Stablecoin law reflects unique position of Hong Kong
Hong Kong made a forward-looking move on digital assets last month by passing a landmark law to regulate the market for stablecoins. Such a regime, which is well ahead of many jurisdictions in Asia and North America, will help bolster public confidence in this popular and fast-growing financial sector. It showcases the city's crucial role in experimenting and rolling out financial schemes separate from the mainland under 'one country, two systems'.
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A stablecoin is so called because it is pegged to a fiat currency such as the US dollar or Hong Kong dollar. Worldwide, stablecoin trading volume hit US$27.6 trillion last year, surpassing the combined volume of Visa and Mastercard transactions over the same period. Hong Kong has stolen a march on this huge and rapidly growing market.
Under the regulatory regime, stablecoin issuers will be licensed by the Hong Kong Monetary Authority (HKMA), and only they will be able to advertise their digital coins. Details of the regulatory regime, such as reserve requirements, client asset segregation, risk management and disclosure still have to be worked out.
At least three firms – Standard Chartered, Hong Kong Telecom and Animoca Brands – plan to set up a joint venture to issue a Hong Kong dollar-backed stablecoin under licence from the HKMA. They will be able to sell the digital asset, and the public may use them for retail transactions and trade them on virtual-asset exchanges that may offer investible assets. So far, the city has approved 10 such exchanges under the Securities and Futures Commission.
Unlike a central bank digital currency (CBDC), which has regulated uses in the form of digital yuan on the mainland and e-HKD in Hong Kong, stablecoins are issued by qualified commercial concerns. And unlike decentralised block-chained cryptocurrencies such as bitcoin, both forms of CBDCs and stablecoins are highly regulated and therefore inherently deter money laundering.
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With proper regulations in place, digital assets can form and expand as part of the city's highly efficient and diversified trade and financial ecosystems. While some industry players have voiced concerns about potentially onerous regulations, there needs to be a balance between being pro-market and protective of the public. Hong Kong regulators are well placed to achieve both.
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