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Hong Kong is set to demand mandatory licensing for stablecoin issuers and won't allow algorithmic stablecoins, its top financial regulator said on Tuesday. Entities conducting regulated activity in Hong Kong will have to obtain a license to operate stablecoin services.
The Hong Kong Monetary Authority (HKMA) laid out its regulatory plans after receiving feedback on a discussion paper published last year. Based on the 58 responses it received, the regulator said it will set up a regime to supervise stablecoins, which are cryptocurrencies whose value is pegged to other assets.
To start with, the HKMA plans to supervise the governance, issuance and stabilization of fiat-backed stablecoins, for which issuers must maintain reserves matching the amount of the crypto in circulation. Stablecoin reserves have come under heavy regulatory scrutiny around the world since 2021, when the issuer of the top stablecoin by market capitalization, Tether, revealed much of its reserves were made up of unsecured short term debt. Major economies like the U.S., the European Union and Japan also are working on controls for stablecoin issuers.
"The value of the reserve assets of a stablecoin arrangement should meet the value of the outstanding stablecoins at all times," the report said. "The reserve assets should be of high quality and high liquidity. Stablecoins that derive their value based on arbitrage or algorithm will not be accepted."
TerraUSD, an algorithmic stablecoin whose value was supposed to be maintained through another crypto asset, collapsed last May.
"In drawing up the specific regulatory arrangements, the HKMA will consider the feedback received, latest market development and international discussion. We will also engage with stakeholders and market participants. We expect to implement the regulatory arrangements in 2023/24,” HKMA Chief Executive Eddie Yue said in a press statement.
Read more: Hong Kong’s Finance Regulator Calls for 'a More Solid Footing' for Crypto
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