Hong Kong regulators released the city’s regulatory regime for stablecoins, aiming to bring issuers under a regulatory umbrella that calls for licensing and anti-money laundering and know-your-customer protocols later this year or by the start of 2024.

The move brings the city one step closer to being the only place in China that will enable retail and institutional trading of cryptocurrency-based products and cryptocurrencies, and offers some insight into how the Hong Kong Monetary Authority views crypto innovation.

Comments lauding Hong Kong’s role in fintech and crypto from regulators and the territory’s Chief Executive John Lee have come with increasing frequency as the city has dropped nearly all its covid restrictions that had kept it isolated from the rest of the world. Lee had told a group of financial regulators and crypto enthusiasts in early January that Hong Kong would become a magnet for startups launching crypto investors and that the city was interested in inviting more entrepreneurs from mainland China to set up their crypto startups in Hong Kong.

"Regulation is the future of this asset class, it brings trust, compliance and accountability,” Donald Day, chief operating officer of digital asset platform VDX, said in an interview. Day is also a former employee of the Securities and Futures Commission in Hong Kong. “This is what institutional investors and intermediaries require. Details will need to be examined, but this is a great step in the right direction and further ensures that Hong Kong stays at the global forefront of the digital asset space and its development."

The HKMA will require issuers of stablecoins to be licensed, starting with stablecoins that are pegged to fiat currencies. It will build in the ability to look at regulating other structures for stablecoin valuation in the future.

“An appropriate regulatory environment will help address financial stability risks possibly posed by stablecoins, and promote the orderly and sustainable development of the industry,” said Eddie Yue, Chief Executive Officer of the HKMA.

According to the announcement, “Appropriate regulatory requirements will be developed [in] areas such as but not limited to ownership, governance and management, financial resources requirements, risk management, anti-money laundering and counter-terrorist financing (“AML/CFT”), user protection, and regular audits and disclosure requirements.”

The conclusion to the survey offers a clear signal of where Hong Kong regulators would like to see Hong Kong head – becoming a rival to its nearest counterpart in trade and fintech, Singapore, as a global hub for cryptocurrency asset investing and innovation.

The announcement does however leave questions about whether innovations such as decentralized autonomous organizations (DAOs), which often have no operators and are managed mostly by code, will be regulated. Many DAOs use stablecoins of their own issuance without any KYC/AML and without any insight into the holdings or activities of their participants.

The director of the Securities and Futures Commission, Julia Leung, in January said the city’s exchange would reverse its earlier phobia of digital assets by allowing institutions to trade an increasing number of crypto asset products. Leung said the SFC was reviewing the framework for enabling retail trading of the same derivatives that are already listed on the Chicago Mercantile Exchange. The SFC already issues licenses for digital asset providers who list securities on the exchange, and the HKMA said in its Tuesday announcement that it is looking into ways to cooperate on establishing its regulations in this area.