong Financial Services and the Treasury Bureau (i.e., the Hong Kong Treasury Bureau) issued a notice that it will soon publish a consultation summary on the regulatory system for stablecoin issuers in order to prepare a draft bill for deliberation by the Legislative Council.

The authorities said that there will be corresponding transitional arrangements for existing stablecoin issuers. Experts believe that the SAR government's risk-based and pragmatic approach to supervision is a very correct approach because it can improve market clarity and security.

The Treasury Bureau stated that in view of the important role of fiat stablecoins in the Web3 and virtual asset ecosystem, and the increasingly close connection between the traditional financial system and the virtual asset market, the SAR government needs to establish a regulatory system for fiat stablecoin issuers to regulate in a risk-based and pragmatic manner. The three main requirements include reserve management and stabilization mechanisms (for example, requiring issuers to ensure that fiat stablecoins are fully backed by high-quality and highly liquid reserve assets), redemption requirements, and regulatory requirements such as governance, knowledge and experience.

Transition arrangements will be provided to existing issuers

The Treasury Bureau also suggested that only licensed fiat stablecoin issuers, banks, licensed corporations, and licensed virtual asset trading platforms can sell fiat stablecoins in Hong Kong or actively promote related services to the Hong Kong public. For existing stablecoin issuers, the proposed regulatory system will also have corresponding transitional arrangements. In addition, the Treasury Bureau hopes that an appropriate regulatory system for fiat stablecoin issuers that complies with international regulatory recommendations can provide users with sufficient protection to deal with potential risks to monetary and financial stability, so that Hong Kong's virtual asset ecosystem can develop sustainably and responsibly.

OSL Chief Financial Officer Hu Zhenbang said that some of the most popular dollar-pegged stablecoins on the market, including USDC and USDT, have been widely used as a digital asset payment tool around the world, especially in Southeast Asia, the Middle East and Africa. However, the market has many questions about its issuers, and many users are concerned about the asset reserves, investment activities, solvency, and whether the stablecoin issuers can mint and redeem in an efficient manner.

If stablecoin issuers are subject to supervision by Hong Kong regulatory authorities, they can effectively ensure the issuers' financial and market transparency, solvency and liquidity, and can connect with traditional financial institutions. These elements provide protection for investors and promote the global application of products.

Lu Zhihong, managing partner of Deloitte China Digital Assets Hong Kong, said that the characteristic of stablecoins is price stability. In addition to investors viewing them as safe-haven assets, stablecoins are also very important in the Web3 ecosystem. Stablecoins have become an important alternative tool in global transactions because they have fast transaction speeds, low costs, and are available "24/7". In addition, there is no "middleman" in their blockchain functions. Therefore, many institutions use stablecoins as a payment tool and regard them as an ideal choice for international remittances and cross-border transactions.

Clear rules help Hong Kong develop virtual assets

It can be seen from this that the importance of regulated stablecoins is self-evident. Although stablecoins are very important for the development of virtual assets in Hong Kong, if they are promoted too hastily, they will have a counterproductive effect, because the lack of clear supervision will create uncertainty and may hinder potential users.

Lui Chi-hung made an analogy, just like a regulated casino, customers can go to the casino to exchange funds for chips, and at the same time they can ensure that their chips can be exchanged for cash at any time, but if there are some unregulated casinos, customers' chips cannot be exchanged for cash, which will cause chaos in the market. The SAR government is right to regulate in a risk-based and pragmatic way, because it can improve the clarity and security of the market, ensure that these digital assets remain pegged to legal currencies, and ensure that issuers have sufficient reserves to cope with investor redemptions to protect the interests of investors.