Lawyer's interpretation丨Hong Kong Stable Coin supervision, five key issues

On December 27, 2023, in the final days of 2024, the Hong Kong government is still working hard to become a global Web3.0 hub. This time the goal is the regulation of Stable Coins. Not to mention the huge advantages of Stable Coins over traditional payment methods, just looking at the scalp-numbing financial statements of USDT issuer Tether (Q1 2023 net profit of $1.48 billion), I have to sigh that Stable Coins are really good, and the Hong Kong government also thinks so. **In order to maintain Hong Kong’s status as an international financial center and promote the sustainable and responsible development of Hong Kong’s virtual asset ecosystem, the Hong Kong government has decided to share the honor and disgrace with Stable Coin and endorse the issuance of Stable Coin in a regulatory manner. **The Financial Services and the Treasury Bureau and the Hong Kong Monetary Authority have jointly published a public consultation paper (“the Stable Coin Consultation Paper”) to collect views on the legislative proposals for the regulation of Stable Coin issuers.

In response to the Stable Coin consultation document, lawyer Mankunkin interpreted the key points that everyone is concerned about.

01 Will Stable Coin be regulated as long as it is issued in Hong Kong?

**Yes, but it is not necessary to apply for a license. **

The Hong Kong government’s definition of Stable Coin is "cryptographically protected digital form value that meets but is not limited to the following descriptions -

(a) Expressed in a unit of calculation or in the form of a store of economic value;

(b) As or proposed to be a Medium of Exchange accepted by the public for the purpose of payment, debt settlement and/or investment for goods or services;

© can be transferred, stored or traded electronically;

(d) the use of a decentralized ledger or similar technology that is not solely controlled by the issuer;

(e) Claims or appears to maintain a relatively stable value with a particular asset, group or basket of assets. ”

That is to say, as long as the virtual assets are anchored to the real world assets and have the possibility of payment, they may be regarded as Stable Coin by the Hong Kong government, and follow the principle of “the same business, the same risk, and the same supervision”, and all Stable Coin will fall within the scope of supervision**, and the first to bear the brunt is naturally Fiat CurrencyStable Coin (including Algorithmic Stablecoin). However, as long as the issuance of the Stable Coin is not open to the general public and only to professional investors, the relevant parties of the Stable Coin may not apply for a licence, provided that it is clearly stated that the Fiat CurrencyStable Coin is not issued by a licensed Fiat CurrencyStable Coin issuer.

02Which is the regulatory authority?

**Hong Kong Monetary Authority. **

**Following the mainstream international view, Stable Coins are considered “commodities” rather than “securities” and are therefore not regulated by the Securities and Futures Commission. **In this regard, the Hong Kong government has also made it clear that “in order to avoid Fiat CurrencyStable Coin issuers being subject to multiple regulatory regimes, it is proposed that the Fiat CurrencyStable Coin issuance of licensed issuers will be excluded from certain regulatory regimes, such as those applicable to securities (including collective investment schemes) and stored value facilities.” ”

Of course, the market is changing rapidly, and the Hong Kong government has not ruled out the possibility of other financial regulators joining the supervision of Stable Coins in the future. However, in the foreseeable future, a more realistic and flexible supervision than long-term supervision is what the Chief Executive of the Hong Kong Monetary Authority, Eddie Yue, called the “sandbox” arrangement set up by the Hong Kong Monetary Authority. **Because regulatory sandboxes “safeguard financial stability without stifling innovation.”

03 If a foreign entity has obtained a license in another country, do I need to apply again?

**Need. **

As long as you start a stable coin business in Hong Kong, you need to apply for a license from the Hong Kong Monetary Authority. First of all, major countries and regions have not issued effective laws and regulations on the issuance of stable coins, so in the field of stable coin supervision, there is no such thing as a license. Second, no country or region will give up the right to speak in the financial field, even if the United States, the European Union, Japan and Singapore will issue Stable Coin licenses in the near future, the Hong Kong government will not be exempted from the obligation to apply for licenses in Hong Kong, and it is even impossible to implement local simplified licensing procedures for foreign entities that have obtained relevant licenses in other countries or regions.

04 Can banks issue stable coins?

**Commercial banks can. **

For the avoidance of doubt, digital forms of fiat currencies issued by or on behalf of the central bank, such as the digital Hong Kong dollar and the digital yuan, are not within the scope of the Hong Kong government’s so-called supervision. Commercial banks can issue stable coins, and commercial banks issue stable coins face different supervision than ordinary companies, Stable Coin consultation paper recommends that banks issue stable coins, no more restrictions on their business activities, nor require banks to pay up registered capital, because licensed banks are already subject to the banking regulatory system in these aspects, and their supervision is more stringent. However, under such an arrangement, whether to issue Stable Coins as a commercial bank or to set up a separate company to issue Stable Coins, which one can achieve regulatory benefits is a question worth pondering. **

05 How high is the cost of Compliance?

Quite high, but maybe it’s still cost-effective compared to the revenue?

Specifically, for issuers looking to issue Stable Coins to the public in Hong Kong, the following are the main hard compliance metrics:

• **A Hong Kong company with a registered office. **The Chief Executive Officer, senior management team and key personnel must be based in Hong Kong.
• Paid-in registered capital**. **Not less than HK$25,000,000, or at least 2% of the denomination of Fiat CurrencyStable Coin in circulation.
• **Fully reserved. **The total value of reserve assets is at least equal to the denomination of the Fiat CurrencyStable Coin in circulation at all times.
• **Complete risk control procedures. **This includes, but is not limited to, external audits, independent escrows, redemption policies, etc.

As for the cost of soft compliance indicators, it is a matter of opinion. For example, restrictions on business activities, Stable Coin the Consultation Paper pointed out that issuers should not engage in lending and financial intermediation activities, nor should they carry on other regulated activities, such as those under the Securities and Futures Ordinance (Cap. 571), the Mandatory Provident Fund Schemes Ordinance (Cap. 485) or the Insurance Ordinance (Cap. 41), Fiat CurrencyStable Coin issuers are required to obtain approval from the Monetary Authority before commencing any new business. ** Whether these soft compliance metrics are more cost-effective through other legal or commercial arrangements depends on a number of factors. **

Tether, the world’s largest stable coin operator by market cap, has yet to respond to the Stable Coin consultation paper. But Circle, the operator of the world’s second-largest Stable Coin USDC, is in favor of it. Regardless of whether Tether supports it or not, if you want to continue to do Stable Coin business in Hong Kong, you must support regulation, and as for the degree of regulation, you can discuss it again before the boots land.

So, ComplianceStable Coin is coming, will RWA Token be far away?