Written by: Shanghai Mankiw Law Firm

After Hong Kong released the summary of the stablecoin regulatory consultation, it also announced the stablecoin sandbox applicants, pulling the Web3 circle into the discussion of Hong Kong dollar stablecoins and Web3 payments. At the same time, the HKMA's Deputy Director Chen Weimin published an important article, in which he mentioned that entering the "sandbox" is not a prerequisite for applying for a stablecoin issuer license in the future. Even if participating institutions that have entered the "sandbox" intend to obtain a license in the future, they must submit a formal application after the regulatory system is implemented.

So, if you want to apply to issue a legal currency stablecoin in Hong Kong, what rules do you need to follow, and what core elements do you need to comply with after the issuance? Manquin Law Firm invited Jen Bai, the head of the Hong Kong office, to sort out and share.

Mankiw's analysis

As the digital currency market continues to expand and mature, Hong Kong, as an international financial center, has taken a number of measures to ensure the compliance, security and transparency of its stablecoin market. The latest draft regulatory framework of the Hong Kong Monetary Authority (HKMA) provides comprehensive guidance to ensure that the issuance and operation of stablecoins meet the highest standards of regulatory requirements. Through a series of regulatory measures, Hong Kong is building a highly secure and transparent stablecoin market, which not only helps protect the interests of investors, but also provides a solid foundation for financial technology innovation. With the gradual implementation of these regulations, Hong Kong is expected to become one of the leaders in the global stablecoin market and set new standards for digital currency regulation.

The following are the core elements of Hong Kong’s stablecoin regulation:

FRS Rules for Issuing Licences

The Hong Kong Monetary Authority (HKMA) has set clear regulatory standards by defining in detail the qualifications of fiat-pegged stablecoins (FRS) and their issuers. To become a fiat stablecoin issuer, you need to obtain a license in Hong Kong. The specific requirements for the license application are:

  • Reserve assets: There are requirements for the quantity, composition, quality, liquidity, custody, separation, location, management and disclosure of the reserve assets that support the FRS. Algorithmic fiat-referenced stablecoins are not accepted.

  • Redemption process: The design should ensure that holders can redeem fiat-referenced stablecoins promptly at par value in the reference currency, usually within 1 business day, and there should be no unreasonable conditions or excessive fees when redeeming.

  • Localization requirements: The FRS issuer must be a Hong Kong company and its senior management and key personnel must be based in Hong Kong.

  • Business activity restrictions: restrict FRS issuers from engaging in business activities unrelated to FRS issuance.

  • Financial resource requirements: The issuer's paid-up share capital must be the higher of: HK$25 million; or 1% of the nominal value of FRS in circulation.

  • Suitability requirements: The personnel involved must have sufficient relevant knowledge and experience.

  • Other requirements: Anti-money laundering/anti-terrorist financing requirements, white paper and other disclosure requirements, risk management, and audit requirements.

Requirements for FRS Issuers

In addition to the licensing requirements, FRS issuers also need to comply with certain strict rules during the issuance process, including:

  • An FRS issuer can issue multiple FRSs under its existing licence without setting up a separate entity or going through an additional application process. However, the FRS issuer should provide the rationale for issuing multiple FRSs, explain the usage, and obtain the prior consent of the HKMA before issuing a new FRS.

  • FRS issuers are required to keep reserve assets in licensed banks in Hong Kong, which can provide better user protection in the event of business interruption or failure.

  • FRS users must be able to redeem their FRS on a “timely” basis, which under normal circumstances is within 1 business day. If there are difficulties, they should apply for approval from the HKMA in advance.

  • FRS issuers may offer marketing incentives to promote their FRS but are prohibited from paying interest to FRS users directly or through any third party.

Through the above detailed regulations, Hong Kong aims to establish a highly secure, transparent and fully regulated stablecoin market environment. These measures not only strengthen market stability and investor protection, but also promote financial technology innovation and the healthy development of the market. For stablecoin issuers, understanding and complying with these strict regulatory requirements is the key to ensuring the sustainable development of their business and maintaining market competitiveness.