In July 2024, the Hong Kong Treasury Department issued the "Consultation Summary on Legislative Proposals for Implementing a Regulatory System for Stablecoin Issuers in Hong Kong", which clarified the legal currency-pegged stablecoins in Web3.
The Hong Kong government has recognized the importance of crypto assets in the ecosystem and released a sandbox list (our e-commerce friend JD.com is one of them, which is really a great achievement). It can be seen that the Hong Kong government recognizes the risks of crypto assets and the symbiotic relationship between crypto assets and the traditional financial system and capital market, which complement and promote each other.

Today, the Sajie team will use an article to explain Hong Kong’s current regulatory measures on stablecoins, and help partners understand how to use the correct approach to catch the Hong Kong stablecoin financial express.

01 Detailed explanation of the regulatory measures that Hong Kong is currently planning to take on stablecoins

According to the definition of the Hong Kong Monetary Authority, a stablecoin is a virtual asset that aims to maintain a relatively stable value with certain assets (usually currencies). Due to the increasing interconnectedness between the traditional financial system and the virtual asset market, the HKMA is developing a regulatory regime for stablecoin issuers in Hong Kong.

1. Regulation of Stablecoin Issuers

At present, Hong Kong has not passed legislation to regulate stablecoins, but the subsequent legislative ideas are likely to remain roughly consistent with the previous consultation documents. We refer to the Hong Kong Treasury Department (
FSTB and HKMA in 2023
The "Legislative Proposal for Implementing a Regulatory Regime for Stablecoin Issuers" released in December 2018 briefly explains the regulatory measures that Hong Kong intends to take on stablecoin issuers, as well as the conditions for applying to become a stablecoin issuer.

1. Licensed supervision

Hong Kong's regulatory measures for the issuance of stablecoins follow the licensing and regulatory model of traditional financial institutions: all qualified fiat stablecoin issuers must obtain a license issued by the Monetary Authority. In other words, only licensed institutions can issue stablecoins. In addition, according to the consultation document, there may be two types of licenses for issuing stablecoins in Hong Kong (or one type of license with different scopes of permission, commonly known as "big and small licenses"). The information document clearly states: (1) Only licensed institutions can provide the public with the service of purchasing fiat stablecoins; (2) Only fiat stablecoins issued by licensed stablecoin issuers can be sold to ordinary investors. In the future, some "currency traders" may only have administrative licenses to "sell" fiat stablecoins.

In addition, the consultation document also made it clear that an appropriate "transition period" would be given so that existing stablecoin issuers and currency traders can adapt to the new regulatory requirements.
According to the transitional period requirements for crypto asset platforms in the VATP Licensing Manual and Circular on the Transitional Arrangements for the Licensing System, we estimate that the transitional period for stablecoin issuers and traders will also be about 12 months. Note that stablecoin issuers and traders who can enjoy the transitional period are likely to meet the condition of "operating real business and having real business locations". Referring to the VATP transitional period arrangements, the considerations for "real business" and "real business locations" include: whether there is a legal Hong Kong entity; whether there is a Hong Kong office; whether the entity is managed and controlled by Hong Kong employees; whether key personnel are stationed in Hong Kong; whether there are independent customers and real trading volume in Hong Kong, etc.

2. Requirements for applying for a stablecoin issuer license

We first need to make it clear that the Hong Kong government does not have strict requirements for the entities that can apply for licenses. Basically, "all qualified entities can apply for licenses", but whether a license can be obtained depends on the specific business and compliance of the platform. In short, in the emerging industry of crypto assets, the Hong Kong government does not value "who you are" but "what you are going to do".

According to the consultation document, the Hong Kong government has put forward the following compliance requirements for the issuers of stablecoins:

3. Other matters

The consultation document clarifies that a stablecoin issuance license is a license that is valid continuously. In other words, once issued, the license will remain valid unless it is revoked. In terms of business development, the current consultation document believes that from the perspective of risk control, licensed stablecoin issuers can provide stablecoin purchase services in Hong Kong, and does not emphasize that they must be sold to professional investors, which means that stablecoins issued by licensed institutions are more likely to be sold to the general public.

02 How to play the stablecoin sandbox?

 
2024 March
On December 12, the Hong Kong Monetary Authority issued the "Hong Kong Stablecoin Sandbox Arrangement", officially launching the Hong Kong Stablecoin Regulatory Sandbox System. According to the information from the HKMA, the purpose of establishing the "Sandbox" is to test the business processes of stablecoin issuers and evaluate how they can conduct stablecoin business in Hong Kong in a compliant and sustainable manner. Therefore, applicants entering the "Sandbox" need to demonstrate detailed and feasible business and "Sandbox" plans.

1 How to apply to join the stablecoin sandbox?

Currently, there is only one application channel (relatively
old school): Through the official email address of the HKMA: stablecoin_sandbox@hkma.gov.hk
Express your intention to join the stablecoin regulatory sandbox to the HKMA and wait for the HKMA to contact you. The HKMA may also ask the applicant for more information. The time it takes for the HKMA to process the application is uncertain, depending on the complexity of the applicant's own business model, the adequacy and quality of the data provided by the applicant, and the speed and thoroughness of the applicant's response to the HKMA's subsequent questions and requirements.

Currently, the three main factors considered in evaluating applications are:

1. Whether the applicant can demonstrate a genuine intention and reasonable plan to issue a fiat stablecoin in Hong Kong.

2. Whether the applicant can demonstrate a specific plan to participate in the “Sandbox”.

3. Whether the applicant can provide reasonable expectations of compliance with the proposed regulatory requirements.

2 Entities that have joined the stablecoin regulatory sandbox

At present, according to information from the Monetary Authority of Singapore, there are three individual or joint entities that have successfully joined the stablecoin sandbox. Among them, JD.com, an e-commerce giant in mainland China that we are very familiar with, is also on the list. The remaining two are also extremely powerful.

According to the information obtained by the Sajie team, a certain Dong has issued a Hong Kong dollar-denominated
The plan of a cryptocurrency stablecoin pegged 1:1 is on the agenda, and the name is tentatively set as "MJ Stablecoin". Technically, this is a cryptocurrency issued based on a public chain, and its price is pegged to the Hong Kong dollar (HKD) 1
: 1
The underlying assets have not been disclosed yet, but according to a certain Dongbi Chain Technology Company, the underlying assets are composed of highly liquid and reliable assets, which are safely stored in independent accounts of licensed financial institutions, and the integrity of the reserves can be strictly verified through regular disclosures and audit reports. Upon inquiry, the coin issuer, a certain Dongbi Chain Technology, has obtained a
No. 1 (Securities Trading), No. 4 (Advising on Securities) and No. 9 (Asset Management) licenses.

3. Sandbox does not mean licensed

It should be noted that entering the sandbox does not mean that a license to issue crypto stablecoins has been obtained. For example, if the stablecoin licensing system is improved and the sandbox test results of the stablecoin issued by JD.com are good (high stability, good compliance, and the ability to create a lot of economic value), then JD.com still needs to apply for a license from the regulatory agency, but the results of the sandbox test can be directly used as the basis for applying for a licensed institution, greatly increasing the probability of obtaining a license. From this perspective, entering the sandbox is equivalent to taking the lead in the tide of stablecoins in Hong Kong.

Final Thoughts

 
Those who are familiar with Hong Kong’s financial system know that since 1983
Since 1995, the Hong Kong Monetary Authority has stipulated a "linked exchange rate system" that links the Hong Kong dollar to the U.S. dollar. The right to issue currency has been delegated to the three note-issuing banks: HSBC, Bank of China, and Standard Chartered. For every HK$7.8 note issued by a note-issuing bank, it must pay US$1 to the HKMA. Only after receiving a certificate of indebtedness can it start printing banknotes. When the note-issuing bank wants to take back the banknotes, it must produce a certificate of indebtedness to exchange them for U.S. dollars from the HKMA, and then exchange them for Hong Kong dollars from the market. However, although the three banks have the right to issue currency, they do not have the "right to mint coins". The three banks only hand over the designed banknote styles and the number of issued currencies to the Hong Kong Note Printing Company, which then issues them uniformly. This is why, in addition to
Except for the 10 Hong Kong dollar note, other Hong Kong dollars will have the words "Payable on Presentment" printed on them, which means that the Hong Kong dollars issued by the issuing bank are essentially "exchange vouchers".

Many partners should be able to realize at this time that Hong Kong's traditional financial system actually has many similarities with the issuance logic of stablecoins. It is not impossible to regard stablecoins as a kind of legal currency "exchange voucher". Therefore, the Sister Sa team believes that Hong Kong has a natural leading advantage in the supervision of stablecoins, which also means that the issuance of legal currency stablecoins in Hong Kong has less resistance. From a historical perspective, obtaining a license to issue legal currency stablecoins is likely to mean continued prosperity for any entity in the next century.