On May 30, the Hong Kong government published the (Stablecoin Bill) in the gazette, marking the countdown to the formal issuance of the Hong Kong version stablecoin. For those interested in the Hong Kong version stablecoin, I think the two most concerning questions might be: 1. Do I have the capital and experience to have the opportunity to become a Hong Kong version stablecoin issuer and participate in this lucrative business? 2. As a user, how can I effectively use the Hong Kong version stablecoin to facilitate my life?
How to Become an Issuer of the Hong Kong Version Stablecoin
According to currently available information, the Hong Kong Monetary Authority has selected three entities as potential issuers of the Hong Kong version stablecoin: JD Coin Chain Technology (Hong Kong), Yuan Coin Innovation Technology, and a consortium of Standard Chartered Bank (Hong Kong) with Animoca and Hong Kong Telecom. Since July 18, 2024, the Hong Kong Monetary Authority has allowed these three entities to test their stablecoin issuance plans within a specific scope through the 'Regulatory Sandbox' and communicate with regulators in real time. As of now, the Hong Kong Monetary Authority has not announced any new participants other than the three entities. According to requirements, issuing stablecoins in Hong Kong or issuing stablecoins pegged to the Hong Kong dollar outside Hong Kong both require approval from the Hong Kong Monetary Authority.
Figure 1: Sandbox Participants
1. Key Points for Application Conditions
Applicant Entities: Companies registered in Hong Kong or recognized legal entities registered outside Hong Kong must provide a main business address and contact information in Hong Kong.
Personnel Requirements: The CEO, directors, and stablecoin managers of the licensed company must possess appropriate knowledge and experience.
Capital Requirements: A minimum of 25 million Hong Kong dollars or equivalent currency in paid-up capital, and holding sufficient high-quality, highly liquid reserve assets to ensure the full redemption capability of stablecoins under any circumstances. In principle, an applicant entity can issue multiple categories of stablecoins, and the corresponding reserve assets should be held in the same reference asset as that of the stablecoin category. In other words, if a Hong Kong dollar stablecoin is issued, the corresponding reserve assets should generally be Hong Kong dollar assets.
Asset Custody: Reserve assets are stored in government-approved custodial institutions, isolated from other categories of assets.
Redemption Mechanism: The redemption mechanism must be disclosed to the public in a timely manner, with no restrictions on redemption and no fees beyond those specified.
Risk Control System: Compliance plan and measures for AML & CTF, and security risk control policies regarding user information and records.
Information Disclosure: Each category of issued stablecoins must publish a white paper, and monthly and annual reports (financial condition, reserve asset status) must be disclosed. Significant changes in operating conditions (including loss of solvency, changes in registered address, inability to maintain the minimum standards for licensing, etc.) must be reported to the Monetary Authority in advance.
Audit Requirements: Independent audits must be conducted annually.
Compliance Requirements: Including payment of license fees within the specified time, displaying license numbers on marketing materials, consistently meeting minimum standards for license issuance, timely reporting when unable to fulfill redemption obligations, timely reporting of address changes, and timely reporting of significant changes in operating conditions.
2. Application Process
Supervisory Authority: Hong Kong Monetary Authority.
Based on the currently published information, to become an issuer of the Hong Kong version of stablecoin, one generally needs to go through the following two steps.
Step 1: Apply to become a participant in the 'Regulatory Sandbox'. The Monetary Authority will consider a range of factors to evaluate sandbox applications, mainly including: the applicant's genuine willingness and reasonable plan to issue fiat currency stablecoins in Hong Kong, the applicant's specific plan to participate in the sandbox, and the applicant's reasonable expectations of meeting regulatory requirements.
Step 2: Apply for a license to issue stablecoins. Applicants must submit application materials in accordance with the above key points of application conditions.
3. Application Results
The Monetary Authority may, based on the applicant's application, grant unconditional approval of a license, conditional approval of a license, or reject the application. Once a license is approved, it remains valid unless revoked.
How to Use Hong Kong Version Stablecoins to Facilitate Production and Daily Life
Currently, regarding questions about how to redeem and use the Hong Kong version stablecoin, neither the Hong Kong Monetary Authority nor the three selected entities participating in the 'Regulatory Sandbox' have provided official introductions. However, from an interview with Liu Peng, CEO of JD Coin Chain Technology, after the Hong Kong Legislative Council passed the (Stablecoin Bill) on May 21, we can infer some general operational models of the JD stablecoin.
According to reports, the JD stablecoin is based on a public chain, with the first phase being the issuance of stablecoins pegged 1:1 to the Hong Kong dollar and US dollar. It has now entered the second phase of sandbox testing, providing mobile and PC application products for retail and institutional use, mainly including cross-border payments, investment transactions, and retail payments. The positioning of the JD stablecoin is to become a global payment infrastructure.
In the field of cross-border payments, transaction speeds can reach seconds, eliminating most of the intermediary costs in cross-border payments, and providing uninterrupted services throughout the year.
In the investment trading field, the JD stablecoin will cooperate with leading compliant exchanges to provide services. It is noteworthy that, as of now, the Hong Kong Securities and Futures Commission has issued 10 licenses for virtual asset exchanges, while 8 other applicants are waiting for approval from the Hong Kong Securities and Futures Commission.
Figure 2: Licensed Virtual Asset Exchanges Announced by the Hong Kong Securities and Futures Commission
In the retail payment field, the JD stablecoin primarily connects and tests with acquiring scenarios such as JD Hong Kong and Macau stations.
Be aware of the risk of regulatory policy differences between the mainland and Hong Kong.
Currently, the legislation and testing progress regarding stablecoins in Hong Kong is in full swing, and the official issuance of the Hong Kong version stablecoin is no longer far off. The Hong Kong courts have also clarified the protection of the legal rights of parties involved in cryptocurrency disputes through multiple case precedents.
Typical cases include the investor suing JPEX platform for compensation, where the judge found that the platform breached its fiduciary duty and ordered the platform to compensate the investor's losses; in the case of WORLDWIDE A-PLUS LIMITED suing two wallet addresses for fraud, the Hong Kong court approved an injunction against the holder of the wallet address when the plaintiff could only provide the defendant's wallet address and not their true identity, and sent the injunction by tokenizing it to that wallet. Any transaction with that wallet address that violates the injunction constitutes contempt of court.
Correspondingly, the mainland currently shows no trend of relaxing or shifting its regulatory attitude towards virtual currencies, including stablecoins. In the mainland, virtual currencies are not considered currency under any circumstances. In disputes related to the buying, selling, investing, and trading settlement of virtual currencies, most courts tend to decline to accept or dismiss claims, requiring parties to bear the risks themselves. This is particularly evident after the launch of relevant guiding cases in the People's Court case database, which tests the skills of the lawyers handling related disputes. However, in criminal cases involving theft, fraud, or robbery of virtual currencies, public security departments generally consider virtual currencies as assets and will investigate and handle such cases.
For information regarding the issuance of the Hong Kong version of stablecoins and related inquiries, please consult and contact Lawyer Lu.
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Author of this article: Lawyer Deron Lu Wenlong.