Hong Kong Takes Its First Step Towards Regulating Stablecoins

Hong Kong plans to introduce special regulations for stablecoins. At the end of December, a draft of new rules was published by the Hong Kong Monetary Authority (HKMA). Public discussion of the document will take place until February 24.

The new regulation applies to stablecoins that are used in Hong Kong or are pegged to the Hong Kong dollar. Stablecoins must be fully collateralized and get license from the HKMA and FSTB to operate in Hong Kong. Stablecoins that are not licensed in the country can be used, but only by residents of the country with the status of qualified investors. Initially, one of the options for regulating stablecoins was to apply the same requirements to them as to electronic money (SVF). Later, regulators decided that it’s better to issue separate rules for stablecoins.

Which countries already have stablecoin regulation?

Hong Kong is far from the first country in the world to create its framework for regulating stablecoins. This issue has long been discussed by regulators in many countries and international organizations such as FATF, FSB, and IMF. However, the need to obtain a special license to issue stablecoins appeared relatively recently. So far, such a license exists in a small number of jurisdictions, but an increasing number of countries are planning to introduce it.

Japan and Singapore

These two Asian countries are of the few large economies in the world that already have such a license. In Japan, the rules for regulating stablecoins were adopted in June 2023 with the participation of Financial Services Agencies (FSAs). According to the new rules, the circulation of stablecoins is regulated in the same way as transactions with digital currency. They must have full collateral pegged to the Japanese yen or other currencies. When the lawfully comes into force (in June 2024), only licensed banks, money transfer operators, and trust companies will be able to issue stablecoins.

The issuer of one of the leading USDC steel coins, Circle, is already planning to expand into this market. While stablecoin regulation in Japan may make it difficult for foreign stablecoin operators to enter the country's market, it appears that they can use local bank licenses without obtaining a license of their own.

In Singapore, stablecoins and cryptocurrencies are regulated by the local fintech regulator MAS (Monetary Authority of Singapore). The main requirements are the presence of reserves and full collateral, as well as the presence of a payment institution license from MAS. The new rules were adopted in August 2023.

European Union

In the European Union, stablecoins and their use for settlement are regulated under the Markets in Crypto-Assets (MiCA) digital asset regulations. This is a large three-hundred-page document that regulates any operations with cryptocurrencies in the EU. It got approval from all 27 EU member states.

For stablecoins, MiCA has identified a separate type of token - EMT (e-money tokens). The main requirements for stablecoins under MiCA are full collateral and reporting of all transactions above €1,000. This regulation has not yet entered into force, but additional requirements have already begun to appear. The European Union banking supervisor has presented new requirements for the regulation of stablecoins on November 8, 2023. Public discussion of these standards is due on January 30, 2024. If the proposals are approved, they will come into force in June 2024. However, it is still not entirely clear how the MiCA requirements will be implemented in practice.

Great Britain

In the UK, initially, the requirements for the regulation of stablecoins and cryptocurrencies coincided with the requirements for e-money issuers. The regulation is currently being clarified. The FCA published its proposals for regulating stablecoins on November 6, 2023 - discussions will continue until February 6, 2024. The regulator remains based on the same approach within the framework of The Payment Services Regulations 2017 (PSRs). However, stablecoins issued in the UK or used for payments in the UK will now need to be registered with the FCA.

USA

In the United States, there is still no clear regulation of stablecoins, although both Tether and USDC are pegged to the American dollar and this is about 90% of the global issue of stablecoins. In the summer of 2023, committees of the US Congress preliminary approved a bill specifically dedicated to the regulation of stablecoins - the Payments Stablecoin Act.

The head of the fintech company Ripple, Brad Garlinghouse, believes that regulatory clarity for stablecoins in the United States will come in 2024. According to him, “the stablecoin market has in some ways surprised people in terms of meeting real needs” - so regulatory certainty will only benefit the industry. In addition, he expects that as regulation becomes more transparent, new participants may appear in the market.

However, due to the lack of consensus among Democrats and Republicans, as well as the complex system of regulation of cryptocurrencies in the United States (more than one regulator) - in 2024 there may also be no clarity on this issue. But what is important is that there are still many more stablecoins that are pegged to the US dollar than to the euro or the Japanese yen. Perhaps this is evidence that when there is no excessive regulation, it is only good for business.

Other countries

Offshore jurisdictions have also introduced special regulations for stablecoins, for example, in the Bahamas and Bermuda, where the local Jewel Bank is planning to launch a special stablecoin Jewel USD. By the way, the USDC Circle issuer is licensed in Bermuda.

Canada

In February 2023, the Canadian Securities Commission has prohibited local exchanges from conducting stablecoin transactions without prior regulator’s approval. In October, the regulator issued additional rules clarifying stablecoin transactions. So stablecoins are allowed in Canada, but VASPs need to get prior regulator’s approval for stablecoins’ trading. To receive such permission, a stablecoin must be fully backed.

Australia

Australia continues to discuss possible approaches to regulating cryptocurrencies and stablecoins. The Treasury published its consultation document on December 8, 2023, on the regulation of payment services - including the certification of stablecoins that circulate in Australia. This regulation has not yet been adopted.

UAE

The United Arab Emirates is quite conservative in the field of crypto payments, however, here too, in the fall of 2023, the first legal acts regulating the circulation of stablecoins appeared from the local regulator VARA. On September 18, 2023, VARA published the “Code of Rules for the Issue of Virtual Assets” and, among other things, discussed the concept of “Fiat-Referenced Virtual Assets (“FRVAs”) there.

The VARA rules mustn't apply to stables with security in dirhams - for them, a separate regulation must be developed by the Central Bank of the UAE (“CBUAE”). To issue other stablecoins in the UAE, the company must have a VARA license of the first category. It is also mandatory to fully back the stablecoin and verify it during an audit.

Conclusion

Gradually, most of the world's fintech hubs are moving towards regulating stablecoins and licensing them. The main requirement that is prescribed by all jurisdictions is the availability of reserves and collateral. The second requirement is regulatory permission to conduct operations in the country.