Hong Kong Unveils Stablecoin Bill ??

On December 6, the Hong Kong Government 香港政府 published the much-anticipated Stablecoin Bill in the official Gazette. The legislation introduces a detailed regulatory framework tailored for issuers of fiat-referenced stablecoins (FRS), aiming to position Hong Kong as a global leader in the virtual asset space.

This milestone initiative addresses key concerns such as financial stability risks tied to FRS, the need for enhanced user protection, and the importance of regulatory clarity. By implementing these measures, Hong Kong aims to foster trust in the stablecoin ecosystem while unlocking the full potential of virtual assets and their underlying blockchain technology for financial innovation and economic growth.

1. Capital Requirements

a. Licensed institutions must maintain a minimum registered capital of HKD 25 million or its equivalent in an approved foreign currency.

b. Adequate financial resources must be ensured to meet financial obligations and other regulatory standards.

2. Supervision of Reserve Assets

a. A separate reserve asset portfolio must be established for each stablecoin, ensuring its market value equals or exceeds the face value of unredeemed stablecoins.

b. Reserve assets must be managed independently from other institutional assets.

c. Investments should prioritize high-quality, highly liquid, and low-risk options.

d. Robust risk management and audit procedures must be in place.

e. Public disclosure of reserve asset management, risk controls, and audit results is required.

3. Stablecoin Redemption Mechanism

a. Licensed institutions must guarantee the unconditional redemption of stablecoins without unreasonable restrictions.

b. Redemption requests must be processed promptly and paid in the agreed form of assets after deducting reasonable fees.

c. In cases of insolvency, stablecoin holders should have the right to proportional redemption.

4. Qualifications of Management team

a. Institutions must ensure clear identification and qualifications of all shareholders.

b. Key roles such as CEOs, directors, and managers must be held by qualified individuals.

c. Senior management must possess the necessary expertise and experience for their roles.

5. Risk Management Policies

a. Comprehensive policies must be in place to ensure information security, fraud prevention, and emergency response capabilities, aligned with policies approved by the Financial Management Commissioner.

6. Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT)

a. Licensed institutions must implement measures to prevent money laundering and terrorist financing involving stablecoins.

b. Compliance with the Anti-Money Laundering and Counter-Terrorist Financing Ordinance and related measures is mandatory.

7. Purpose and Prudence in Stablecoin Issuance

a. The issuance, business model, and operational arrangements for stablecoins must be robust to mitigate potential risks.

8. Business Scope Restrictions

a. Licensed institutions must focus on stablecoin-related business and obtain prior approval from the Financial Management Commissioner before pursuing other business activities, ensuring such activities pose no significant risks to stablecoin operations.

9. Disclosure Requirements

a. A comprehensive and transparent white paper must be published, detailing stablecoin operations, risk evaluations, complaint handling, and compensation mechanisms.

10. Complaint Handling Mechanism

a. Effective mechanisms must be in place to ensure holders can resolve issues conveniently and efficiently.

11. No-Interest Policy

a. Licensed institutions are prohibited from paying interest on stablecoins or facilitating any form of interest payment.

12. Orderly Wind-Down and Recovery Plans

a. Mechanisms must be in place for the orderly wind-down of operations, ensuring smooth stablecoin redemption. Appropriate contingency plans must be developed.

This comprehensive regulatory framework aims to ensure the stability, security, and transparency of the stablecoin ecosystem while safeguarding the interests of stakeholders.

The Bill is set to be introduced in the Legislative Council for its first reading on December 18.