Clifford Chance

This year is a landmark year for Hong Kong in the development of the regulatory regimes relating to stablecoins and virtual assets.

On 17 July 2024, the Financial Services and the Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA) jointly issued the Consultation Conclusions on the Legislative Proposal to Implement the Regulatory Regime for Stablecoin Issuers in Hong Kong. This concludes a seven-month consultation period (with the initial Consultation Paper having been issued in December 2023).

Some key points and observations 

• The FSTB and HKMA will take forward the proposal to implement a new stablecoin regulatory regime and will introduce a bill into the Legislative Council later this year. It is anticipated the new stablecoin regulatory regime will take full effect next year (2025). It was proposed that the commencement date of the regime would be 1 month upon gazettal of the proposed new ordinance (following the Legislative Council process), with a non-contravention period of 6 months.
• The Consultation Conclusions specified that the HKMA will take into account the use cases and business plans of prospective issuers of fiat-referenced stablecoin (FRS) when reviewing their licence applications. This could entail the need for the applicant to devise a business plan that differentiates itself from pre-existing products in the market (e.g. existing e-money products) and how the FRS can uniquely address (or act as an important alternate option to resolve) market pain points / demand / effective market operations. The HKMA announced on 18 July 2024 the list of participants of the stablecoin issuer sandbox, with 3 groups of institutions.    
• It was mentioned that tokenised versions of certain assets could be regarded as high quality and high liquidity reserve assets for FRS issuers. This demonstrates Hong Kong's continuing recognition, and development promotion, of tokenised financial instruments.
• There appears to be some flexibility on certain issues, which would be considered by the HKMA on a case-by-case basis. In addition, drawing on concepts from existing regulatory regimes is welcome and provides a degree of certainty notwithstanding that this is a new area of regulation.
• Reserve assets are expected to be kept with licensed banks in Hong Kong but the HKMA is open to consider proposals for offshore custody arrangement on a case by case basis.
• There is prohibition on paying interest, or to make arrangements to provide interest to FRS users, but the offering of marketing incentives would not be prohibited.

The Consultation Conclusions reflected substantial input from industry stakeholders, with the FSTB and the HKMA actively engaging in discussions with the industry during the consultation period (as well launching the stablecoin issuer sandbox arrangement in March). The initial Consultation Paper also considered feedback received from the HKMA's Discussion Paper on Crypto-assets and Stablecoins issued in January 2022 and the Conclusion of Discussion Paper on Crypto-assets and Stablecoins issued in January 2023.

Other recent developments

This development follows other key developments in Hong Kong in 2024 including:

• the launch of virtual asset spot exchange-traded funds
• the launch of the first Securities and Futures Commission-authorized publicly offered tokenized gold product
• the new virtual asset trading platform licensing regime coming into effect, the announcement by the HKMA of Project Ensemble (a wholesale central bank digital currency project to support the development of the tokenization market in Hong Kong)
• the continued development of Project mBridge (which has reached the MVP (i.e. minimum viable product) stage)
• the ongoing consultation relating to over-the-counter trading services of virtual assets. 

Things are moving fast in this sector and we expect more to come in the second half of this year so, please, watch this space.