Hong Kong debuts Stablecoins Bill

As 2024 draws to a close, Hong Kong has delivered on its promise by unveiling its draft Stablecoins Bill, a comprehensive framework for regulating fiat-referenced stablecoin issuers in Hong Kong. The bill generally aligns with the consultation conclusions of the stablecoin regime (finalized July 2024) and solidifies the Hong Kong Monetary Authority’s (HKMA) stablecoin sandbox initiative (launched March 2024) – see our previous post. The landmark bill provides for the licensing and supervision of stablecoin activities, Hong Kong Monetary Authority’s (HKMA) investigatory and enforcement powers, and other related matters. At 285 pages, here’s the TLDR version.

Which stablecoins are in scope?

Stablecoins tied to a single or basket of fiat currencies and maintained on distributed ledgers and similar information repositories are covered. Hong Kong’s definition is not restricted to HKD-linked stablecoins (i.e., they can be linked to other jurisdictions’ official currencies).

What are “regulated stablecoin activities” and who is eligible to obtain a license for them?

A person who carries on (or holds themselves out as carrying on) regulated stablecoin activities must be licensed or otherwise exempt from licensing. “Regulated stablecoin activities” includes the issuance of stablecoins in Hong Kong, as well as the issuance of HKD-linked stablecoins outside Hong Kong. As expected, the new bill has extraterritorial effect for offshore stablecoin activities that actively target the Hong Kong public. The HKMA (after consulting the Financial Secretary) can also designate additional regulated activities in future without the need for new legislation. Such designation must consider the activity’s impact on Hong Kong’s monetary or financial stability, role as an international financial centre, or significant public interest.

A license application can only be made by (i) a company incorporated in Hong Kong or (ii) an authorized institution (AI) incorporated outside Hong Kong (e.g. a bank that operates as a branch in Hong Kong). The bill contains a lengthy list of financial instruments exempted from stablecoin licensing requirements (e.g. deposits, securities and futures contracts, float stored in stored value facilities (SVF) and SVF deposits).

What are the penalties for non-compliance?

A person who carries on business (or holds themselves out as carrying on business) in regulated stablecoin activities without the requisite license commits an offence, punishable by a fine of up to HK$5,000,000 and up to seven years’ imprisonment, with an additional HK$100,000 fine for every day the offence continues. The bill also sets out offences and penalties for the unauthorized offering, advertising, inducement, fraud, or misrepresentation in stablecoin transactions.

How to get a license, including the provisional license?

License applicants (companies or AIs incorporated outside Hong Kong) must have their principal business in Hong Kong. The license fee is HKD$113,020. The HKMA may decide to impose license conditions regarding operations, reserve management, additional financial resources, and more. Breach of license conditions is an offence, punishable by up to HK$400,000, with an additional HK$10,000 for every day the offence continues.

In terms of transitional arrangements, existing stablecoin issuers who commenced regulated stablecoin activities prior to the commencement date (i.e. prior to the bill being passed and coming into effect), may apply for a provisional license. The provisional license application must be submitted within three months of the commencement date and granted by the HKMA within the first six months of the commencement date. If the license application is rejected (and any objection is unsuccessful), the stablecoin issuer must cease regulated stablecoin activities in Hong Kong.

Are there any specific requirements for team members and shareholders of licensees?

Licensees must appoint a CEO, alternate CEO, and Stablecoin Manager; all of whom must be ordinarily resident in Hong Kong and deemed fit and proper, with the HKMA’s consent. Directors must also be fit and proper and obtain the HKMA’s consent for appointment, albeit there is no local residency requirement. Controllers are also subject to the HKMA’s prior approval; namely, majority shareholder controllers (i.e. a person with more than 50% voting rights), minority shareholder controllers (i.e. a person with at least 10% but not more than 50% of voting rights), or indirect controllers (i.e. persons who influence the licensee’s board or subsidiary body corporate).

What are the key requirements for licensees?

In line with the consultation conclusions, licensees must fulfil minimum key criteria (schedule 2), including the following:

• Financial resources (e.g. minimum HKD$25,000,000 paid up share capital) and adequate operational resources
• Reserve assets management
• Timely redemption
• Fit and proper requirements
• Adequate and appropriate systems of control with knowledgeable and experienced officers
• Prudential and risk management policies and procedures
• Anti-money laundering and counter-financing of terrorism measures
• Comprehensive and transparent disclosure (e.g. stablecoin whitepaper publication)
• Adequate complaint handling
• Stablecoins must be non-interest bearing (the licensee must not pay interest to holders of stablecoins)
• Recovery planning and orderly winding down
• Ongoing notifications and approvals (e.g. regarding changes to certain personnel, capital structures, and any sale/disposal of business)

Looking ahead

The first reading of the bill is set to be on the 18 December 2024, following which we expect the bill to pass through the legislative process fairly quickly. More detailed licensing guidelines will be released in due course.