On Friday the Hong Kong government published its Stablecoins Bill in the Gazette, with plans for its first reading on December 18. The legislation covers fiat-referenced stablecoins.
“We have undertaken extensive consultations and given due consideration to the views of the industry when formulating the details of the regulatory regime,” said Eddie Yue, CEO of the Hong Kong Monetary Authority (HKMA). “We believe that a well-regulated environment is conducive to the sustainable and responsible development of the stablecoin ecosystem in Hong Kong.”
The government statement says the legislation applies to fiat stablecoin issuers based in Hong Kong, or stablecoins pegged to the Hong Kong dollar (HKD) or stablecoins that are actively marketed to the public in Hong Kong. We may be splitting hairs, but we found some ambiguity in the wording related to marketing to the public (see later).
The legislation provides ample scope for expansion. For example, in addition to the three activities outlined above (a Hong Kong issuer, a HKD stablecoin or marketed in HK), the regulators can add other activities. That might apply if the HKMA views an issuance as potentially impacting financial stability, or affecting its status as a financial centre or is a matter of public interest.
Other stablecoin requirements
In several places, the legislation is not overly prescriptive. For example, reserve assets must be segregated and be held in the same currency as the stablecoin. However, it doesn’t specify the type of reserve assets. It just says they must be “of high quality and high liquidity with minimal investment risks.” Reserve attestations were a big topic in previous Hong Kong consultations. The legislation mentions them, but not how often they must be conducted.
Issuers must have a minimum capital of HK$25 million ($3.2m).
Marketing a stablecoin to the public
Circling back to the issue of marketing a stablecoin to the public, a pessimistic reading of the Bill is it could cover any foreign stablecoin, whether or not actively marketed in Hong Kong, although there may be some questions over jurisdiction.
This is the clause we struggled with:
…A person is to be regarded as holding out as carrying on a regulated stablecoin activity if—
(a) the person actively markets, whether in Hong Kong or elsewhere, to the public that the person carries on, or purports to carry on, an activity; and
(b) the activity, if carried on in Hong Kong, would constitute a regulated stablecoin activity.
We see an ambiguity because the term “public” does not say “Hong Kong public”.
If the Tether stablecoin was issued in Hong Kong, it would constitute a regulated stablecoin. It’s not, but if it was. So our pedantic reading is that Tether would fall into that clause, even if it was not actively marketed to the Hong Kong public.
It matters because the consequences of infringements are significant. A serious offense attracts a jail sentence of seven years, in addition to a fine of $5 million plus $100,000 per day.
There are also hefty fines for advertising an unlicensed stablecoin.
Meanwhile, a few Hong Kong institutions are exploring stablecoins as part of the HKMA stablecoin sandbox, including Standard Chartered Bank Hong Kong (SCBHK), Animoca Brands, and Hong Kong Telecom.
