On 12 March 2024, the Hong Kong Monetary Authority (HKMA) announced the launch of the FRS issuer sandbox arrangement,¹ aiming to support the development of the Web3 and virtual asset ecosystem in Hong Kong. This sandbox arrangement is a special programme which provides a controlled environment where a prospective FRS issuer can conduct experiments under relaxed regulatory conditions. It serves as a collaborative platform for regulators and businesses to develop new financial technologies safely and in accordance with standards.

Objectives and evaluation criteria

At its core, the sandbox initiative serves multiple objectives. Primarily, it acts as a platform through which the HKMA can communicate its supervisory expectations and compliance guidelines (e.g. reserves management and stabilisation, governance, user protection, AML/CFT, data transparency, etc.) to participating entities. Furthermore, the sandbox facilitates a dialogue wherein participants can provide feedback on proposed regulatory requirements, thereby ensuring that the eventual regulatory regime is both effective and conducive to industry growth.

In-scope FRS issuers

Under the proposed FRS regulatory regime, the following entities must obtain an FRS issuer licence from the HKMA:²

• any entity which issues an FRS in Hong Kong;
• any entity which actively markets its issuance of FRS to the Hong Kong public; and
• any entity which issues an FRS referencing the Hong Kong dollar.

These entities will benefit from participating in the sandbox by gaining valuable experience in navigating regulatory expectations and compliance requirements. Additionally, they can test their operations and business models in a controlled environment, allowing them to identify and address potential issues early on. Furthermore, participation provides an opportunity to establish constructive relationships with regulators, fostering trust and collaboration for future endeavours in the FRS issuance market.

Application procedure

Entities interested in participating in the sandbox arrangement are encouraged to register their interest by reaching out to the HKMA via stablecoin_sandbox@hkma.gov.hk. Throughout the evaluation process, applicants may be requested to provide additional information to facilitate a comprehensive assessment of their suitability for sandbox participation.

Applicants to the arrangement must demonstrate:

• genuine interest in and a reasonable plan on issuing FRS in Hong Kong;
• a concrete plan on participating in the sandbox; and
• a reasonable prospect of complying with the proposed regulatory requirements.

It is worth noting that acceptance into the sandbox does not confer endorsement from the HKMA nor guarantee future regulatory compliance. Sandbox participants wishing to obtain the official licence must apply separately once the regulatory regime is in place.

Transparency and governance

Transparency and accountability are paramount within the sandbox arrangement. Approved participants may have their information disclosed to the public and any announcements regarding participation status must receive prior approval from the HKMA. Additionally, the HKMA reserves the right to adjust sandbox requirements as deemed necessary based on the progress and proposals of participating entities.

Conclusion

With the launch of the sandbox arrangement for FRS issuers, the HKMA underscores its commitment to fostering innovation in Hong Kong's financial landscape while ensuring robust regulatory oversight. By providing a structured environment for collaboration and experimentation, the initiative is poised to accelerate the development of FRS projects, ultimately contributing to the growth and sustainability of the virtual asset ecosystem within the region.

Jacky Cheung, trainee solicitor of Dentons Hong Kong, is one of the authors of this article.

1. HKMA launches the stablecoin issuer sandbox arrangement (Hong Kong Monetary Authority) (12 March 2024).↩
2. Legislative Proposal to Implement the Regulatory Regime for Stablecoin Issuers in Hong Kong – Consultation Paper (Financial Services and the Treasury Bureau and Hong Kong Monetary Authority) (December 2023).↩