Setting up a Hong Kong entity might be problematic for foreign entities that have already issued stablecoins.
According to its consultation conclusions, the Hong Kong Monetary Authority (HKMA) may require firms seeking stablecoin licenses to keep their principal business in Hong Kong and have a locally incorporated entity.
The HKMA’s current stance is that stablecoins must be fully backed by high-quality liquid assets (which they have yet to detail) and redeemable to fiat currencies at par. Under this regime, algorithmic and arbitrage coins are effectively prohibited.
Last year, Terraform Labs and the algorithmic Terra stablecoin collapsed, prompting regulators worldwide to focus on stablecoin regulation.
The proposed stablecoin regulatory regime will cover entities that actively market or operate in Hong Kong. It will also increase the number of licenses an issuer will need.
In an inquiry to the HKMA, CoinDesk asked whether non-Hong Kong stablecoin issuers like Tether would be regulated.
According to the HKMA, “the regulatory treatment of different types of virtual assets would depend on their operational details and actual structures.”
Stablecoin regulation will be based on a risk-based, pragmatic, and agile approach, the representative said, adding that the regulator would “conduct further consultation on the granular details”.
Currently, wallet providers obtain a “Trust or Company Service Provider” license, but under the new regime, they will likely need a stablecoin wallet license as well.
There is a possibility that stablecoin issuers like Tether will need to form a local corporation.
We reached out to stablecoin issuers Tether, Circle, and Paxos for comment. At the time of publication, none of them responded to our questions about applying to be regulated under the proposed stablecoin regime.
What is the firmness of its position?
Since the city is trying to attract talent and maintain its position as an international financial center, the HKMA might relax its stance.
In addition to ensuring the stability of Hong Kong’s financial system, the HKMA plays an important role in promoting the economy.
It came as no surprise, then, that traditional banks and virtual banks, which have been competing to sign up retail customers, as well as companies involved in cross-border trade payments, all provided feedback to the regulator.
Ken Lo, chief strategy officer of HKbitEX, said stablecoins can also facilitate the next era of payments, pointing to the city’s strength in wholesale and commercial banking.
From previous discussions with the HKMA regarding the private equity fund regime, Michael Wong, a partner at Dechert, said he expected the regulator to take a commercially friendly stance so that it will benefit both the industry and investors.
Entity incorporated locally
According to Wong, if they want to do something friendly to the industry, they shouldn’t require that the issuer is incorporated in Hong Kong. Registration as a non-Hong Kong company is straightforward in Hong Kong, he said.
It would be complicated for foreign entities that have already issued stablecoins to set up an entity in Hong Kong and issue stablecoins from that entity.
According to Wong, investors holding stablecoins issued by the Hong Kong entity can go after only that entity, not its other entities.
If only a small market uses the stablecoin issued by the issuer’s Hong Kong entity, it might also affect trading pairs, according to Jason Chan, senior associate at Dechert.
Due to HKMA’s current position, exchanges would have to separate their virtual asset and stablecoin businesses.
“Every time you want to trade, let’s say 0.1 Bitcoin, you have to pay gas fees back and forth to the custodians,” Tim Byun, global government relations officer at OKX, said.
According to Byun, there are other ways to protect consumers and make sure exchanges aren’t lending out customers’ funds through fractional reserve systems.
Among the things he emphasized were OKX’s use of Merkel trees and its commitment to undergo an audit this year.
As Byun put it, “moving the entire crypto industry into traditional securities is like pushing a square peg into a round hole.”