Hong Kong Releases Guidance on Strict Rules for Stablecoin Issuers

The Hong Kong Monetary Authority (HKMA) released guidance on Tuesday for stablecoin licensing, outlining strict capital, reserve, governance and technology standards for issuers seeking to operate in the city’s regulated digital asset market.

The guidance also covered rules on money laundering and transitional measures for issuers of existing stablecoins. Stablecoins are digital assets that are pegged to other assets like fiat currency.

HKMA's stablecoin regime is set to take effect on Friday and a bill on rules for the sector was passed in May. Already 40 firms are waiting to apply for a stablecoin license, though the regulator is reportedly expected to approve less than 10 applications initially. HKMA CEO Eddie Yue last week warned companies to not be overly excited about the coming regulatory regime, particularly if their business is not related to stablecoins.

The regulator wants to take a cautious approach as outlined in its consultation conclusions on money laundering. Issuers are yet to prove that they can effectively mitigate against money laundering, HKMA said in its paper.

Unless a stablecoin issuer that is licensed can prove that it can effectively mitigate money laundering risks, it will need to verify the identity of every stablecoin holder "even if the holder has no customer relationship with the licensee," the HKMA consultation response document said. The document also outlined that supervised virtual asset service providers or a reliable third party can also verify the identity of its stablecoin holders.

Hong Kong also has a license regime for crypto companies and started awarding licenses last year.

"The HKMA will continue to evaluate the effectiveness and appropriateness of such measures considering, among other things, the evolving regulatory landscape," the regulator said in its Tuesday consultation response.

Stablecoin issuers which are fully prepared should apply by the end of September, the HKMA press release said.

A realistic timeline to start awarding licenses is early next year, Darryl Chan Wai-man, deputy chief executive of HKMA, told South China Morning Post on Tuesday talking about the region's stablecoins regime.

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Update and Correction (July 29, 18:21 UTC): Adds details throughout from the guidelines and context from South China Morning Post at the bottom. Also corrects the story to say HKMA wants firms that are fully prepared to apply by the end of September, an earlier version said end of August.