"Stablecoins are not tools or means for making money or speculation. We hope the market returns to the original intention of launching stablecoins in Hong Kong, which is to use this financial tool to help the real economy and enhance the efficiency of capital circulation."
After announcing a series of favorable policies for the development of stablecoins and other digital assets, as market enthusiasm continues to surge, several relevant regulatory departments in the Hong Kong SAR recently frequently expressed the aforementioned views, emphasizing that the issuance and application of stablecoins are still in the exploratory stage, with high entry barriers and involving multiple levels of institutional construction or connection, thus requiring prudent advancement.
In short, Hong Kong hopes to fully align the issuance and regulation of stablecoins with the compliance framework at the 'traditional financial level'.
The so-called 'stablecoins' are digital assets aimed at maintaining a relatively stable value in relation to certain assets (usually currencies). Stablecoins used as payment tools in relevant scenarios are also seen as an interface or connection mechanism linking traditional finance and digital assets.
From a global perspective, due to expectations that stablecoins will be used more widely, how to properly manage the various inherent and extrinsic risks that arise during this process is gradually becoming the focus of international regulation. At this year's Summer Davos Forum, IMF Vice President Li Bo stated that stablecoins could become very efficient means of payment and value storage, but the premise is moderate use and effective regulation.
Including the Hong Kong Monetary Authority (referred to as 'HKMA'), several relevant institutions in Hong Kong have actively participated in the work of international regulatory organizations in recent years, including the Financial Stability Board (FSB), which released the (Global Crypto Asset Activity Regulatory Framework) in 2023. This framework provides a set of guiding international standards for how to regulate stablecoins. The 'underlying logic' of Hong Kong's relevant regulatory system is believed to be largely based on this.
On this basis, as one of the regions globally preparing to be the first to release legal stablecoins, the regulatory preparations and release pace of Hong Kong are considered to be of certain referential value. In conjunction with a series of viewpoints and attitudes recently expressed by local regulatory departments, the following points may be worth noting:
Firstly, regarding entry barriers, legal stablecoins do not have a 'blooming' situation in the early stages of their legal landing in the Hong Kong Special Administrative Region.
In May of this year, the Hong Kong Legislative Council passed the (Stablecoin Regulations) (hereinafter referred to as the 'regulations'), introducing a licensing system for stablecoin issuers pegged to legal currencies in Hong Kong. According to the implementation steps, the regulations will come into effect on August 1, at which time the Hong Kong Monetary Authority will begin accepting license applications. This also marks the landing of the world's first comprehensive regulatory framework for fiat-backed stablecoins.
"Stablecoins, as a key tool connecting traditional finance with the Web3 ecosystem, have enormous potential but also come with potential systemic risks. The introduction of (regulations) is precisely to provide a clear and predictable institutional environment for innovation while maintaining financial stability and consumer rights." Partner of King & Wood Mallesons Hong Kong office and lecturer at the Faculty of Law at the University of Hong Kong, Fei Si, analyzed (Finance) stating that "the core of stablecoin regulation is 'stability'. Through a clear licensing system, strict compliance requirements, and comprehensive prudent regulation, we inject trust and transparency into the market. This institutional trust is crucial for Hong Kong's digital asset ecosystem to attract global capital and serve global users."
On June 23, Yu Weiwen, President of the Hong Kong Monetary Authority, explicitly mentioned in an article discussing the stability and sustainable development of stablecoins that stablecoins are not tools for investment or speculation, but one of the payment tools utilizing blockchain technology, and they do not have appreciation potential. Moreover, the anonymity and ease of cross-border use of stablecoins also bring challenges in regulatory risks, especially in anti-money laundering.
Regarding the number of licenses, which is a subject of high market attention, Yu Weiwen also clearly pointed out, "Considering that stablecoins are relatively new products, the risks involved in the issuance business, the protection for users, and the market's capacity and long-term development, the licensing has a considerable high threshold, and we expect that at the initial stage, at most only a few licenses will be issued."
This prediction regarding the numbers is seen as a form of 'expectation management' regarding the local public opinion and the keen discussions among various institutions about the issuance of licenses. In fact, the Hong Kong Monetary Authority will launch the 'stablecoin issuer sandbox' in early 2024, but entering this sandbox is not a prerequisite for applying for stablecoin issuer licenses. Participating institutions in the sandbox do not necessarily mean they will obtain licenses.
The Hong Kong Monetary Authority will launch the "stablecoin issuer sandbox" in early 2024, but participating institutions do not necessarily mean they will obtain licenses. The standards set by the regulators are relatively high, almost on par with regulations for e-wallets and banks. Photo by Jiao Jian.
According to incomplete statistics from (Finance), at least nine institutions in the Hong Kong market have expressed intent to apply for or are rumored to be exploring license applications. This includes three groups of institutions participating in the HKMA's stablecoin sandbox, all of which plan to issue HKD stablecoins.
"We will carefully consider all license applications according to consistent and strict standards," Yu Weiwen pointed out that Hong Kong has set relatively strict standards for stablecoin issuers, with high entry barriers, almost on par with regulations for e-wallets and banks.
"Hong Kong is fully aligning the issuance and regulation of stablecoins with the compliance framework at the 'traditional financial level', especially proposing higher requirements in areas such as anti-money laundering, transaction monitoring, and risk identification, advancing steadily. For stablecoin issuers intending to enter the Hong Kong market, establishing a secure foundational infrastructure and a compliance system covering the entire chain has become a key prerequisite for obtaining licenses and achieving long-term compliance operations," said Wade Wang, CEO of Safeheron, an enterprise-level self-custody service provider serving multiple compliant digital asset institutions, analyzing (Finance). "The overall threshold is not low, and it is not something that ordinary players can easily enter."
Secondly, regarding the timeline, the Hong Kong SAR Government's stablecoin licensing effectiveness is expected to be issued within this year.
On July 7, Xu Zhengyu, Secretary for Financial Services and the Treasury of the Hong Kong SAR Government, stated in an interview with local media that the Hong Kong SAR Government looks forward to receiving applications after the (regulation) comes into effect, but they aim to issue licenses within this year.
Just a week prior, Xu Zhengyu also emphasized that stablecoins should not be seen as tools for making money or speculation. Like "cowboys in the West" or "guerrilla warfare", such markets have no long-term appeal. "To build a market that everyone trusts, Hong Kong's credibility comes from our high-quality financial regulation."
Lawyer Liu Honglin, founder of Shanghai Mankun Law Firm, which focuses on serving the Web 3.0 new economy, analyzed (Finance) stating that the "single-digit issuance of licenses" and "the first batch of licenses to be issued this year" actually reaffirm the overall regulatory approach to stablecoins in Hong Kong, which is not a full opening but a prudent pilot and quantitative distribution. "This logic is actually the same as the licensing of virtual asset exchanges before. What Hong Kong values more now is compliance models and controllable risks, rather than the number of licenses."
According to (Finance), there are still multiple factors affecting the timeliness of license issuance. For example, the HKMA is still consulting with market participants on how to implement (regulations) and will subsequently announce guiding policies, which will involve anti-money laundering (AML) and a series of related requirements.
Taking the streamlining of the anti-money laundering regulatory system related to stablecoins as an example, key links include KYC (Know Your Customer) and KYT (Know Your Transaction). The former is to prevent high-risk users from entering, while the latter is to monitor on-chain transactions in real-time.
Wade Wang revealed some key milestones, for example, in order to comply with Hong Kong's regulatory requirements, enterprises intending to engage in related businesses need to establish a complete KYC/KYT process, implement sanctions list screening, submit suspicious reports, and improve internal compliance and data management.
On this basis, digital asset service providers, such as custodians and compliance service providers, should have advanced AML and KYT functions, provide real-time, proactive early warning systems, dynamically track the flow of funds, and identify suspicious transaction patterns, thus helping enterprises more accurately detect and prevent money laundering and other illegal activities.
The establishment of this series of systems actually requires time. "What truly determines whether digital assets can achieve large-scale and long-term landing is not only the improvement of the regulatory environment but also the maturity and security of the underlying infrastructure. The widespread application of stablecoins, especially in key scenarios such as payments and settlements, must be built on a high-security, high-availability, and strong-compliance technological architecture. This 'invisible supporting system' is what determines the sustainability and mainstream process of the digital asset industry," Wade Wang pointed out.
Thirdly, regarding application scenarios, after relevant institutions are granted licenses, there is currently a relatively high level of uncertainty regarding the specific usage scenarios and whether they can be pegged to other fiat currencies.
Taking cross-border payment as an example, as a difficult and painful issue in the real economy, according to the general viewpoint of academic research, if there is a stablecoin based on legal currency, it can facilitate cross-border transactions as an effective payment tool and reduce transaction costs.
According to publicly available data, by 2024, the transaction volume supported by stablecoins has reached $27.6 trillion, exceeding the combined transaction volume of global payment giants Visa and Mastercard.
However, stablecoins are not the only option. Other new payment tools that can solve similar problems include some CBDC (central bank digital currency) networks established in cooperation with central banks, certain tokenized deposits planned for issuance by international banks, and cross-border connections of fast payment systems, among others. These related payment tools each have their own characteristics, varying levels of maturity, and their development prospects are mainly determined by the market.
Moreover, globally, there is a very strong demand for stablecoins in practice, which is "asset preservation". Especially in some countries with highly depreciated local currencies or unstable financial systems, such as some African countries, the penetration rate of stablecoins is relatively high locally. They are not just payment tools but also a 'substitute for the dollar' accessible to ordinary people. This case has been used by some local opinions in Hong Kong to illustrate the need to accelerate the release of multi-scenario usage of stablecoins.
Lawyer Liu Honglin believes that the Hong Kong SAR Government's statement actually conveys a relatively clear attitude of cooling the market. "In the past period, expectations from all parties regarding the stablecoin track have indeed been a bit overheated. Everyone wants to issue, and everyone claims they can do it. But the regulators have clearly pointed out several practical issues, including that competition will be very fierce, there won't be many licensed institutions in the early stages, and concerns that if licenses are issued, they may not be utilized. Stablecoins that lack real-world scenarios supporting them are not very meaningful, and to avoid misleading ordinary investors by turning such products into 'pseudo-financial instruments', interest-bearing or incentive-based stablecoins are not allowed."
"Overall, the regulatory authorities in Hong Kong hope that the industry will be a bit calmer and not rush to issue coins, but rather truly land around the actual needs of payment, clearing, and cross-border circulation in the real economy. This is the 'original intention' of Hong Kong's promotion of stablecoins," Liu Honglin pointed out.
Xu Zhengyu pointed out that when stablecoins are used in scenarios such as cross-border transactions, different financial systems will be involved. If local people in a region do not have much confidence in their own currency, once there is serious inflation or a sharp decline in currency exchange rates, there will be a demand for using other currencies as payment means. If the financial system in that region also cannot support other foreign currencies, stablecoins based on blockchain can serve as alternatives to local currencies. "In these cases, the benefits of stablecoins in cross-border transactions and payments can be clearly reflected."
The background of his statement is that some applicants in the Hong Kong market have recently publicly pointed out that in addition to intending to issue HKD stablecoins after obtaining licenses, they also hope to issue stablecoins pegged to the RMB.
In fact, Huang Yiping, Dean of the National School of Development at Peking University and a member of the Monetary Policy Committee of the People's Bank of China, recently stated in an interview with relevant media in mainland China that Hong Kong has an offshore RMB market. "If the offshore market develops, whether it can issue stablecoins pegged to offshore RMB in Hong Kong is a possibility."
"Issuing stablecoins pegged to offshore RMB in Hong Kong is not necessarily legally obstructed. From the perspective of the internationalization strategy of the RMB, it also has positive significance." Lawyer Liu Honglin believes, "However, in reality, we have also found that some startup teams have indeed encountered some legal and compliance issues during the attempt. This indicates that current policies are not yet fully sorted out, and there is still a gap between market enthusiasm and regulatory coordination. If the central bank can more clearly express support for enterprises to legally and compliantly issue offshore RMB-based stablecoins overseas in the future, it should help promote the improvement of the entire mechanism."
/END.
The article is sourced from a financial magazine, authored by Jiao Jian.