The Hong Kong Monetary Authority (HKMA) has announced that it will establish regulatory requirements for stablecoins using a risk-based approach.

According to a press release, the regulators decision stemmed from feedback received from a discussion paper released to the public on crypto-assets and stablecoins.

The HKMA released the discussion paper in January 2022 and ended the consultation period in March of the same year. The regulator received 58 submissions from several individuals, public bodies, businesses, and professional organisations.

In the feedback, the respondents expressed their support for the regulators plan to regulate stablecoins with a risk-based and agile approach.

They also urged the regulator to take the recent market developments into account and draw reference from several international agencies regulatory strategies.

Commenting on the feedback, Eddie Yue, Chief Executive of the HKMA, said: An appropriate regulatory environment will help address financial stability risks possibly posed by stablecoins, and promote the orderly and sustainable development of the industry. We are grateful to the respondents for their valuable feedback to the discussion paper on crypto-assets and stablecoins and their general support for our recommended regulatory principles and direction.

Through the publics reaction, the HKMA drew a consultation conclusion in a document dubbed Conclusion of Discussion Paper on Crypto-assets and Stablecoins. The regulator intends to include significant activities concerning stablecoins in its regulatory perimeter.

In the consultation conclusion, the HKMA disclosed that its regulatory perimeter may focus more on fiat-linked stablecoins due to the unpleasant past of the algorithmic ones.

The regulator believes that a stablecoin would be more stable if its value is relative to one or more fiat currencies. On the other hand, stablecoins that rely on arbitrage activities or algorithms to derive their value pose more risk and face the same fate as the fallen TerraUSD.

Furthermore, the HKMA insisted that it issue separate licences for different regulated activities on such digital assets.

In drawing up the specific regulatory arrangements, the HKMA will consider the feedback received, latest market development, and international discussion. We will also engage with stakeholders and market participants. We expect to implement the regulatory arrangements in 2023/24, Yue added.

~ By William A. Frederick ~