Hong Kong recently enacted stablecoin law, while positioning the city as an early leader in digital asset regulation, is sparking concern within the industry. Sources suggest that the new law’s strict customer identification rules, or know-your-customer (KYC) requirements, could slow down the adoption of stablecoins and ultimately hurt Hong Kong’s competitiveness in the global digital finance market.
The law, which took effect on August 1, is designed to regulate fiat-backed stablecoin issuers. However, the finalized KYC rules are proving controversial. They require issuers to verify the identity of every stablecoin holder, a measure that runs counter to the principles of privacy and anonymity often associated with the cryptocurrency market. This strict approach has caught the industry by surprise.
High level of scrutiny
The Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, has defended the new rules, calling them essential for combating money laundering and terrorism financing. The HKMA states that it is taking a prudent approach during the initial stages of regulation.
However, industry experts are concerned the high level of scrutiny will discourage stablecoin use. “This is a bit too strict and not good for acquiring users,” said Bo Tang, assistant director at the HKUST Institute for Financial Research. Tang explained that these rules could force a stablecoin recipient in a cross-border payment to open a new account in Hong Kong just to pass KYC checks. If stablecoin transactions become entirely name-based, they lose their advantages of efficiency and privacy over traditional payment systems.
Anonymous, unhosted wallets
Stablecoins are a type of cryptocurrency pegged to a stable asset, like the U.S. dollar, to maintain a constant value. They are valued for their ability to enable instant, borderless, and low-cost transfers, which gives them the potential to disrupt traditional payment systems.
Some in the industry believe Hong Kong’s KYC rules are even tougher than those in the U.S. “It’s not just KYC for those with accounts with the stablecoin issuer, it’s KYC for every stablecoin holder,” noted Ricky Xie, a Hong Kong-based crypto trader, who believes many overseas users may be deterred.
Market watchers predict that the high compliance standards will exclude many existing stablecoin users who prefer anonymous, unhosted wallets. According to Peter Brewin, PwC’s digital assets Asia lead, the primary users of HKMA-regulated stablecoins will likely be mainland Chinese companies using them for cross-border money transfers, trade, and payments.
The HKMA expects to grant the first stablecoin issuer licenses early next year, but it emphasizes that only “a handful” will be issued. Tang of HKUST suggested that the HKMA’s tight regulation might be an attempt to temper the investment frenzy in Hong Kong surrounding stablecoin and digital asset companies. This is supported by the fact that stablecoin-related stocks like ZhongAn Online and Bright Smart Securities & Commodities have seen their gains diminish since the new bill took effect.
