Hong Kong to Regulate Stablecoin Issuers: Algorithmic Coins Not Allowed

• Hong Kong is planning to require licensing for stablecoin issuers
• The HKMA plans to supervise the governance, issuance and stabilization of fiat-backed stablecoins
• Algorithmic stablecoins like terraUSD will not be accepted under the planned regulatory regime

Hong Kong Plans to Require Licensing for Stablecoin Issuers

The Hong Kong Monetary Authority (HKMA) announced it will set up a regime to supervise stablecoins, which are cryptocurrencies whose value is pegged to other assets. Entities conducting regulated activity in Hong Kong will have to obtain a license to operate stablecoin services.

Stablecoin Reserves Must Be Maintained

The HKMA stipulates that the issuer must maintain reserves matching the amount of the crypto in circulation. Stablecoin reserves have come under heavy regulatory scrutiny around the world since 2021, when the issuer of the top stablecoin by market capitalization, Tether, revealed much of its USDT reserves were made up of unsecured short-term debt. Major economies such as the U.S., the European Union and Japan also are working on controls for stablecoin issuers.

Algorithmic Stablecoins Will Not Be Permitted

The report stated that “the value of the reserve assets of a stablecoin arrangement should meet the value of outstanding stablecoins at all times” and “stablecoins that derive their value based on arbitrage or algorithm will not be accepted.” TerraUSD, an algorithmic stablecoin whose value was supposed to be maintained through another crypto asset, luno, collapsed last May.

Specific Regulatory Arrangements Will Be Considered

In drawing up specific regulatory arrangements, the HKMA said it will consider feedback received from respondents as well as latest market development and international standards while taking into account local circumstances and interests.

Conclusion

Overall, Hong Kong’s move towards mandatory licensing for stablecoin issuers seeks to ensure more secure issuance and stabilization of fiat-backed cryptocurrencies within its jurisdiction while preventing algorithmic ones from gaining traction.