Safeguards crucial as Hong Kong seeks slice of cryptocurrency pie

Hong Kong is competing with financial centres around the world to establish itself as a hub for cryptocurrency business.

To achieve this requires allowing multiple forms of cryptocurrency tools as well as the appropriate regulatory framework to help manage the risk of monetary and financial instability.

To that end, a regulatory regime for stablecoins has taken a welcome step closer to fruition after a two-month consultation wrapped up last month.

The Hong Kong Monetary Authority and Financial Services and the Treasury Bureau have prudently chosen to keep in place most of the rules they initially proposed in December to manage stablecoins, virtual assets that are pegged to other assets such as a fiat currency to maintain a stable value.

Issuers will be required to obtain a licence from the HKMA. The rules also require that stablecoins be fully backed by reserve assets “at any given point in time”, and that issuers publish monthly confirmation of those assets from an independent auditor.

Overseas issuers hoping to offer blockchain-based stablecoins in Hong Kong also must establish a local subsidiary with key management personnel based in the city.

Rules that were relaxed after the consultation included a reduction in the minimum paid-up share capital requirement from 2 per cent to 1 per cent of the value of its stablecoins in circulation, with a minimum of HK$25 million (US$3.2 million). Legislation would be drafted and introduced as soon as possible, the regulators said.

The requirements are similar to those adopted by the Securities and Futures Commission for virtual asset trading platform licences.

Perhaps due to the stringent nature of the rules, Hong Kong saw 24 applicants compared to rival hub Singapore, which garnered three times as many applicants under its regime.

The revised proposal is unlikely to mollify those critics who say they are too strict, but at least it should be welcomed by others who thought the regulators were moving too sluggishly to put a framework in place.

Authorities are right to be cautious. Cryptocurrencies are known for volatile price swings and are regarded as higher risk investments. Hong Kong is the only city in China that is being allowed to experiment with a cryptocurrency regime and needs to get it right.

Still, demand for cryptocurrencies as an alternative investment tool is real, and the city is aiming to be a digital forerunner.

It is therefore important to build suitable and transparent guardrails that will strike a balance between protecting the interests of investors and creating a favourable regulatory environment for coin issuers.

Once the law is drafted, the city will be a step closer to becoming a competitive virtual assets hub.