Last week Hong Kong enacted legislation supporting the issuance of stablecoins. We noted that most of the relevant details are delegated to rulemaking by the Hong Kong Monetary Authority (HKMA). Yesterday the HKMA published two consultation documents outlining the draft guidelines for stablecoin issuers and anti-money laundering procedures. Responses are required by the end of June.
One of the more surprising rules relates to currency. While the backing assets need to match the currency of the stablecoin, this rule is relaxed for the Hong Kong Dollar (HKD) given its peg to the US dollar. So US dollar assets are allowed for a HKD stablecoin.
On the one hand, one can view this as appeasing the desires of the US administration to expand demand for US Treasuries. However, it is more likely a financial stability issue because of the relatively smaller volumes of HKD securities. If there are large volumes of HKD stablecoins issued, the demand for HKD denominated securities could be significant. If there were a sudden spike or fall in demand this could create stability issues.
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