The global financial landscape is evolving rapidly, driven by continuous technological innovation. The Hong Kong Monetary Authority (HKMA) actively supports financial innovation while closely monitoring these dynamic developments. For instance, in 2016, the HKMA commissioned a study on Distributed Ledger Technology (DLT) and published a whitepaper. In 2019, it collaborated with the Bank of Thailand on the "Inthanon-LionRock project," later renamed the "Multiple Central Bank Digital Currency Bridge Project" (mCBDC Bridge), to explore the use of wholesale central bank digital currencies for cross-border payments. This initiative received strong support from the Bank for International Settlements Innovation Hub Hong Kong Centre and expanded in February 2021 to include the Central Bank of the United Arab Emirates and the Digital Currency Institute of the People's Bank of China. Last year, the HKMA announced the "Fintech 2025" strategy to drive the development of financial technology in Hong Kong.
Throughout this process, the HKMA recognizes the benefits brought by financial innovation while also understanding the need to monitor and address potential risks. One area of particular concern is the significant growth of crypto assets and their increasing interconnectedness with the financial system. In response, the HKMA adopts a risk-based and "same risk, same regulation" approach, guided by international standards, to supervise relevant institutions and activities. Key considerations include monetary and financial stability, user and investor protection, and potential issues such as fraud and money laundering. This article elaborates on the HKMA's perspective regarding these developments.
Understanding Crypto Assets
Crypto assets lack a unified definition. Their structure, nature, and purpose can vary significantly. Sometimes referred to as virtual assets, some products within this category have no intrinsic value, leading to debates about whether they should be classified as assets at all. Examples include investment-related tokens, stablecoins, utility tokens, and non-fungible tokens (NFTs).
In recent years, the market capitalization of crypto assets has grown substantially, estimated at around $2.2 trillion. Both institutional and retail investors are showing increased interest, indicating a deeper integration with the mainstream financial system. In Hong Kong, the government has announced plans to amend the Anti-Money Laundering and Counter-Terrorist Financing Ordinance to establish a licensing regime for virtual asset service providers operating crypto asset trading platforms.
Guided by international standards, the HKMA currently focuses on three key areas regarding the impact of crypto assets: payment-oriented stablecoins, investor protection related to crypto assets, and the business connections between authorized institutions and crypto assets. This approach aligns with the HKMA's mandate to maintain the stability of Hong Kong's monetary and banking systems.
The Rise of Stablecoins
Stablecoins are a type of crypto asset that has gained considerable market traction. Unlike many other crypto assets that lack asset backing, stablecoins are typically pegged to or reference one or more assets, such as securities or fiat currencies. Currently, the absence of widespread regulatory or disclosure requirements for stablecoin arrangements means the support mechanisms for some stablecoins remain opaque.
In regulatory discussions within international organizations and standard-setting bodies like the Financial Stability Board (FSB), stablecoins—especially those used for payments—have become a focal point. Given their nature and intended use for purchasing goods, services, or other financial transactions, payment-oriented stablecoins are likely to develop broad and frequent connections with the mainstream financial system and everyday commercial activities. Consequently, they may pose more direct and immediate risks to financial stability. For example, if user and investor confidence is shaken due to operational issues, the functioning of payment and financial systems could be significantly disrupted.
Therefore, ensuring the safety and soundness of arrangements and activities related to payment-oriented stablecoins is crucial. From market observations, the functions of these stablecoins and their wallets resemble those of stored value facilities. Adhering to the "same risk, same regulation" principle, the HKMA is reviewing whether adjustments to the existing regulatory framework—such as under the Payment Systems and Stored Value Facilities Ordinance—are necessary to ensure that payment-oriented stablecoins are appropriately regulated in Hong Kong.
As part of this effort, the HKMA has published a discussion paper on crypto assets and stablecoins, outlining its proposed regulatory regime for payment-oriented stablecoins. Feedback from stakeholders is expected by March 31, 2022, with the goal of introducing a new regulatory framework by 2023/24. To better understand the evolving regulatory landscape and its implications, 👉 explore more strategies for navigating digital finance.
Enhancing Investor Protection
As mentioned earlier, some crypto assets may lack intrinsic value and exhibit extreme price volatility. These characteristics raise concerns about their suitability for retail investors and how their sales processes should be regulated. The HKMA emphasizes the need for investor education and enhanced product disclosure. It is collaborating with the Securities and Futures Commission to develop regulatory expectations regarding investor protection for authorized institutions providing crypto asset-related intermediary services.
Crypto Asset Exposure of Authorized Institutions
Authorized institutions are increasingly forming business connections with crypto assets. The HKMA is examining the regulatory priorities in this area. Depending on the nature of the connection and the substantive structure of the crypto assets, key regulatory issues encompass a wide range, including user protection, credit risk, market risk, operational risk, financial crime risk (such as fraud, money laundering, and terrorist financing), and whether direct exposures to these assets are handled prudently according to relevant international standards recommended by the Basel Committee on Banking Supervision. The Financial Action Task Force has also updated its recommendations to address money laundering and terrorist financing risks associated with virtual assets, including stablecoins. Authorized institutions should rigorously assess their risk exposures and implement appropriate mitigation measures before establishing business relationships with crypto asset service providers. The HKMA will soon issue a circular to authorized institutions providing more detailed regulatory guidance on these matters.
Future Outlook
The HKMA is committed to striking an appropriate balance between maintaining a safe and efficient financial system in Hong Kong and supporting financial innovation. The release of the discussion paper on crypto assets and stablecoins marks an important milestone in the HKMA's ongoing communication with stakeholders on these issues. It will closely monitor developments, maintain an open mindset, and retain flexibility in formulating the details of the regulatory regime. The HKMA is also actively participating in relevant international discussions. As a member of the Financial Stability Board, it plans to develop a roadmap by July 2022 for introducing new or adjusting existing regulatory regimes in line with the FSB's recommendations. Finally, it will continue to communicate and coordinate closely with other regulators to contribute to both international and local cooperation.
Frequently Asked Questions
What is the HKMA's stance on financial innovation?
The HKMA supports financial innovation and actively monitors developments to harness benefits while addressing associated risks. Initiatives like the "Fintech 2025" strategy demonstrate its commitment to fostering a progressive financial technology ecosystem in Hong Kong.
Why are stablecoins a regulatory priority?
Stablecoins, especially those used for payments, pose potential risks to financial stability due to their growing integration with mainstream finance. The HKMA aims to ensure they operate under a sound regulatory framework to protect users and maintain system integrity.
How does Hong Kong plan to protect crypto investors?
The government is amending existing ordinances to introduce a licensing regime for virtual asset service providers. The HKMA is also working with other regulators to enhance investor education, improve disclosure requirements, and set clear expectations for institutions offering crypto-related services.
What should authorized institutions consider regarding crypto assets?
Institutions should thoroughly assess risks—including operational, market, and financial crime risks—before engaging with crypto assets. They must adhere to international standards and implement robust risk mitigation measures.
Will Hong Kong's regulations align with global standards?
Yes, the HKMA actively participates in international forums and plans to align its regulatory approach with recommendations from bodies like the Financial Stability Board and the Basel Committee to ensure consistency and effectiveness.
When will the new stablecoin regulations take effect?
The HKMA aims to introduce a new regulatory framework for payment-oriented stablecoins by 2023/24, following a consultation process that concludes in March 2022.