Stablecoins under scrutiny: HKMA outlines regulatory framework

The Hong Kong Monetary Authority (HKMA) has announced its intentions to establish a comprehensive regulatory framework for stablecoins. This comes as the crypto industry continues to mature and regulators seek to promote stability and transparency in the market. The proposed framework will prioritize stablecoins that “purport to reference one or more fiat currencies” and will require issuers to back up their values with underlying reserve assets at all times.

Algorithmic stablecoins will not be accepted under the proposed framework, as the HKMA emphasizes the importance of full backing and redemption at par value. The licensing process will be mandatory for both issuers operating within Hong Kong and those companies actively marketing their products to the public. 

The regulatory framework will cover issuance, governance, and stabilization, but some stablecoin-related activities may not be included in the initial stage, such as the operation of centralized stablecoin lending services and crypto-asset ATMs.

The HKMA’s approach to regulation will be “risk-based and agile,” and the regulator aims to restrict companies from deviating from their core business activities. For example, wallet operators will not be allowed to engage in lending activities. This is in line with the regulator’s goal of maintaining stability and promoting transparency in the crypto market.

In the consultation conclusion issued by the HKMA, the regulator repeats the importance of a “risk-based and agile” approach and acknowledges the feedback received from 58 submissions. The regulatory arrangements are expected to be established in 2023/24, either in the form of new legislation or amendments to existing laws.

According to a recent report from CryptoCompare, algorithmic stablecoins currently make up just 1.71% of the crypto market, down from its all-time high of 12.4% in April 2022. The HKMA’s push for full reserve backing of stablecoins will contribute to the maturing of the crypto industry and increase stability and transparency in the market. This is a significant step forward for the crypto industry, as regulators around the world continue to scrutinize stablecoins and establish regulatory frameworks to ensure their stability and security.