Hong Kong Regulator Releases Blueprint for New Crypto Framework

On January 12 2022, the Hong Kong Monetary Authority (HKMA) released a discussion paper on cryptoassets. Later this year, a bill will be introduced there to regulate businesses operating in the space. At first, the regime will only apply to cryptoasset exchanges, while custodians and wallet providers will be included at a later stage. The HKMA’s paper sets out considerations for expanding the scope of Hong Kong’s regulatory framework, and in particular, how it should regulate stablecoins.

As the HKMA is responsible for licensing and supervising Stored Value Facilities (SVFs) it is considering whether stablecoins fall under this definition. If this is the case, SVF will be the subject of HKMA’s mandatory licensing regime.

However, the decentralized nature of cryptoassets – including stablecoins – means that individual activities conducted by businesses may not be considered an SVF, while the ecosystem as a whole is likely to resemble one.

For non-backed stablecoins, the HKMA deems it necessary to impose additional investor protection measures for businesses offering related services. It is in the process of setting out supervisory expectations with the Securities and Futures Commission (SFC).

Due to the growing prevalence of stablecoins and perceptions that they could become more widely used, the HKMA may extend the scope of the Payment Systems and Stored Value Facilities Ordinance (PSSVFO) or introduce new regulation. Key takeaways from the envisioned framework include:

Stablecoin type to be regulated: focus on asset-linked stablecoins first rather than algorithmic stablecoins.

Activities to be regulated:

stablecoin issuance, stablecoin reserve management;

transaction validation and record-keeping;

private key storage;

facilitating the redemption of stablecoins for other assets (exchange);

transmission of funds;

executing transactions.

Regulatory regime: the HKMA plans to run a license regime using a risk-based approach. Business will need to demonstrate compliance with:

prudential requirements;