The Hong Kong Monetary Authority is looking to roll out a comprehensive regulatory framework for fiat-referenced stablecoin (FRS) issuers, according to an announcement from the regulator and the Financial Services and the Treasury Bureau (FSTB).

The news comes alongside a proposal for legislation that was released on Wednesday.

"We believe that a well-regulated environment is conducive to the sustainable and responsible development of the stablecoin ecosystem in Hong Kong," said HKMA Chief Executive Eddie Yue in a press release.

The new regime would require foreign FRS issuers to establish a physical presence in Hong Kong, require that issuers custody reserves at Hong Kong banks, and prohibit issuers from paying interest to holders.

"Non-Hong Kong incorporated companies, other than authorized institutions incorporated outside Hong Kong, intending to apply for a licence will be required to establish a subsidiary in Hong Kong," the HKMA wrote in its report.

A key aspect of the regulation is the custody of reserve assets. On that point, the HKMA noted that, "safekeeping reserve assets with licensed banks in Hong Kong could provide greater user protection in case of business disruptions or failures."

Emphasizing the importance of stability, the regulator said it would mandate full backing of stablecoins—meaning that rules there would require 1:1 backing for each token issued. "We maintain that the amount of FRS issued must always be fully backed by reserve assets at any given point in time," the report notes.

The HKMA will have extensive powers to license and supervise FRS issuers. This includes the authority to impose ongoing conditions on licenses and adjust regulatory parameters as needed, according to the proposed legislation.

"The establishment of a licensing regime for FRS issuers will further strengthen the [virtual asset] regulatory framework in Hong Kong in line with international standards," said Christopher Hui, Secretary for Financial Services and the Treasury in the press release.

The proposed legislation was heavily influenced by a consultation with industry players that wrapped up in February 2024. The HKMA said it received 108 submissions from various stakeholders. It plans to introduce its proposed legislation as a bill to the Legislative Council later this year.

There's been growing interest in rolling out a stablecoin in Hong Kong. In February, the General Chamber of Commerce proposed the issuance of a stablecoin backed by the Chinese yuan.

In their budget recommendations, the Chamber suggested that the government consider "RMB stablecoins or stablecoins backed by a basket of different currencies, including RMB, in addition to HKD or USD stablecoins."

Edited by Stacy Elliott.