Regulation in a Dilemma: Hong Kong Issues Strictest Stablecoin Regulations

On August 1st, the highly anticipated Hong Kong stablecoin regulations officially came into effect.

Regulation on both sides of the ocean presents a stark contrast, and the landscape of encryption is also beginning to accelerate its differentiation from this moment on.

In terms of overall requirements, the draft of the regulation in June had no significant differences, but the implementation details can only be described as stringent. On the eve of the regulation's official implementation, on July 29, the Hong Kong Monetary Authority released a series of supporting regulatory documents regarding the new regulation, including the consultation summary and guidelines for "Regulatory Guidelines for Licensed Stablecoin Issuers"; the consultation summary and guidelines for "Guidance on Combating Money Laundering and Terrorist Financing (Applicable to Licensed Stablecoin Issuers)"; the "Summary of the Licensing System and Application Procedures for Stablecoin Issuers" related to the licensing system and application process; and the "Summary of Transitional Provisions for Existing Stablecoin Issuers."

In short, to meet anti-money laundering risks, stablecoin issuers must not only verify user identities and retain real-name data for more than 5 years, but also must not provide services to anonymous users. Furthermore, they have an obligation to verify the identities of every stablecoin holder in the initial stages. The Monetary Authority has also provided clarification; Assistant Chief Executive (Regulation and Anti-Money Laundering) Chen Jinghong pointed out that, given the current industry's continuous monitoring tools have not convinced the Monetary Authority that they can effectively reduce money laundering risks, and that international organizations such as the Bank for International Settlements emphasize the importance of preventing money laundering with stablecoins, the Monetary Authority will adopt a "risk-based but cautious" regulatory approach.

However, from the perspective of the scenario, especially in cross-border payments in physical scenarios, it is almost impossible to verify the identity of anonymous holders in offshore accounts in real-time, let alone cover every holder in a large-scale payment system. Practically speaking, to a certain extent, this move essentially excludes other types of applicants outside of banking institutions. It is worth noting that under this regulation, Hong Kong stablecoins have also basically bid farewell to DeFi protocol interactions, as existing interaction wallets are all anonymous. In comparison, the competitiveness of Hong Kong stablecoins will be significantly reduced compared to the openly usable USDT and USDC.

Such a stringent implementation path has led to Hong Kong's stablecoin regulations being dubbed the "strictest stablecoin regulations in the world," which is not without reason. Interestingly, the last region recognized by the market for having the strictest regulations was Singapore, which is known alongside Hong Kong as the "twin stars." In June this year, the Monetary Authority of Singapore (MAS) released the final policy guidelines for Digital Token Service Providers (DTSP). Due to the strict regulations of "no license, no service" and "full industry chain jurisdiction," the market has also seen a wave of Web3 retreat.

From the perspective of specific measures, the first is to abandon the original traditional model of jurisdiction first and then follow the law, and will clarify the reclassification criteria for crypto assets, provide clear disclosure norms, exemption conditions and safe harbor mechanisms for common on-chain economic activities such as airdrops, ICOs, and staking, and will adopt different regulatory models according to the nature of different assets; The second is to give institutional legitimacy to decentralized applications such as Defi, provide a clear path for on-chain software developers who do not rely on centralized intermediaries, protect developers of decentralized software, and let decentralized software have a place in the financial market; The CSRC will formulate a regulatory framework to promote the implementation of this idea, such as drafting a regulatory framework to allow securities and non-securities types of crypto assets to coexist and trade on SEC-registered platforms, and relaxing the listing conditions for certain assets on non-registered exchanges (such as state-licensed platforms); Fourth, institutional and service guarantees, the introduction of an "innovation exemption mechanism", with commercial viability as the core, allows emerging business models and services that do not fully comply with the existing rules to be quickly brought to market, but such service providers are required to comply with the requirements of regular reporting to the SEC, the introduction of whitelisting or certification pool functions, and the requirement to allow only security tokens that meet compliance functional standards (such as ERC3643) to be allowed to circulate.

It is not difficult to foresee that the "American-centered" pattern of the crypto industry will be further strengthened, and the US market will become an important battleground for determining the development of crypto projects. Other regions may be destined to take a differentiated path as a subsidiary.