Second Reading of Government Bills: STABLECOINS BILL
Deputy President, first of all, I declare that I work in an authorized institution and have the opportunity to participate in stablecoin business.
With the rapid development of digital economy and continuous innovation in Fintech, stablecoins as an emerging digital asset are gaining widespread application in various payment and transaction scenarios by virtue of their advantages of being pegged to assets such as fiat currencies, government bonds, gold and stocks, as well as their high efficiency in cross-border payment. They not only provide convenience to participants, but also significantly reduce transaction costs and exchange rate risks. In recent years, there has been an increase in the number of illegal activities and risky events related to cryptocurrencies. Hence, ensuring transaction and operation security has become imperative, and the issuance of stablecoins is undoubtedly a viable solution.
The global circulation of stablecoins has exceeded US$100 billion, demonstrating the market’s urgent demand for efficient payment tools. While various stablecoin products are already circulating in Hong Kong, there is still a lack of clear regulatory standards. On the contrary, advanced financial markets like the United States, European Union, Japan and Singapore have already enacted relevant laws and policies to regulate the issuance and trading of stablecoins. As an international financial centre, Hong Kong must keep abreast of the times and respond to changes in the global financial landscape. The Government issued the Policy Statement on development of Virtual Assets in Hong Kong in 2022 and formulated necessary regulations under the principle of “same activity, same risks, same regulation”, so as to facilitate the sustainable development of virtual asset (“VA”) activities. In addition to the regulatory regime for VA trading platforms, the establishment of a licensing regime for issuers of fiat-referenced stablecoins (“FRS”) will undoubtedly further strengthen Hong Kong’s regulatory framework and bring it in line with international standards.
I am a member of the Bills Committee. During the clause-by-clause examination of the Bill, members have actively put forward a number of comments on the presentation, specific implementation details and potential impact of the Bill. I am pleased to see that the Government has listened extensively and thoroughly to our views, and accepted most of the suggestions and made substantial amendments to the relevant provisions. I would like to take this opportunity to thank the Financial Services and the Treasury Bureau and the Hong Kong Monetary Authority for their hard work.
The following are my views and suggestions on the content of the Bill and the amendments. First, regarding the custody arrangements, in view of the recent incident in which a third-party custodian was suspected of illegally misappropriating the digital asset reserves, I consider it necessary to limit the custodian role to licensed Hong Kong financial institutions at the early stage of stablecoin development, so as to more effectively protect the interests of investors and prevent them from suffering losses due to the selection of inappropriate custodian by the issuer. As for the eligibility of custodians, the authorities have indicated that they were drawing up industry guidelines to clarify the eligibility requirements. I hope that the authorities will finalize the relevant arrangements as soon as possible, with a view to avoiding any uncertainty in the enforcement after the implementation of the ordinance.
Second, regarding the position of stablecoin manager, clause 66 of the Bill stipulates that authorized institutions must create a stablecoin manager position. In my opinion, it is important to clarify whether the holder of this position may also serve as business manager in another authorized institution. For example, in the banking industry, it is common for an individual to hold both positions of international business and retail business manager, but risk management and frontline operations must remain independent. The Administration has replied that the stablecoin manager must be approved by the Monetary Authority and fulfil the duties specified in the ordinance. However, it did not give a definite answer to my concern about dual roles. I hope the Administration will further clarify the regulation on dual roles in future guidelines. Meanwhile, the Bill mentions flexible filling of manager vacancy. Take the practice in the banking industry as an example, key positions can usually be taken up by several people to ensure the flexibility of bank operations. I understand that according to the Administration, dual roles refer to the fact that a manager of a particular business line may also serve as stablecoin manager. However, the Administration has not clearly indicated what positions must not be overlapped. I recommend the Administration to clarify the restrictions on dual roles by specifying personnel of which business lines may concurrently hold stablecoin positions, so as to avoid potential conflicts and strike a balance between compliance requirements and operational efficiency.
Third, regarding the establishment of the Stablecoin Review Tribunal, the Bill requires the Chairperson of the Tribunal to have a background as a judge. However, it does not specify the composition of the tribunal, the number of members and professional qualifications of the members. In contrast, the Protection of Critical Infrastructures (Computer Systems) Bill passed recently clearly outlined the appeal panel mechanism and provided for its composition and membership in detail: The Chief Executive will appoint an appeal panel comprising at least 15 members, including at least two information technology professionals, two legal professionals and two neutral individuals with neither information technology nor legal backgrounds. On the contrary, the composition of the Stablecoin Review Tribunal appears too simplistic. The Administration has replied that this is in line with corresponding provisions in the Banking Ordinance, the Payment Systems and Stored Value Facilities Ordinance and the Anti-Money Laundering and Counter-Terrorist Financing Ordinance. However, in view of the highly technical nature of stablecoins, the Administration is advised to draw reference from relevant experience and carefully consider the composition, number and professional qualifications of tribunal members, particularly the inclusion of professionals who are familiar with finance and technology, so as to further enhance its credibility.
Fourth, regarding the proportionality of the regulatory scope, given that stablecoin is similar in nature to issuance of banknotes, it is necessary to impose more stringent regulation. However, the existing regulation of banks primarily focuses on senior management, while the regulation of stablecoins encompasses all employees, which seems overly stringent and may hinder the development of the industry. The Administration has responded that stablecoin issuers are effectively managing the fiat assets of the holders. In the event of bankruptcy, financial irregularities or fraud, the reputation of the entire licensed institution will be directly affected. Hence, it is necessary to establish a corresponding risk control mechanism. At the same time, the Bills Committee’s report emphasizes that limiting the scope of clause 64 of the Bill might restrict the Monetary Authority’s discretion in response to the potential risks. However, it is anticipated that instances requiring the Monetary Authority’s consent would not be common in practice. Accordingly, I recommend the Administration to further clarify the regulatory scope concerning licensed employees and focus the regulation on personnel directly related to stablecoin operations, so as to ensure that the requirements are clear, reasonable and easily understood by the public, thereby striking a balance between stringent regulation and industry development.
Lastly, regarding enhancement of the stablecoin redemption mechanism, the establishment of the regulatory framework for FRS issuers is only a preliminary stage. Gradual enhancements to the support measures should be adopted subsequently. The Bill stipulates that licensed institutions must redeem valid requests from holders at par without imposing onerous conditions or unreasonable charges. The redemption process, time frame and so on shall also be clearly disclosed in order to protect holders’ rights. However, under the current regime, as the implementation of the redemption mechanism is left to the discretion of the licensed institutions without uniform standards, there will probably be inconsistencies in the standards and levels of procedural transparency. It is suggested that the Administration should further clarify the redemption review standards, so as to provide clearer compliance guidelines for the industry and promote the robust development of the stablecoin market.
Deputy President, in view of the important roles of FRS and Web3 VA ecosystem, coupled with the increasingly close ties between the traditional financial system and the VA market, the Bill which sets out the eligibility of issuers, management of reserve assets and redemption mechanism, will not only provide clear rules for the market, but also help enhance investor confidence and promote healthy development of the stablecoin market. It is expected to attract more international top-tier stablecoin issuers to establish a presence in Hong Kong, which will have far-reaching significance to building Hong Kong’s stablecoin ecosystem.
With these remarks, I support the Bill and all the amendments.