Hong Kong is taking steps to regulate stablecoins and explore regulations for virtual asset derivatives. The city intends to establish a licensing system for stablecoins by 2024, as announced by officials during the China Conference: Hong Kong forum.
Hong Kong is determined to create a comprehensive and predictable regulatory environment, as stated by Christopher Hui, the city’s financial chief. With the aim of becoming a global hub for Web3 technologies, Hong Kong is actively enhancing its virtual asset licensing framework.
Christopher Hui Ching-yu, Secretary for Financial Services and the Treasury, emphasized that Hong Kong will pursue a holistic and predictable regulatory approach towards digital assets. This approach is based on the principle of “similar risk, similar regulation,” which advocates for the regulation of the crypto space in a manner similar to that of financial markets.
Earlier this month, Hong Kong introduced rigorous retail trading rules and licensing guidelines for cryptocurrencies, solidifying its position as one of the world’s most stringent regulatory frameworks for centralized crypto exchanges. The crypto industry widely supports these new regulations, with industry leaders calling for an expansion of legitimate virtual asset activities to encompass derivatives and stablecoins. Stablecoins are cryptocurrencies that are pegged to another asset, typically a fiat currency.
The Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, announced plans in January to implement a mandatory licensing system for stablecoin-related activities. Platforms will be required to hold fully backed reserves for the tokens.
Regulators are actively developing this regime, which is expected to be in effect next year. Christopher Hui expressed the importance of establishing a sustainable regulatory framework that enables market growth while effectively managing associated risks.
Elizabeth Wong, director of licensing for the Securities and Futures Commission (SFC), responsible for enforcing Hong Kong’s new virtual asset trading regulations, emphasized the agency’s collaboration with the HKMA in formulating a stablecoin policy. They are working together to minimize overlaps between their regulatory frameworks and resolve any potential conflicts.
Additionally, the SFC is currently reviewing the possibility of allowing the trading of virtual asset derivatives on licensed virtual asset trading platforms. Wong highlighted the need to address conflicts of interest, as virtual asset platforms can serve as both derivative issuers and market players.
Hong Kong Goal
Despite the challenges faced by the cryptocurrency industry during the “crypto winter,” Hong Kong remains committed to its goal of becoming a prominent international hub for virtual assets. The industry has experienced significant setbacks, such as the collapse of the Terra Luna stablecoin in May 2022 and the bankruptcy of FTX, formerly the world’s largest crypto exchange, in November.
Hong Kong’s approach diverges from that of mainland China, where cryptocurrency trading is banned. Instead, the city focuses on regulating for investor protection rather than solely relying on enforcement measures to promote positive behavior. Elizabeth Wong emphasized that Hong Kong’s regulatory approach has been vindicated by the issues that arose during the crypto winter, which were largely attributed to the absence of proper regulation.
I think the crypto winter has really validated this approach because many of the problems that emerged during that period were a direct result of inadequate regulation.
Hong Kong recognizes the importance of a robust regulatory framework to ensure the stability and protection of investors in the virtual asset space.