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Hong Kong's de facto central bank will push ahead with proposals to regulate stablecoins, as it seeks to address the risks they pose to financial stability highlighted by the crypto sector's turmoil last year.
With a view to implementing a regulatory framework over this year and the next, the Hong Kong Monetary Authority (HKMA) will start by regulating stablecoins that reference fiat currencies, including the Hong Kong dollar, as their use in payments and ties with the traditional financial system mean they pose a bigger risk to monetary stability.
The HKMA launched a consultation in January 2022 as it identified stablecoins an area of regulatory concern.
For the consultation a total of 58 submissions were received, and respondents "generally indicated their support" for regulating stablecoins, the HKMA said.
The regime will cover areas including user-protection, audit and disclosure requirements, anti-money laundering and counter-terrorist financing.
Activities such as the issuance of stablecoins, provision of wallet services, and reserve management will be regulated. Entities that conduct such regulated actitivies in Hong Kong or actively market to the Hong Kong public will need to apply for a licence from the HKMA.
Months of turmoil in the crypto sector, included the collapse of exchange FTX in late 2022 and the fall in value of TerraUSD.
Also known as "UST", TerraUSD was the largest algorithmic stablecoin. It lost its peg to the U.S. dollar in May 2022 and roiled cryptocurrency markets.
"The stablecoin market experienced much price volatility in May 2022 subsequent to the collapse in value of TerraUSD. Some crypto exchanges also ran into trouble, such as FTX in November 2022," the HKMA said in its conclusions to the consulation published on Tuesday.
These events have caused international regulatory bodies to come up with measures and recommendations targeting stablecoins, which the HKMA said it has taken into consideration. (Reporting by Georgina Lee; editing by Barbara Lewis)