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Hong Kong’s proposed stablecoin rules would be ‘extremely challenging’ for global issuers like Tether and USDC

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The Hong Kong government’s proposed rules for stablecoins this week have prompted both optimism for the city’s effort to become a virtual asset hub and concern that the rules may be too stringent for even the biggest players in the market.

While Hong Kong’s proposed regime follows recommendations issued by global standard-setters, the city’s rules are “slightly more stringent in certain ways” than Singapore’s, such as the minimum paid-up capital requirement of at least HK$25 million (US$3.2 million), according to Chengyi Ong, Head of APAC Policy at Chainalysis.

“The framework reflects Hong Kong authorities’ intention to set a high bar for fiat-referenced stablecoins [FRS], recognising their potential for widespread adoption,” Ong said.

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The rules as written in the consultation paper, published on Wednesday by the Hong Kong Monetary Authority (HKMA) and the Financial Services and the Treasury Bureau (FSTB), would not allow companies without a licence to sell stablecoins to Hong Kong’s retail investors through regulated channels, or actively market their FRS to the city. Requirements include holding reserves at least equal to the value of issued stablecoins and having an incorporated entity in Hong Kong, with a chief executive, senior management team and key personnel all based in the city.

“It will be extremely challenging to become licensed as an issuer of a fiat-referenced stablecoin under the proposed regime,” said Ben Hammond, partner and office managing partner at Ashurst in Hong Kong. “Currently, it is also questionable how many issuers will even be capable of meeting the criteria to be licensed.”

The operator of US dollar-pegged Tether (USDT), the world’s largest stablecoin by market capitalisation, ostensibly already operates in Hong Kong, where it was founded and has a legal entity, Tether Limited. However, the parent company Tether Holdings Limited is incorporated in the British Virgin Islands, and the leadership team, which has ties to exchange Bitfinex, appears to no longer operate out of Hong Kong, raising questions of whether it would seek a licence. Tether did not immediately respond to a request for comment.

Boston-based Circle, which operates the world’s second-largest stablecoin, USD Coin (USDC), said it “commends the Hong Kong government” on its proposed rules that “resonate” with the company’s own policies, and it is reviewing the framework for opportunities to work with regulators.

“We remain committed to working with the HKMA and the FSTB to support the advancement of regulated stablecoins as a credible medium of exchange and the development of a sustainable and responsible virtual asset ecosystem in Hong Kong,” Yam Ki Chan, vice-president of strategy and policy at Circle, said in a statement.

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The localisation requirements “can be very burdensome for stablecoin issuers that currently operate on a global basis”, said Andrew Fei, partner at King & Wood Mallesons in Hong Kong.

“Given the significant financial resources and compliance costs associated with setting up a locally-incorporated licensed entity in Hong Kong, this may deter some global issuers from offering their FRS to Hong Kong’s general public,” Fei said.

The strict proposal on stablecoins comes after recent crypto-related scams, including one of the largest financial fraud cases ever in Hong Kong that involved the exchange JPEX. That was seen as denting consumer confidence in the industry, which the local government has sought to attract.

“There are trade-offs between easier market access and more protection for retail investors that policymakers need to carefully balance,” Fei said.

There could also be some benefits to the physical presence requirement. It may, for example, “create space for locally issued stablecoins to emerge and gain market share”, said Chainalysis’ Ong.

Hong Kong regulators propose licensing for sale of stablecoins to public

Patricia Ho, general counsel at blockchain firm Scroll, said there will also be fewer opportunities for companies to leverage different rules in different markets.

“The ability for issuers and platforms to operate in the grey zone is narrowing, and we’ll increasingly see this over the next one to two years,” she said. “Going forward, there’s going to be a lot more cooperation between regulators and cross-border exchange of information, so the room for regulatory arbitrage will narrow.”

Hong Kong legislative council member Johnny Ng Kit-chong expressed concerns on Wednesday about the proposal, saying in a post on X, formerly Twitter, that blocking international stablecoins may adversely affect the city’s virtual asset industry.

“International virtual asset trading has been developed for many years, and there are several stablecoins already circulating in the market,” Ng wrote. “If international stablecoin companies fail to apply [for a licence] in Hong Kong within the specified period, the relevant regulatory agencies must consider how such global stablecoins can be traded on licensed exchanges in Hong Kong to achieve international alignment.”

The proposal would require stablecoin issuers to apply for a licence within three months of the regulation taking effect, for which there is no current timeline.

Ho said there are a few areas where the industry may be expected to push for changes, particularly on the requirements to only hold reserves in the referenced currency and the ban on interest payments.

“This is one aspect where the real world and the regulated world don’t really converge, because in the real world, investors and consumers are chasing yield, especially at this point of the crypto market cycle,” she said, referring to an anticipated bull run amid a rise in prices for tokens like bitcoin and ether.

While the Hong Kong government still aims to be a virtual asset hub, its “tightly drawn and restrictive” rules show that it is “not willing to [pursue growth] at any cost”, Ashurst’s Hammond said.

“In this case, monetary policy and financial stability concerns, and a perhaps understandably cautious approach to consumer protection, look to be driving the policy choices,” he said.

Additional reporting by Matt Haldane



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