Hong Kong passes stablecoin regulation to provide a legal framework for industry development

The Hong Kong Legislative Council officially passed the "Stablecoin Issuers Ordinance Bill" on May 21, 2024, providing the first complete regulatory framework for the stablecoin industry. The ordinance is expected to come into effect within this year and stipulates three categories of stablecoin-related activities that require a license: issuing fiat stablecoins in Hong Kong, issuing Hong Kong dollar stablecoins in Hong Kong or overseas, and actively promoting the issuance of fiat stablecoins to the public in Hong Kong.

According to the regulations, individuals or entities intending to issue or operate "designated stablecoins" in Hong Kong must apply for a license from the Hong Kong Monetary Authority. The Authority will review whether the applicants meet the minimum standards, which include capital strength, risk management, corporate governance structure, and internal control systems, among others. For example, license holders need to have a minimum capital of at least HKD 25 million.

Licenses do not have a fixed validity period, but if the license holder does not meet the minimum standards or encounters significant issues, the monetary authority can revoke or suspend the license. The monetary authority will also establish a "Registered License Holder List" for the public to query authorized entities.

The regulations stipulate that only designated licensed institutions can sell fiat stablecoins in Hong Kong, and only fiat stablecoins issued by licensed issuers can be sold to retail investors. These designated licensed institutions include stablecoin issuers licensed by the Financial Commissioner, banks, institutions holding Type 1 licenses issued by the Securities and Futures Commission, and virtual asset trading platforms licensed in Hong Kong.

The regulations also stipulate that engaging in regulated stablecoin activities without a license or unauthorized sale of designated stablecoins is a criminal offense, punishable by a fine of up to 5 million HKD and imprisonment for 7 years.

Other important regulations include:

1. 100% Reserve and Custody: Licensed issuers must maintain a robust stablecoin mechanism, ensuring that reserve assets consist of high-quality, highly liquid assets, and are properly segregated and safeguarded from the issuer's own assets.

2. Unconditional redemption mechanism: Holders of stablecoins have the right to redeem stablecoins at face value from the issuer, without any fees.

3. Strict compliance framework: Licensed issuers must meet a series of stringent regulatory requirements, including anti-money laundering, risk management, information disclosure, and qualified audits.

In addition to legislation, the Hong Kong Monetary Authority has also launched a stablecoin issuer sandbox. Currently, there are three groups of participants in the sandbox, namely a consortium of Standard Chartered Hong Kong, Anni Group, and Hong Kong Telecommunications, JD Coin Chain Technology (Hong Kong), and Yuan Coin Innovation Technology.

Insiders have expressed strong support for this, believing it will have a profound impact on the development of the digital asset market. Some legislative members have suggested that in the future, further promotion of stablecoin applications in areas such as physical retail and cross-border trade should be considered, and the possibility of releasing stablecoin interest to enhance market attractiveness should be explored.

With the passage of the regulations, some companies have begun to lay out related businesses. For example, a certain blockchain platform has announced that it will provide full-stack support for Hong Kong stablecoin and its reserve assets, accelerating the construction of on-chain infrastructure for the issuance, circulation, and management of stablecoins.

Overall, the passage of the "Stablecoin Issuers Ordinance Draft" marks an important step for Hong Kong in the field of digital finance, providing a clear legal framework and regulatory guidance for the healthy development of the stablecoin industry.