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This week, the Hong Kong Monetary Authority (HKMA) issued a new discussion paper looking at what the regulatory approach to crypto-assets and stablecoins should be, causing concern for some in the process.
The paper, which is open for consultation, sets out the financial regulator’s thinking on the regulatory approach for crypto-assets, and in particular, payment-related stablecoins.
The proposed HKMA’s approach has taken into account, among other things, the international recommendations, the market and regulatory landscape locally and in other major jurisdictions, and the characteristics of payment-related stablecoins.
“The rapid development of crypto-assets, particularly stablecoins, is a topic of keen attention in the international regulatory community as it presents possible risks regarding monetary and financial stability,” said Eddie Yue, the chief executive of the HKMA, continuing that the financial centre’s authority has been closely tracking the relevant development and would like to proactively share its thinking with the public and industry.
“We look forward to hearing the feedback from stakeholders and will draw up a risk-based, pragmatic and agile regulatory regime on this front,” he added.
The HKMA has identified two key areas for deliberation at this stage:
- HKMA’s regulatory approaches regarding the institutions that are authorised to interface with and provision of intermediary services to customers related to crypto-assets.
- The adequacy of the existing regulatory framework in response to the challenges arising from the growing use of stablecoins and other types of crypto-assets in financial markets.
As part of its endeavour to better regulate the stablecoin market, the HKMA has devised a set of questions for stakeholders to consider. These include looking at whether the HKMA should regulate all types of stablecoins, or give priority to those payment-related stablecoins that pose higher risks to the monetary and financial systems, while providing flexibility in the regime to make adjustments to the scope of stablecoins that may be subject to regulation as needed in the future.
Other questions posed include what the licensing regime should look like, and what kind of authorisation and regulatory requirements would be envisaged for those entities subject to the new licensing regime.
The HKMA's report is reflective of a global trend, said David Carlisle, policy and external affairs director at crypto consultancy Elliptic. “Regulators worry that the rapidly growing crypto-asset industry poses emerging risks to the broader financial sector, and they are intent on nipping those risks in the bud,” he said, noting that the report reflects growing concern among regulators that consumers are vulnerable to fraud in crypto-asset markets, and that innovations such as stablecoins could pose risks to financial sector stability.
The HKMA's proposal to regulate a wide range of stablecoin activities reflects a similar approach to that the US regulators proposed in November, he pointed out, stressing that such a move could have negative consequences. “This would limit many stablecoin activities to licensed banks, and would set an extremely high bar in terms of the compliance standards that stablecoin issuers must meet."
"While it's understandable that regulators should want to proactively address risks, limiting stablecoin activities to licensed banks could hinder innovation,” Carlisle warned. “Smaller innovative firms may struggle to afford the costs of complying with such a stringent standard.”
Jurisdictions such as Hong Kong that want to position themselves as fintech hubs should consider whether these types of proposed regulatory measures may run counter to their aims to foster financial sector innovation, he said.
Beyond stablecoins, the paper also focuses on the key issues raised by non-payment-related crypto-assets.
Here, the HKMA states that it is primarily worried about consumer knowledge of the risks involved, as well as user protection and the potential use of such assets for criminal activities.
To aid this market, the HKMA and the Securities and Futures Commission are working together to set out their supervisory expectations on the investor protection aspects of authorised institutions’ provision of intermediary services to customers related to crypto-assets.
Once the consultation is complete, the regulator has said that it will take into account the feedback and consider the next steps, including assessing the need to issue further documents on specific aspects of the regulatory framework in this year or next.
The HKMA aim to introduce this new regime no later than 2024. Comments on the paper are being received until March 31, 2022.
