On January 12, 2022, the Hong Kong Financial Authority (HKMA) issued a Dialogue Paper concerning increasing Hong Kong’s regulatory framework for stablecoins, or what the HKMA calls “payment-related stablecoins”.
These are cryptocurrency belongings backed by precise fiat currencies. Within the Paper, the HKMA analyzes the present regulatory framework’s adequacy on the time of its writing when bearing in mind the growing and widespread use of cryptocurrency belongings like stablecoins in monetary markets each inside Hong Kong and outdoors of it. The Paper’s authors assess the challenges this proliferation presents.
It then goes on to supply eight questions for the monetary trade to think about, comparable to the size of any newly proposed regulatory framework for stablecoins.
Whereas the HKMA acknowledges crypto-asset exercise doesn’t essentially pose any current danger to the soundness of worldwide monetary markets, its growing prevalence might nicely achieve this sooner or later.
The Authority expressed specific concern in regards to the rising publicity of each retail and institutional buyers to the asset class as a complement or different to conventional ones.
The HKMA tasks such a shift will result in an growing interconnectedness between crypto-assets and the mainstream financial system. The Authority additionally expresses concern within the Paper about how simple it’s to anonymously switch crypto belongings, making them extra weak to illicit makes use of, comparable to to launder cash and finance terrorism.
Perceived Dangers of Stablecoins
The HKMA identifies a number of key dangers it hopes to alleviate with the newly proposed laws. These embrace:
- Fee integrity throughout operational failures and disruptions in markets the place stablecoins are frequently accepted for fee
- defend customers who lack technique of recourse from the dangers of stablecoin disruptions or failures
- Stability of banks if they begin growing their stablecoin publicity, particularly if thought of a legitimate different to financial institution deposits
- Financial provide threats to interbank HKD provide and demand from issuing and redeeming HKD-backed stablecoins
Questions for Hong Kong Crypto Regulators to Contemplate
Within the Paper, the HKMA poses the next eight questions to think about in creating a brand new regulatory framework for crypto belongings.
- Ought to laws apply to all stablecoins or solely payment-related ones that pose the next hazard to Hong Kong’s financial coverage and monetary markets?
- What sorts of actions involving stablecoins needs to be regulated, comparable to reserves administration, custody and administration or insurance coverage and redemption?
- What necessities and authorization ought to laws impose on new stablecoins licensees, comparable to regards liquidity, administration and possession, backing asset reserves and danger administration, governance and controls?
- Who would the requirement to acquire a stablecoin license cowl, comparable to Hong-Kong integrated entities or overseas teams and firms?
- When ought to they set up this new regulatory regime?
- Ought to new laws require stablecoin issuers to be Approved Establishments below the Banking Ordinance?
- Ought to the Authority contemplate regulating unbacked crypto belongings sooner or later?
- What ought to potential and present entities and different events within the stablecoin ecosystem do to organize for the launch of the brand new regulatory regime?
The HKMA has set a March 31, 2022 deadline for responses and expects to provoke this new regulatory oversight someday in 2023-2024.
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