On January 31, the Hong Kong Monetary Authority (HKMA) stated that it would give priority to the supervision of stablecoins. The major global financial centre is striving to become a virtual asset center.
Eddie Yue, chief executive of the HKMA, said that an appropriate regulatory environment will help with financial stability risks that may be brought about by stablecoins. Further, when the agency is finalizing specific regulatory arrangements, it will consider the latest market developments and international discussions as well as expert opinions. The agency expects to implement regulatory arrangements between 2023 to 2024.
In January last year, the HKMA issued a discussion on encrypted assets and stablecoins, and invited stakeholders to provide feedback. This paper discussed the idea that stablecoins could potentially develop into a generally accepted payment type, and could provide more flexibility in the current system.
At the end of the feedback period in March 2022, HKMA received 58 submissions. Respondents generally expressed their support for the proposal that the HKMA will add the coin to its regulatory scope. It is worth noting that in the list of 58 submissions, there are well-known institutions such as Binance, Alipay, WeChat, HSBC, ZA Bank, MasterCard and BC Technology.
In the newly released document, the HKMA noted a series of financial risk events in the cryptocurrency market in 2022, and called for more complete supervision of stablecoins.
Last May, TerraUSD, as an algorithmic stablecoin, was designed to be pegged to the US dollar by operating with sister token Luna. After losing the peg, the value of the currency collapsed, which triggered the bankruptcy of several cryptocurrency companies and the market plunge. After FTX, once the second-largest cryptocurrency exchange in the world, went bankrupt because of its misdealings, further turmoil unfolded.
For stablecoins, the HKMA will adopt a risk-based approach to determine the scope of supervision. In view of the fact that stablecoins may bring greater risks to currency and financial stability, the authority will give priority to the supervision of stablecoins claiming to refer to one or more legal tenders. Among them, four aspects related to stablecoins were highlighted, including: the rules for establishing and maintaining stablecoins within the management scope; issuing, creating or destroying stablecoins; stability and reserve management arrangements of stablecoins; and providing a service that allows the user’s encryption key to be stored.