The authorities in Hong Kong are exploring regulating stablecoins, as the latest consultation paper proposed the regulation of fiat-referenced stablecoins (FRS). If the proposed rules are implemented, stablecoin issuers in Hong Kong must obtain a local license.

Hong Kong’s Step to Regulate Stablecoins

The consultation paper issued by the Financial Services and the Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA) defined stablecoins as “one that purports to maintain a stable value with reference to one or more fiat currencies.” It further specified that the companies “actively market their issuance of FRS to the public of Hong Kong” need to be licensed.

The authorities will accept feedback on the proposed regulations until 29 February 2024. The paper elaborated that the necessity for such regulations arrived after the collapse of TerraUSD, an algorithmic stablecoin, last year. Hong Kong’s proposed rules will not license the stablecoins.

“With the implementation of the licensing regime for VA trading platforms from June this year, the legislative proposal to regulate FRS is another important measure facilitating Web3 ecosystem development in Hong Kong,” Christopher Hui, the Secretary for Financial Services and the Treasury, said.

Local Presence Is a Must

According to the proposed rules, licensed stablecoin issuers must maintain a full reserve of assets backing the stablecoins “at least equal to the par value.” Further, the reserves must be segregated and safely kept. Companies need to disclose their reserves and regularly report to the regulators.

Additionally, to receive the license, stablecoin issuers need to establish a local office by appointing a Chief Executive Officer, a senior management team, and other key personnel.

Hong Kong has already implemented regulations around the broader crypto industry. The local regulator now offers licenses to cryptocurrency exchanges. Several crypto exchanges have already established their Hong Kong base for local operations. However, Hong Kong does not allow trading against stablecoins under the existing rules.

Meanwhile, stablecoin coins have now become the focus of many regulators. Apart from Hong Kong, Singapore has introduced many rules to regulate the so-called stablecoins.