Circle Responds to Hong Kong’s Proposed Stablecoin Regulatory Framework

On February 29, 2024, Circle submitted its response to the Hong Kong Financial Services and the Treasury Bureau and the Hong Kong Monetary Authority (HKMA) on the proposed regulations for stablecoin issuers in Hong Kong. Properly regulated stablecoins can advance the development of Hong Kong’s Web3 ecosystem and its role as an international financial center.

Circle commends the Authorities on their recognition of the unique technological and economic capabilities of fiat-referenced stablecoins (FRS) and creation of a framework that provides a regulatory regime for FRS that is separate from other digital assets and payments instruments. 

A clear and risk-based regulatory framework will mitigate any monetary risks posed by stablecoins, protect consumers, and lower cross-border payment costs for businesses and the public by lowering fees and shortening settlement times. 

Circle commends the Authorities’ approach to first introduce legislation for a regulatory framework for stablecoins and then address other virtual asset activities in a separate framework. This avoids a one-size-fits-all solution for stablecoins and virtual assets. The Authorities’ proposed approach of clearly defining FRS and regulating FRS activity under the HKMA allows for clear supervision of FRS issuers. 

Circle’s comments to the Authorities underscore the following points:

• Stability: Circle agrees with the Authorities that the FRS issuer must be responsible for ensuring that the FRS remains stable, as this is critical for a trusted store of value.
  
  
• Reserve Composition and Use: Circle commends the Authorities on proposing a regulatory framework around reserves management that both ensures the stability of the FRS and protects consumers. Circle is already operating in accordance with the proposed reserve requirements - full backing in high-quality liquid assets (HQLA) - that are fully segregated and protected for redemption claims. Circle also supports the HKMA’s position that FRS issuers should be prohibited from fractionalizing or rehypothecating the reserve assets that back outstanding FRS in circulation in order to maintain its value and stability. 
  
  
• Transparency: Circle agrees with the proposed disclosure requirements for issuers of FRS, which include: 
  • Daily disclosures on the total amount of FRS in circulation and the value of reserve assets.
  • Weekly disclosures of the composition of reserve assets; and, monthly attestations by an independent auditor. This framework reflects the emerging international regulatory framework around FRS disclosures and Circle’s current operating posture. 
  • Circle also notes the importance of the other proposed disclosure requirements, including a company white paper and redemption policies. 
    
    
• Countering Illicit Activities: Circle takes its anti-money laundering/countering the financing of terrorism and sanctions obligations seriously across all jurisdictions and therefore, we commend the HKMA for stating that FRS issuers are held to the applicable provisions of Hong Kong’s existing Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO). Similarly, Circle supports that FRS issuers must have in place appropriate risk management processes and measures for its operations. 
  
  
• Interoperability and Equivalence: Circle agrees that proper licensure is critical for the safe provision of FRS to the retail public. Circle encourages the Authorities to consider offering a licensing path to FRS issuers licensed under foreign laws and regulations that are deemed equivalent to Hong Kong’s regulations for FRS issuers. 
  • Such a framework would affirm Hong Kong’s status as an international financial center. An interoperable architecture would allow well-regulated, international stablecoins to be used by retail users, corporates, and small-medium enterprises, who would benefit from lower remittance and cross-border trade costs and shorter settlement times.