Hong Kong Tightens Stablecoin Regulations To Protect The Financial System

JAKARTA - Hong Kong, one of the crypto-friendly areas, is preparing new regulations to oversee stablecoin activities in its territory. Stablecoins are a type of crypto asset whose value is tied to fiat currency or other stable assets.

The Monetary Authority of Hong Kong (HKMA) issued a public consultation document on Wednesday, December 27, outlining the regulatory framework that will apply to stablecoin publishers. The document can be commented on by the public until February 24, 2024.

According to the consulting document, stablecoin publishers must obtain a license from HKMA if they want to operate in Hong Kong and serve retail investors. The license will regulate various aspects, such as capital requirements, risk management, governance, disclosure, consumer protection, and compliance with anti-money laundering and anti-terrorism financing rules.

Stablecoin publishers must also ensure that the stablecoins they issue have "full support" from high-quality and liquid reserve assets, and can be exchanged for fiat currencies that are benchmarks for nominal value.

Reflecting On The Collapse Of Terraform Labs' Stablecoin

This regulation is considered important by HKMA because stablecoins have the potential to become a wide and efficient means of payment, but also pose a risk to monetary and financial stability, especially if the stablecoins are not adequately supported by reserve assets.

HKMA gave an example of the case of the collapse of UST, an algorithmic stablecoin issued by Terraform Labs, in mid-2022, which caused huge losses to its holders. HKMA said that the incident "underestimated the urgency" of the proper stablecoin arrangement.

Based on data from CoinMarketCap, the total market capitalization of stablecoins currently reaches more than $130 billion (approximately IDR 2,012 trillion), or about 5 percent of the total crypto market cap. The most popular stablecoins are Tether (USDT), whose value is associated with the US dollar, with a market share of around 60 percent. Other well-known stablecoins are USD Coin (USDC), Binance USD (BUSD), Dai (DAI), and TerraUSD (UST).

Hong Kong is not the first to regulate stablecoins. Several other countries, such as Singapore, Britain, and the United States, have also issued guidelines or draft laws to oversee these crypto assets.

The aim is to prevent risks such as price volatility, market manipulation, fraud, money laundering, and terrorism financing. In addition, regulations are also expected to increase the trust and security of stablecoin users and investors.