Authored by: Shanghai Manqun Law Firm

After the release of the stablecoin regulatory consultation summary in Hong Kong, the announcement of stablecoin sandbox applicants has brought the Web3 community into the discussion of Hong Kong dollar stablecoins and Web3 payments. At the same time, Chen Weimin, Deputy Chief Executive of the Hong Kong Monetary Authority (HKMA), published an important article, in which he mentioned that entering the "sandbox" is not a prerequisite for future applicants for stablecoin issuers' licenses. Even participating institutions that have entered the "sandbox" will need to submit a formal application separately after the regulatory system is implemented if they intend to obtain a license in the future.

So, what rules need to be followed to apply for the issuance of fiat stablecoins in Hong Kong, and what core elements need to be followed after issuance? Jen Bai, head of the Hong Kong office of Manqun Law Firm, was invited to sort out and share this information.

Analysis by Manqun Law Firm

With the continuous expansion and maturation of the digital currency market, Hong Kong, as an international financial center, has taken multiple measures to ensure the compliance, security, and transparency of its stablecoin market. The latest regulatory framework draft from the Hong Kong Monetary Authority (HKMA) provides comprehensive guidance to ensure that the issuance and operation of stablecoins meet the highest regulatory requirements. Through a series of regulatory measures, Hong Kong is building a highly secure and transparent stablecoin market, which not only helps protect the interests of investors but also provides a solid foundation for financial technology innovation. With the gradual implementation of these regulations, Hong Kong is expected to become one of the leaders in the global stablecoin market, setting new standards for digital currency regulation.

The following are the core elements of stablecoin regulation in Hong Kong:

Rules for FRS Issuance License

The HKMA has defined in detail the qualifications of fiat-pegged stablecoins (FRS) and their issuers, setting clear regulatory standards. To become an issuer of fiat stablecoins, a license must be obtained in Hong Kong. The specific requirements for license applications include:

• Reserve Assets: There are relevant requirements for the quantity, composition, quality, liquidity, custody, segregation, location, management, and disclosure of reserve assets supporting FRS. Algorithmic fiat reference stablecoins are not accepted.

• Redemption Process: Design requirements to ensure that holders can redeem fiat reference stablecoins at face value in the reference currency, usually within 1 working day, and there should be no unreasonable conditions or excessive fees during redemption.

• Localization Requirements: FRS issuers must be a Hong Kong company, and their senior management and key personnel must be resident in Hong Kong.

• Business Activity Restrictions: Restrictions on FRS issuers engaging in business activities unrelated to FRS issuance.

• Financial Resource Requirements: The paid-up capital of the issuer must be the higher of the following two: HK$25 million; or 1% of the face value of FRS in circulation.

• Suitability Requirements: Personnel involved must have sufficient relevant knowledge and experience.

• Other Requirements: Anti-money laundering/counter-terrorist financing requirements, white paper and other disclosure requirements, risk management, and audit requirements.

Requirements for FRS Issuers

In addition to licensing requirements, FRS issuers also need to comply with strict rules during the issuance process, including:

• An FRS issuer can issue multiple FRS under its existing license without establishing a separate entity or undergoing additional application processes. However, the FRS issuer should provide reasons for issuing multiple FRS, explain their usage, and obtain prior approval from the HKMA before issuing new FRS.

• FRS issuers need to keep reserve assets in licensed banks in Hong Kong, providing better user protection in the event of business interruption or failure.

• FRS users must be able to redeem their FRS on a "timely" basis, typically within 1 working day under normal circumstances, and should seek prior approval from the HKMA if difficulties arise.

• FRS issuers can provide marketing incentives to promote their FRS, but direct or indirect payment of interest to FRS users is prohibited.

Through the detailed regulations mentioned above, Hong Kong aims to establish a highly secure, transparent, and well-regulated stablecoin market environment. These measures not only strengthen market stability and investor protection but also promote innovation in financial technology and the healthy development of the market. For stablecoin issuers, understanding and complying with these strict regulatory requirements are key to ensuring the sustainable development of their business and maintaining market competitiveness.

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