Hong Kong is advancing its vision to become a leading virtual asset hub through a comprehensive regulatory framework. A key pillar of this strategy is the proposed regulatory regime for fiat-backed stablecoin issuers, developed by the Financial Services and the Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA).
This article provides a clear overview of the proposed licensing system, its core requirements, and what it means for the future of digital assets in Hong Kong.
Background and Policy Objectives
The push to regulate stablecoins, particularly those backed by fiat currencies, stems from their potential to bridge the virtual and traditional financial worlds. Regulators recognize that while they offer innovation, they could also become channels for financial risk to spill over into the broader economy.
The key policy goals of the new regime are:
- To mitigate potential risks to monetary and financial stability.
- To provide sufficient protection for stablecoin users.
- To establish a clear and internationally aligned regulatory environment.
- To support the sustainable and responsible development of Hong Kong’s virtual asset ecosystem.
Definition of Regulated Stablecoins
The proposed law defines a “stablecoin” as a cryptographically secured digital representation of value that is expressed as a unit of account, acts as a medium of exchange, and is transferable electronically. Crucially, it must purport to maintain a stable value relative to a specific asset or basket of assets.
A “fiat-backed stablecoin” is a stablecoin that is specifically referenced to one or more fiat currencies. Issuing these in Hong Kong will be a regulated activity.
Scope of Regulated Activities
The core regulated activity is the “issuance” of a fiat-backed stablecoin. A license from the HKMA will be required to:
- Issue or advertise the issuance of a fiat-backed stablecoin in Hong Kong.
- Issue a stablecoin that purports to be referenced to the Hong Kong dollar.
- Actively market the issuance of a fiat-backed stablecoin to the Hong Kong public.
This “active marketing” rule applies to any entity, including intermediaries promoting an unlicensed issuer’s stablecoin, making it a criminal offense. 👉 Explore more about regulatory compliance strategies
Key Licensing Requirements and Conditions
The proposed regime establishes a rigorous set of rules for licensed issuers.
Reserve Management and Stabilization Mechanism
- Full Backing: Stablecoins must be fully backed at all times by high-quality, high-liquidity reserve assets of equal or greater value.
- Investment Restrictions: Reserve assets are limited to secure instruments like cash, bank deposits, and high-quality government securities. Their tokenized forms are also permitted.
- Custody: Assets must be held in segregated accounts, preferably with licensed banks in Hong Kong, under robust trust arrangements for enhanced protection.
- No Interest: Issuers are prohibited from paying interest to users. Any gains or losses from managing the reserve assets belong to the issuer.
- Audit and Disclosure: Independent monthly audits of the reserve assets are mandatory. Issuers must also regularly publicly disclose the total stablecoins in circulation and the composition of their reserves.
Redemption Requirements
Users must have the right to redeem their stablecoins at par value, in the referenced fiat currency, within one business day of a request and without unreasonable conditions.
Corporate and Governance Structure
- Local Presence: Issuers must be companies incorporated in Hong Kong with a physical registered office. Key management personnel must be based in Hong Kong.
- Fit and Proper: All controllers, CEOs, and directors must be deemed “fit and proper” by the HKMA, with changes requiring prior approval.
- Capital Requirements: A minimum paid-up capital of HKD 25 million or 2% of the stablecoins’ face value in circulation (whichever is higher) is required.
Other Operational Rules
Issuers must comply with strict anti-money laundering (AML) and counter-financing of terrorism (CFT) regulations, establish effective risk management frameworks, and provide users with accessible complaint handling systems. A comprehensive white paper detailing the stablecoin’s mechanics and risks is required before issuance.
Who Can Offer Stablecoins in Hong Kong?
Only licensed entities can offer fiat-backed stablecoins to the Hong Kong public:
- Licensed stablecoin issuers (can only offer their own stablecoins).
- Authorized institutions (banks).
- SFC-licensed corporations.
- SFC-licensed virtual asset trading platforms (VATPs).
These latter three entities can only offer stablecoins issued by an HKMA-licensed issuer to retail investors. Offering stablecoins from unlicensed issuers is restricted to professional investors only.
The HKMA’s Supervisory and Enforcement Powers
The HKMA will have broad powers to ensure compliance, including:
- The authority to collect information, issue directives, and make rules.
- Powers to investigate suspected offenses.
- The ability to impose a range of sanctions for non-compliance, including fines of up to HKD 10 million or three times the profit gained/loss avoided (whichever is higher), and license suspension or revocation.
Transition Arrangements and Implementation Timeline
Existing stablecoin issuers with a “meaningful and substantive presence” in Hong Kong before the new law takes effect will have a 6-month grace period. They must apply for a license within the first 3 months to continue operating. The government aims to introduce the bill to the Legislative Council within the year.
HKMA’s Stablecoin Issuer Sandbox
The HKMA has launched a sandbox to allow potential issuers to test their business models and discuss regulatory expectations. The first cohort of participants, announced in July 2024, includes a mix of technology firms, banks, and Web3 companies. Sandbox participation is not a prerequisite for a license application but provides valuable guidance.
Frequently Asked Questions
What is a fiat-backed stablecoin?
A fiat-backed stablecoin is a type of digital currency designed to maintain a stable value by being fully backed by reserves of traditional government-issued currency, like US dollars or Hong Kong dollars.
Who needs a license under this new law?
Any entity that issues a fiat-backed stablecoin in Hong Kong, issues a Hong Kong dollar-referenced stablecoin anywhere, or actively markets such a stablecoin to the Hong Kong public will require a license from the HKMA.
Can a licensed issuer launch multiple stablecoins?
Yes, a licensed issuer can issue multiple different stablecoins without setting up separate entities, but it must obtain prior approval from the HKMA for each new stablecoin and justify its use case.
What are the reserve asset requirements?
Reserves must be high-quality and high-liquidity assets, held in segregation from the issuer’s own assets. They must always be sufficient to meet redemption requests at full par value.
How does this affect existing stablecoin projects?
Existing projects with a substantive presence in Hong Kong will have a limited transition period to either apply for a license or wind down their Hong Kong operations in an orderly manner.
Are other types of stablecoins, like algorithmic stablecoins, regulated?
The current proposal focuses on fiat-backed stablecoins. Algorithmic stablecoins, which use algorithms to maintain price without full reserve backing, will not be eligible for a license under this regime.