HKMA to introduce mandatory stablecoin licensing regime following FTX collapse and industry blow-ups in 2022
- The regulator aims to roll out the new regulations either this year or next year, having received 58 submissions
- The HKMA will first regulate stablecoins backed by fiat currencies, as they pose ‘more imminent monetary and financial stability risks’
The Hong Kong Monetary Authority (HKMA) said it will put in place a mandatory licensing regime for activities relating to stablecoins before 2024, including requiring fully backed reserves, as Hong Kong commits to become a virtual asset hub following a series of meltdowns in the industry last year.
The HKMA, the city’s de facto central bank, will first regulate stablecoins purportedly backed by fiat currencies, as they pose “more imminent monetary and financial stability risks”, it said on Tuesday in a paper concluding a consultation launched in January last year. Stablecoins can either be pegged to currencies like the US dollar or other types of assets or commodities such as gold.
The regulator aims to roll out the new regulations either this year or next year, having received 58 submissions regarding its initial stablecoin discussion paper last year. The HKMA said it will take the feedback and international recommendations into account with new requirements covering governance and management, anti-money-laundering and counterterrorist financing, user protections and regular audits.
Among the new regulations will be a requirement for the value of a stablecoin’s reserve assets to meet the value of its outstanding tokens at all times. Those that derive their value based on arbitrage or algorithms will not be accepted, the HKMA added.
In May last year, TerraUSD, an algorithmic stablecoin designed to be pegged to the US dollar through its operation in conjunction with sister token Luna, collapsed after losing its peg, setting off the implosion of several cryptocurrency firms and a global market rout.
Further turmoil unfurled in the wake of the bankruptcy of FTX, once the world’s second-largest cryptocurrency exchange, as a result of revelations about its malpractices. Institutional and retail investors suffered heavy losses from both events, while crypto firms around the world reeled from contagion within the industry.