Written by: Lawyer Wu Wenqian
Recently, the stablecoin legislation has officially come into effect, and the entire Chinese cryptocurrency community is filled with inexplicable misunderstandings about the legislation. I hope to clarify everyone's understanding of the regulations.
According to Article 8 of the regulations, if someone engages in regulated stablecoin activities, it constitutes a crime.
So what exactly is "regulated stablecoin activity"? Article 5 of the regulations provides an explanation:
Issuing specified stablecoins in Hong Kong during business operations;
If specified stablecoins are issued outside of Hong Kong, they must be pegged to the Hong Kong dollar to maintain stable value; or
The Financial Management Commissioner designates an activity as a "regulated stablecoin activity."
Here comes the key point: First, what is regulated is the issuance of stablecoins in Hong Kong. If not issued in Hong Kong, the stablecoin must be pegged to the Hong Kong dollar to maintain stable value. Under this framework, Tether and Circle do not need to obtain licenses in Hong Kong. They are not issuing in Hong Kong, nor are they priced in Hong Kong dollars. They are not avoiding obtaining licenses in Hong Kong; they simply do not need to.
Second, the definition of "issuance" refers to when the stablecoin is first recorded on the blockchain, which can be understood as "minting" or "initial issuance." Therefore, conducting OTC trading of USDT/USDC in Hong Kong does not constitute issuance and is not regulated by the regulations. Future OTC licenses may regulate OTC activities, but the stablecoin regulations do not pertain to OTC matters.
Third, for the Financial Management Commissioner to designate an activity as a "regulated stablecoin activity," it must first be published in the Hong Kong Gazette; regulation cannot be arbitrarily designated.
Fourth, there are many factors to consider for issuance in Hong Kong. For example:
Whether daily management and operations are conducted in Hong Kong;
Whether the issuer is registered in Hong Kong;
Whether the minting and burning of stablecoins occur in Hong Kong;
Whether reserve assets are managed in Hong Kong;
Where bank accounts are opened.
And so on.
Additionally, if a stablecoin issuer actively promotes stablecoins to the public in Hong Kong, it may also be considered as engaging in regulated stablecoin activities in Hong Kong.
The Hong Kong Securities and Futures Commission's website provides a more detailed explanation regarding "active promotion," as follows:
Active promotion can include various situations, such as: frequently contacting Hong Kong investors and promoting their services (including selling products), conducting media campaigns targeting the Hong Kong public, and engaging in internet activities aimed at Hong Kong investors.
Generally speaking, unless one has obtained a license from the Securities and Futures Commission, no one may actively promote any services to the public in Hong Kong, whether within or outside of Hong Kong, that would constitute regulated activities and/or virtual asset services. In determining whether someone is "actively promoting" their services to the public, the Commission will consider the overall nature of the business activities and take into account several factors, including (but not limited to) the following:
Whether there is a detailed promotion plan for the relevant services;
Whether the relevant services are promoted through channels such as direct mail, advertisements in local newspapers, broadcasting, or other online "push" technologies for widespread publicity;
Whether the related promotion is carried out in a planned manner and whether it follows a plan or procedure; and
Whether the relevant services are packaged with the Hong Kong public in mind, such as being written in Chinese and priced in Hong Kong dollars.
As for the application requirements, many different articles have already covered this, so I will not repeat them.
However, the fifth key point is that the license application process requires preliminary consultation with the Monetary Authority for informal discussions. Only after the Monetary Authority has a preliminary understanding of the business will they provide the applicant with an application form to fill out. Unlike the Securities and Futures Commission's VATP exchange license, not just anyone can download the application form online to fill out. At this stage, the Monetary Authority primarily looks at the applicant's background and business model. The business model is especially important. After all, the market cannot accommodate too many stablecoin licenses; if the business is merely for payment or to be listed on an exchange as a trading pair, the Monetary Authority may feel that having too many issuers of the same business is not ideal.
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