By Mauro Wolfe and Carolina Goncalves
In the game of which jurisdiction will become the crypto global king, Hong Kong is the latest aspiring fintech hub to announce enhancements to its digital asset regulation framework. No doubt this change is designed to give Hong Kong an edge in the global crypto markets.
In July 2024, the Hong Kong Monetary Authority (HKMA) announced its plans to enhance its digital asset regulatory framework by introducing legislation related to stablecoins, a type of cryptocurrency tied to stable assets like fiat currencies, within the following 18 months. The HKMA is carrying out sandbox testing and plans to introduce stablecoins by the end of 2024.
HKMA launched the sandbox in March 2024 as “part of the HKMA’s efforts in facilitating the sustainable and responsible development of stablecoin ecosystem in Hong Kong.” The sandbox participants are required to “propose concrete use cases for the stablecoin to help address pain points in economic activities and create value and new opportunities for [Hong Kong’s] economy and financial services.” The use cases will involve supply chain management, applications in capital markets and digital asset trading, including cross-border trade payments. The sandbox participants will then provide their use case feedback to regulators who will use the data to formulate a “fit-for-purpose and risk-based regulatory regime.” Where the use case involves cross-border payments, the sandbox participants must ensure that both they and their overseas partners strictly comply with the legal and regulatory requirements of the applicable jurisdictions, in addition to ensuring that their stablecoin issuance process complies with the sandbox requirements and Hong Kong laws. The participants will be prohibited from soliciting or handling funds from the public for sandbox activities.
On July 18, 2024, the HKMA announced the first participants in its stablecoin issuer sandbox. They include a company linked to significant Chinese e-commerce retailer Jingdong Coinlink Technology; RD InnoTech Limited, a local fintech firm; and a coalition of Standard Chartered Bank, venture capital firm Animoca Brands and Hong Kong Telecommunications. The sandbox participants will undergo an assessment process as they test their respective stablecoin operational plans within a limited scope and in a risk-controlled environment specified by the HKMA. The HKMA will announce on its website any future participants as it continues to process sandbox applications.
These developments follow a two-month public consultation period that received 108 stakeholder submissions, including from market participants, industry associations and professional organizations. The consensus was that a regulatory regime is necessary for stablecoin issuers to both manage potential monetary and financial stability risks and also ensure transparent and effective oversight.
Hong Kong’s enhanced regulatory framework is aligned with developments in international standards and practices, such as the expectations of the G20’s Financial Stability Board, in the virtual asset ecosystem, including the issuance of stablecoin. The new framework is intended to (1) complement existing regulatory measures for virtual asset trading platforms, (2) make digital asset transactions more secure through regulatory oversight and enforcement, (3) encourage more innovative financial products in Hong Kong, (4) foster innovation and (5) attract global fintech talent.
A central feature of cryptocurrency is the development of borderless commerce. Regardless of which jurisdiction becomes the global crypto king, the cross-border nature of crypto business development is here to stay. Duane Morris will continue to monitor the global legislative landscape as the digital asset continues to mature.