CoinDesk Report:
Summary: Stablecoins represent the first mass-market Web3 product capable of achieving hundreds of millions in volume, with Hong Kong’s regulation poised to facilitate global adoption.
On July 17th, Hong Kong’s Treasury and Monetary Authority released the “Consultation Conclusions on the Legislative Proposal for the Regulatory Framework for Stablecoin Issuers in Hong Kong,” indicating intentions to submit a legislative proposal to the Legislative Council promptly, in response to a series of views and recommendations. The Monetary Authority also disclosed ongoing handling of stablecoin issuer sandbox applications, highlighting a notable list of applicants. OSL has already engaged with various stablecoin sandbox entities, positioning itself for further collaboration.
With the enhancement of regulatory frameworks, stablecoins are poised to play a more significant role in Hong Kong’s financial ecosystem, further solidifying its position in the global financial arena and attracting global financial technology enterprises and investors to focus on Hong Kong.
Prospects of Stablecoin Regulation in Hong Kong
As Hong Kong’s only listed company focusing on digital assets, OSL Group (863.HK), through its licensed digital asset trading platform OSL Digital Securities Limited, became the world’s first platform licensed by the Hong Kong Securities and Futures Commission on December 15, 2020, for Type 1 (Securities Trading) and Type 7 (Automated Trading Services), currently providing market services (brokerage, exchange, and custody) and Software as a Service (SaaS) solutions.
Addressing community concerns and market discussions regarding stablecoin regulation in Hong Kong, OSL Group CFO Hubert Benoit shared perspectives:
Q: Where do you see differences between Hong Kong’s stablecoin reserve asset custody, stablecoin minting/redemption processes, and those of popular stablecoins in terms of participant types and operational processes?
Hubert Benoit:
In recent years, stablecoins have gained widespread global use, particularly in Southeast Asia, the Middle East, and Africa, where USD-backed stablecoins like USDC and USDT have become crucial digital asset payment tools. However, concerns exist in the market regarding issuers, including adequacy of asset reserves, financial transparency, risks from investment activities, solvency, and efficiency of minting and redemption processes.
The Hong Kong Monetary Authority (HKMA) has initiated consultations on stablecoins and invited issuers to participate in stablecoin sandbox programs to test their operational models, marking a significant step forward in Hong Kong’s efforts to develop the stablecoin market.
Hong Kong’s regulated stablecoins are likely to rely primarily on banks and financial institutions regulated by the HKMA to custody stablecoin reserve assets, possessing robust compliance frameworks and stable asset management capabilities, enhancing market confidence. Regulated digital asset exchanges or compliant custodians in Hong Kong may also participate in custody, minting, and redemption processes in the future, improving overall operational efficiency and flexibility, beneficial for issuers to complete redemptions within one business day upon receiving requests.
Hong Kong’s regulatory authorities are likely to maintain “full-reserve” asset requirements at all times, possibly introducing additional buffer reserve requirements, ensuring issuer solvency and liquidity. Issuers may be required to limit reserve assets to highly liquid and low-risk assets, such as cash and short-term government bonds, to ensure sufficient reserves to support stablecoin redemption demands in any market condition. Future regulated Hong Kong stablecoins are expected to prioritize financial transparency and audits. Institutions under HKMA supervision will be required to regularly publish detailed audit reports conducted by independent audit firms, significantly enhancing transparency and ensuring adequacy and security of reserve assets.
Hong Kong boasts a robust legal system capable of effectively safeguarding investor rights, built upon common law principles known for high transparency and international recognition. Stablecoin issuers may be required to implement stringent trust arrangements, segregating reserve assets from issuer’s own assets and establishing effective trust agreements. These arrangements provide legal rights and priority claims to fiat-backed stablecoin users in case of issuer difficulties. Independent trusteeship and trust declarations for reserve assets are recognized practices in this regard.
Hong Kong is likely to strictly require all entities involved in stablecoin issuance and management to adhere to Anti-Money Laundering (AML) regulations, ensuring legality and transparency of all transactions, significantly reducing the risk of illicit activities and enhancing market confidence. Furthermore, Hong Kong’s close cooperation with numerous financial hubs globally can facilitate cross-border regulatory collaboration, ensuring the legality and stability of stablecoins internationally. As policies become clearer and are implemented, Hong Kong stablecoins will increasingly play a crucial role in global financial markets.
Q: In what applications do you foresee Hong Kong stablecoins making an impact?
Hubert Benoit:
We anticipate initial issuance of stablecoins based on the Hong Kong dollar and USD during the early stages of stablecoin development, transacted primarily on mainstream public chains like Ethereum ERC-20. Major banks will participate in custody of reserve assets, ensuring asset security and transparency. Hong Kong regulators will rigorously oversee the issuance and management of these stablecoins, ensuring compliance and transparency.
Initially, we expect Hong Kong stablecoins to be primarily used in B2B scenarios such as cross-border trade payments. Hong Kong, as an international financial center and trade hub, maintains close trade relations worldwide. Using stablecoins for cross-border payments can significantly enhance payment efficiency, reduce transaction costs, and mitigate delays inherent in traditional payment methods. Enterprises can achieve instant settlement, mitigate exchange rate volatility risks, simplify payment processes, and thereby enhance overall trade efficiency.
As the market matures, the application scope of Hong Kong stablecoins is expected to gradually expand to B2C payments and investment scenarios. In the B2C sector, stablecoins can be used for e-commerce, retail payments, and personal cross-border remittances, providing consumers with a more convenient and cost-effective payment experience.
Q: What aspects of Hong Kong stablecoin development require further exploration?
Hubert Benoit:
Ensuring secure custody and trading of stablecoins by businesses and individuals remains an unresolved issue. In this regard, compliant exchanges with custody and trading capabilities can play a significant role. As a nascent financial instrument, stablecoins still present high cognitive barriers for participants in stablecoin application scenarios. Investor education is a critical link to ensure healthy market development. Hong Kong needs to strengthen investor education and protection measures through collaboration between regulatory authorities and market participants.
While stablecoins present broad global application prospects, they also face challenges of regulatory coordination and legal compliance. Cross-border regulatory cooperation will be critical in promoting the legitimate application of stablecoins in overseas markets, ensuring legality and compliance across different jurisdictions. Further exploration is needed on whether reserve assets can be stored overseas. Overseas reserve asset storage may encounter different legal and regulatory environments, imposing higher requirements on asset security and transparency. Defining policy guidelines on when reserve assets can be stored overseas and ensuring the safety and compliance of these assets are crucial for issuers and investors alike.
