Hong Kong stablecoin trading for retail investors blocked until launch of regulatory framework

Hong Kong retail investors will not be allowed to trade stablecoins on exchanges until 2024, pending the launch of a framework to regulate their issuance and use.

Hong Kong’s Minister for Financial Services and the Ministry of Finance Christian Hui said the ban seeks to protect investors from serious risks associated with stablecoins. Hui pointed to the collapse of TerraUSD (UST) in 2022 and volatility issues affecting other stablecoins as reasons for a retail ban on stablecoins.

Hui added that concerns over stablecoin issuers’ reserves could make investors unable to redeem their holdings in the event of a black swan event. In light of sharp risks to investor safety, Hui added that Hong Kong residents will be allowed to dabble in stablecoins on exchanges following the rollout of a comprehensive legal framework.

Hong Kong has been moving forward with plans for a stablecoin rulebook since the start of the year, but appears to have adopted a slow and steady approach. In early 2023, the Hong Kong Monetary Authority (HKMA) published its recommendations for a “risk-based approach”, but progress has been marked by two rounds of public consultations.

Despite the seemingly slow pace of stablecoin efforts, the HKMA says a 2024 launch date is possible, but squashed theories that it will support the launch of algorithmic stablecoins.

“We are currently conducting the second round of consultation,” Chui said in a speech at the 2023 Shanghai Blockchain Week. “We hope that by the middle of next year, Hong Kong can announce the regulatory conditions for stablecoins, allowing stablecoin participants to issue stablecoins in Hong Kong.”

The warning against retail stablecoin trading follows Hong Kong’s Securities and Futures Commission (SFC) enforcement of JPEX, an unregistered cryptocurrency exchange. After investors reported losses of up to $200 million, the HKMA moved to introduce new rules banning digital currency service providers from using terminologies such as “deposits” and “savings plans.”

“These descriptions may mislead members of the public into thinking that these crypto firms are banks authorized in Hong Kong to whom they can entrust their savings,” the HKMA said.

Retailers basking in the heat of new gains

After months in limbo, Hong Kong lifted the ban on retail investors starting to trade digital currencies on approved exchanges. The SFC noted that the approved digital assets would be those with large market capitalizations such as BTC and Ethereum (ETH), excluding the offering of derivatives and stablecoins.

The approval follows plans to launch a new licensing scheme for digital currency service providers in the region, where the SFC has so far issued licenses to a handful of firms.

“Operators of virtual asset trading platforms that are prepared to comply with the SFC’s standards are welcome to apply for a license,” the SFC said. “Those who do not plan to do so should proceed to an orderly closure of their business in Hong Kong.”

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