Summary

• HKMA mandates licensing for stablecoin issuers, bans algorithmic stablecoins.
• Initial focus is on fiat-backed stablecoin supervision, with equal reserves required.
• Stablecoin reserves must match outstanding coins, be high quality and liquid, algorithmic stablecoins not accepted. Regulations to be implemented 2023/24.

Hong Kong's financial regulator, the Hong Kong Monetary Authority (HKMA), has announced its plans to regulate stablecoin issuers by requiring mandatory licensing. This means that entities conducting regulated activities in Hong Kong must obtain a license to provide stablecoin services. The HKMA released these regulations after receiving feedback on a discussion paper published last year, with 58 responses received.

The regulator's initial focus will be on supervising the governance, issuance, and stabilization of fiat-backed stablecoins. Issuers of these stablecoins must maintain reserves that match the amount of crypto in circulation. Stablecoin reserves have come under increased regulatory scrutiny globally since 2021, when the top stablecoin issuer, Tether, revealed that much of its reserves were made up of unsecured short-term debt. Major economies, including the U.S., European Union, and Japan, are also working on controls for stablecoin issuers.

According to the HKMA report, the value of stablecoin reserves must always match the value of the outstanding stablecoins and must be of high quality and liquidity. Stablecoins that derive their value based on arbitrage or algorithms will not be accepted. This is because algorithmic stablecoins, such as TerraUSD, which failed last May, can be unreliable.

In developing its specific regulatory arrangements, the HKMA will take into account the feedback received, latest market developments, and international discussions. The regulator will also engage with stakeholders and market participants. The HKMA Chief Executive, Eddie Yue, stated in a press statement that they expect to implement the regulatory arrangements in 2023/24.

In conclusion, the HKMA has taken a strong stance on regulating stablecoin issuers by requiring mandatory licensing and banning algorithmic stablecoins. The regulator's focus will initially be on supervising fiat-backed stablecoins, and the value of stablecoin reserves must match the outstanding stablecoins and be of high quality and liquidity. The HKMA will consider feedback and market developments in developing its regulations, with implementation expected in 2023/24.