Does not represent UDF‘s viewpoint

The stablecoin issuer sandbox (“sandbox”) launched in March this year has been well-received by the industry. We received enquiries from dozens of institutions, and those who are more prepared have made formal applications.  After careful consideration, we announced today the first batch of three participants admitted to the sandbox.  The participants may now test their proposed business models within a limited scope as specified by the HKMA, and further engage with the HKMA on future compliance with the proposed regulatory regime.

Eligibility for accessing the sandbox

The sandbox enables us to better understand the business models of stablecoin issuers with a view to assessing their plans to start stablecoin issuance business in Hong Kong in a compliant and sustainable manner. It is therefore a prerequisite for an applicant to demonstrate that it has formulated detailed and feasible business and sandbox plans before it is admitted to the sandbox.

A key consideration is the need to propose concrete use cases for the stablecoin to help address pain points in economic activities and create value and new opportunities for our economy and financial services. An applicant is also expected to explain how its network, supply chain or major partners can drive the long-term, sustainable demand for the stablecoin it issues.  There should also be specific plans on using the sandbox to demonstrate the robust processes to be put in place for the issuance, distribution and redemption of the stablecoin, in full compliance with the future regulatory requirements such as the management and safekeeping of the reserve assets, risk mitigation measures for credit, liquidity, technology, operational and money laundering / terrorist financing risks, etc.  The admission bar is set at a reasonably high level so as to facilitate the effective operation of the sandbox.  As such, only applicants that fully satisfy the above requirements will be admitted.  We will continue to handle the enquiries and applications pending the enactment and implementation of the legislative proposal. 

Whether an individual institution, including existing stablecoin issuers, applies for sandbox participation depends on a number of factors, such as its business plans when the legislation is implemented, its need to test out stablecoin issuance processes within a limited scope at the current stage, etc. It should be emphasised, though, that sandbox participation is not a prerequisite for the application for a stablecoin issuer licence in future.  Sandbox participants that intend to apply for a licence later on will still need to submit a formal application when the regulatory regime comes into effect.

Use cases of stablecoins

Digital finance is a means to address pain points and achieve breakthroughs in traditional financial operations by leveraging new technologies. It should aim to better serve businesses and individuals through enhanced efficiency, lowered costs and improved user experience.  The primary use cases proposed by the first batch of three sandbox participants include payments, supply chain management and applications in capital markets.  They are designed to target pain points in the movement of funds across financial institutions, payment services companies, settlement systems, etc. in different time zones.  Currently, these intermediaries or financial market infrastructures may not operate on a 24/7 basis, and the costs are relatively high with low efficiency.  Stablecoins, as a possible medium for payments, will not only lower costs and reduce transaction time, but also provide various innovative solutions by leveraging their programmability feature.  They will generate more automated and “smarter” financial services, thereby facilitating fund flows and enabling better management of risks associated with the transactions.  The sandbox participants have also proposed application of their stablecoins in other areas such as Web3, gaming and virtual asset trading.

Risk management and compliance measures

All operations and testing under the sandbox arrangement will be conducted within a limited scope and a risk-controlled environment. The participants will test out their stablecoin issuance process under various use cases, with particular focus on operational and technology risks.  Throughout the process, we will observe how they intend to comply with the proposed regulatory requirements, such as the approach to ensure the reserve assets are of high quality and liquidity, whether stablecoin redemption requests are met in a seamless manner and within a reasonable timeframe, robustness of wallet and private key management measures, as well as adequacy of measures for protecting stablecoin holders and combating money laundering / terrorist financing.  Apart from complying with the requirements of the sandbox and the laws of Hong Kong, participants must ensure that they and their overseas partners strictly comply with the applicable laws and regulations of the respective jurisdictions where the use case involves cross-border payments.  Depending on the participants’plans, testing progress and sophistication of risk management, the HKMA may fine-tune the permitted operational parameters and testing scope of a sandbox participant as appropriate.

Stay on guard against scams under Sandbox-related claims

The list of sandbox participants are published on the HKMA’s website.  The participants are required to strictly observe the requirements of the sandbox.  For example, they must not raise funds from the public or offer any investment products in the name of the sandbox, and they cannot use the general public’s funds at the initial stage of their testing.  The HKMA will make separate announcement in case sandbox participants are allowed to handle the general public’s funds within a limited scope as a result of adjustments to the testing scope.  Non-compliance will lead to immediate termination of sandbox participation.  Members of the public are advised to stay vigilant to any institution that claims to be a sandbox participant and markets stablecoin or related products, as this is clearly a scam.  When in doubt, members of the public may contact the HKMA to enquire and confirm about the information of the sandbox participants.

Stablecoin is just among the myriad of virtual asset-related products available in the market. As virtual assets are relatively high-risk products, it would be advisable for potential investors to better understand their own risk appetite, study carefully the nature and risks of the virtual assets in question, and exercise caution when making investment decisions.  We should also stay alert to frauds that use virtual assets as bait.

Latest international developments

International bodies, including the Financial Stability Board under the G20, have set out expectations for member jurisdictions to bring the issuance of stablecoin into their regulatory perimeter. Other global financial centres are also speeding up legislative work in relation to stablecoin issuance.  In line with international standards and practices, Hong Kong should put in place a regulatory regime, taking into account local circumstances, so as to create a facilitating environment for the development of virtual asset ecosystem in Hong Kong and further consolidate our status as an international financial centre.

The Financial Services and the Treasury Bureau and the HKMA published yesterday the consultation conclusions on the legislative proposal for implementing a regulatory regime for stablecoin issuers in Hong Kong. We are working full steam on the draft legislation and will strive to introduce the bill into the Legislative Council by the end of this year.  We believe an early implementation of the regulatory regime will help promote the healthy, responsible and sustainable development of the stablecoin ecosystem in Hong Kong.