HKMA Releases Draft Stablecoin, AML Guidelines; Seeks Feedback

HomeNews* Hong Kong has introduced draft guidelines for stablecoin issuers and anti-money laundering (AML) processes.

• The Hong Kong Monetary Authority (HKMA) will accept U.S. dollar reserves to back Hong Kong Dollar (HKD) stablecoins due to the HKD-USD currency peg.
• Stablecoin issuers must follow strict reserve quality rules and enhanced due diligence for certain transactions.
• Issuers must maintain a minimum capital of approximately $3.2 million USD, with higher requirements possible.
• Public transparency and regular reporting on reserves and redemption processes are mandatory. Last week, Hong Kong enacted new laws to support issuing stablecoins, and on Tuesday, the Hong Kong Monetary Authority (HKMA) released two consultation papers on draft rules for stablecoin issuers and anti-money laundering requirements. The HKMA is seeking public feedback by the end of June.

• Advertisement - The proposals allow stablecoins tied to the Hong Kong Dollar (HKD) to be backed by U.S. dollar assets. This is possible because the HKD is pegged to the U.S. dollar. The HKMA said this approach helps maintain financial stability, as there are not enough HKD-backed assets to support a large stablecoin market. If only HKD assets were allowed, sudden changes in demand could risk market stability.

For anti-money laundering compliance, the draft rules require issuers to perform extra checks on self-hosted wallets. Stablecoin holders can ask for direct redemption of their coins within one business day. The issuer must check the identity of frequent counterparties, or anyone making transactions of $8,000 or more. The rules also allow issuers to set transaction limits for self-hosted wallets.

The consultation documents expand on what kinds of reserves are allowed for backing stablecoins. Permitted reserves include bank deposits maturing within 90 days and government, central bank, or multilateral development bank securities maturing in less than one year. Overnight repurchase agreements (short-term loans) and qualified money market funds are also allowed. The HKMA can approve additional asset types.

Compared to other countries like Singapore, the allowed maturity periods for securities are longer in Hong Kong, and some business activities are permitted with permission from the regulator. The rules prevent stablecoin issuers from paying interest to coin holders, but allow paying marketing incentives.

Issuers must regularly publish data about reserve levels and the amount of stablecoins in circulation. Weekly reports must go to the regulator. HKMA will specify how often issuers need to have their reserves independently checked.

All stablecoin issuers, excluding banks, must hold at least $3.2 million USD (approximately HKD 25 million) in capital, though HKMA may require more if needed.

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