Hong Kong will not allow retail customers to trade stablecoins Hong Kong will not allow retail customers to trade stablecoins

Hong Kong will not allow retail customers to trade stablecoins

Hong Kong's securities watchdog warns that licensed platforms cannot provide interest-bearing or lending services to customers.

Hong Kong will not allow retail customers to trade stablecoins

Cover art/illustration via CryptoSlate. Image includes combined content which may include AI-generated content.

Hong Kong Securities and Futures Commission (SFC) has stated that retail traders will not be allowed to trade stablecoins pending new regulatory arrangements for these assets.

According to the SFC’s concluded a consultation paper on regulating virtual asset trading platforms by claiming that there is a need to focus on the risks of stablecoin and its regulations.

The SFC claimed that its reasoning was based on the need to ensure that stablecoin reserves are appropriately managed for price stability and that investors can exercise redemption rights. It added that if these risks are not adequately managed, they pose “fundamental implications for the stability of a stablecoin.”

The regulator highlighted the Hong Kong Monetary Authority’s (HKMA) discussion paper on stablecoins which required stablecoin issuers to be licensed and curtailed the proliferation of algorithmic stablecoins.

“A stablecoin which is unable to maintain its peg or return an investorโ€™s funds upon redemption cannot be said to be stable. In addition, heightened vulnerability to runs greatly affects their liquidity and renders them generally unsuitable for retail investors.”

Meanwhile, SFC noted that a new regulatory regime is expected to be implemented for stablecoins before the end of next year.

Retail access to crypto trading

While retailers would not be allowed to trade stablecoins, the SFC would allow licensed trading platform operators to serve retail investors with non-security tokens with at least 12 months of no bad records.

The SFC said it would implement robust measures to protect these investors, including ensuring suitability in the onboarding process, good governance, enhanced token due diligence, admission criteria, and disclosures.

SFC CEO Julia Leung said:

“Hong Kongโ€™s comprehensive virtual assets regulatory framework follows the principle of โ€˜same business, same risks, same rulesโ€™ and aims to provide robust investor protection and manage key risks. This will enable the industry to develop sustainably and support innovation.”

No lending, borrowing services

Meanwhile, virtual assets trading platforms licensed by the SFC cannot provide customers services such as earning, deposit-taking, lending, and borrowing.

According to the financial regulator, the primary function of a licensed platform is “to act as an agent and provide an avenue for the matching of orders between clients.” SFC added:

“Any other activities may lead to potential conflicts of interest and require additional safeguards. As such, licensed VA trading platforms will not be allowed to conduct these activities at this stage.”

Additionally, these platforms cannot provide their clients with algorithmic trading services.

The SFC also said licensed platforms must hold most of their client virtual assets in cold storage to mitigate against hacking and other cybersecurity risks.