Interpretation of Hong Kong's Stablecoin New Regulations: How Will It Reshape the Industry Landscape?

Authors of this article: Bai Zhen Jen, Huang Wenjing

Introduction

On 21 May 2025, the passage of the Hong Kong Stablecoin Ordinance in the Hong Kong Legislative Council marked a critical turning point for regulation, which was gazetted on 30 May 2025 and is scheduled to come into effect on 1 August 2025. Fiat-pegged stablecoins (FRS) are no longer in the grey area of crypto finance, but are part of a formal and institutionally regulated legal framework. The Ordinance represents a deliberate recalibration: it aims to position Hong Kong as a compliant, forward-looking virtual asset hub capable of hosting the next generation of programmable finance under the rule of law. This article analyzes the key provisions, strategic positioning, and practical impact of the regulation, and clarifies its differences from related technologies such as physical asset tokenization (RWA).

Legal Infrastructure

The legislation constructs a complex semantic system about digital value. Stablecoins are defined not only as a functional instrument, but also in technical, economic, and legal terms: they need to be cryptographically secured, used as a store of value or medium of exchange, and run on distributed ledger technology (DLT). "Specific stablecoins" further limit the scope to tokens that are pegged to the official currency or other units approved by the Hong Kong Monetary Authority ("HKMA").

The scope of regulated activities is broad, covering not only issuance and redemption but also marketing, operational participation, and even indirect inducement involving Hong Kong residents. This broad definition ensures the coverage capability of regulation while minimizing the regulatory arbitrage space based on geography or type of activity.

The principle of fiat currency backing is at the core. The Regulation clearly states that any "specified stablecoin" must be fully redeemable in its linked fiat currency, especially the Hong Kong dollar. This is not only a mechanical requirement, but also a fundamental safeguard mechanism. Fiat support ensures that stablecoins can operate as credible monetary instruments rather than speculative crypto assets. The HKMA requires reserve assets to be high-quality, liquid assets (e.g. cash, short-term treasury bonds) denominated in the same fiat currency to which the stablecoin is pegged. This eliminates the risk of currency mismatch, i.e., the mismatch between the currency of the reserve asset and the currency of the stablecoin, which could lead to depreciation of value. In addition, it insulates users from the risk of volatility contagion – the impact of panic selling on the stablecoin market caused by the collapse of unpegged crypto assets.

The regulations explicitly prohibit anchoring assets that are highly volatile or illiquid, such as real estate tokens, commodity portfolios, or mixed-asset indices. If a token is not explicitly redeemable for fiat currency and is not explicitly backed by fiat currency, it is not considered a stablecoin and cannot enjoy legal protection. This approach effectively prevents regulatory arbitrage and prevents financial engineering from blurring the line between asset-backed securities and monetary instruments, thus reflecting Hong Kong's position on financial stability over speculative or synthetic innovation.

Licensing Framework

The regulation introduces a comprehensive prudential licensing system, emphasizing the systemic importance of stablecoin issuers. Key requirements include:

• Capital Bottom Line: The minimum paid-in capital is HKD 25 million.
• Reserve Structure: The issuer must maintain high-quality, liquid reserve assets (such as cash and short-term government bonds) that correspond to the circulating stablecoin at a 1:1 ratio.
• Isolation and Legal Protection: Reserve assets must be placed in a trust or similar closed mechanism, and cannot be used for other creditors in case of bankruptcy.
• Redemption Mechanism: There must be a mechanism in place to ensure that redemption requests are fulfilled at face value in real-time; delays or additional fees constitute a legal violation.
• Governance Review: The appointment of shareholders, directors, and stablecoin managers must be approved by the Monetary Authority and must continuously meet the "fit and proper" standards and disclosure obligations.

The licensee must also continuously fulfill related obligations, including paying annual fees, reporting significant changes, and submitting annual compliance reports.

In addition, on June 6, the Financial Secretary issued a notice allowing unlicensed issuers to offer non-regulated stablecoin proposals to professional investors as defined under the Securities and Futures Ordinance, while retaining some practical space without crossing regulatory red lines.

Regulatory Authority and Law Enforcement Tools

The regulatory authority of the Monetary Authority is equipped with powerful tools:

• Investigation Authority: Authorized investigators may request documents, conduct on-site inspections, and require sworn statements.
• Sanction Mechanism: The regulations empower the Monetary Authority with multi-level sanctioning authority, including fines, revocation or cancellation of licenses, public warnings, confiscation orders, and appointment of statutory managers; the Monetary Authority has also conducted public consultations on the detailed regulatory requirements under the regulations, focusing on core compliance provisions such as anti-money laundering and combating the financing of terrorism, laying the groundwork for future enforcement operational guidelines.
• Management Intervention: The Monetary Authority can appoint a statutory manager to take over a licensed entity that is experiencing operational difficulties—this was originally a measure exclusive to systemic banks.
• Arbitration Mechanism: An independent "Stablecoin Arbitration Office" is responsible for judicial review of sanction decisions, license approvals, and investigative actions.

Prohibited Conduct and Criminal Liability: Drawing the Line Between the Laws

The regulations clearly specify the activities that market participants in the virtual asset market are prohibited from engaging in, enhancing legal certainty and strengthening market discipline. Key prohibitions include:

• Unlicensed Operation (Article 9): Engaging in regulated activities related to stablecoins (including issuance, redemption, and management) or claiming to engage in related activities constitutes a criminal offense, regardless of whether it is based in Hong Kong, as long as its activities are directed at the Hong Kong market.
• Issuance of Specific Stablecoins without Authorization (Article 9): Providing specific stablecoins to the public without obtaining appropriate authorization constitutes an independent criminal offense;
• Advertising Restrictions (Article 10): If a party is unlicensed or not exempt, publishing or preparing to publish advertisements indicating their involvement in stablecoin activities or the issuance of stablecoins constitutes a crime;
• Fraud and Misleading (Article 11): Any attempt to commit fraud, mislead, or engage in false advertising regarding stablecoin transactions is a criminal offense, including false statements about reserve support, redemption rights, or relationships with licensed entities;
• Inducement Offense (Article 12): It constitutes a criminal offense to induce others to purchase, dispose of, subscribe to, or underwrite specific stablecoins through false statements or disregard for the truth.

Transitional Provisions

The regulation is scheduled to take effect on August 1, 2025, and includes a time-limited transitional arrangement: Stablecoin issuers that have been operating substantially in Hong Kong before the formal implementation of the regulation may continue to operate for six months if they submit a license application within the first three months. However, this is not an indefinite or unconditional exemption; those without a license must exit the market or complete the authorization process in accordance with the law.

International Comparison and Hong Kong's Differentiated Positioning

Compared to the EU's Market in Crypto-Assets Regulation (MiCA), Singapore's Payment Services Act 2019, and the state-level remittance licensing system in the United States, Hong Kong's regulations exhibit a unique regulatory approach:

• Mandatory Redemption Obligation at Par Value: Most jurisdictions (including MiCA and the US MTL system) allow for redemption to be delayed or determined by the issuer, for example, MiCA allows for redemption within five working days, while Hong Kong mandates immediate redemption at par value.
• Introduction of a Legal Management Mechanism: The "pre-bankruptcy intervention rights," which are rarely found in cryptocurrency asset legislation, have been explicitly introduced in the Hong Kong regulations, originally an exclusive tool for banks.
• Intersection with Bank Regulation: Regulatory requirements such as capital requirements, reserve segregation, and "fit and proper" standards are similar to those of traditional deposit-taking institutions, blurring the lines between token issuers and traditional financial intermediaries.

This strategic difference reflects Hong Kong's priority for stability and fiat currency anchoring, rather than simply pursuing market growth or issuer flexibility.

Tokenization of Physical Assets: Key Distinctions

A common misconception is that the compliance of stablecoins implies that RWAs are also indirectly recognized. This is not the case. The regulation does not provide a direct path or legal recognition for RWA projects.

Stablecoins operate within the framework of fiat currency, while RWA involves tokenizing domestic assets (such as real estate, stocks, and bonds). The regulations emphasize that there are still regulatory gaps for RWA, with major challenges including:

• Cross-border asset transfer: If assets located in mainland China are tokenized, it involves foreign exchange control, securities regulations, and capital account supervision.
• QFII Restrictions: Unless QFII/RQFII approval is obtained through traditional channels, domestic assets may not be used for tokenization across borders.
• Stablecoin License ≠ RWA Legitimacy: Obtaining FRS permission does not equate to being legally allowed to engage in RWA activities, especially for illiquid, unverified, or assets in a "firewall" state.

RWA projects need to address their independent legal challenges. Stablecoins can serve as payment or collateral tools within the RWA ecosystem, but they do not solve the core legal issues of cross-border asset circulation.

Actual Impact and Industry Adjustment

The new regulations will fundamentally change the way virtual asset companies operate in Hong Kong. Both issuers and investors must reassess their strategies, partners, and legal risks.

• Issuer: The era of quickly launched products is over. The issuance of stablecoins requires robust financial governance, real currency backing, and clear legal responsibilities. The capital requirement starting at HKD 25 million, along with audit fees, reserve checks, and real-time redemption systems, significantly raises the threshold. Unlicensed issuance is no longer a "risk," but a criminal offense.
• Banks and Trust Institutions: Naturally, they can become reserve custodians, compliance verifiers, and risk managers. In the future, they may develop services such as stablecoin treasury management and KYC support, but they also need to upgrade their systems to support tokenized transactions and assess legal responsibilities.
• Investors: Enhanced protection, temporary reduction in choices. The separation of forced redemption rights and reserves has increased investment confidence. Although the initial selection of stablecoins may decrease, it will be easier in the long run to identify truly compliant stablecoins that are backed by fiat.
• Global Platform: It is no longer permissible to "incidentally" provide stablecoins to Hong Kong. Under the new regulations, a dedicated compliance strategy must be established. Unlike the EU MiCA passport system, Hong Kong does not recognize external licenses. Promoting or providing asset basket-backed tokens to users in Hong Kong is highly likely to violate advertising laws.
• Developers and DeFi Builders: Technology cannot surpass the law. Any protocol development that interacts with fiat-backed stablecoins must prioritize compliance from the very beginning, embedding a verification system for the status of stablecoin issuers.

Conclusion

Hong Kong's stablecoin regulations are a deliberate strategic choice: to include crypto finance in an institutional accountability system. By integrating licensing, regulation and enforcement into a unified framework, Hong Kong sends a clear message to global markets that digital finance must operate under the rule of law. Market participants should be prepared for rigorous audits, reserve checks, and ongoing regulatory dialogues. Those who adapt will not only survive, but also shape the future of compliant digital finance in Asia.

But deeper questions remain: Can programmable money thrive in a rule-of-law economy? Can decentralized technology coexist with centralized regulation? Can crypto innovation gain public trust without enforceable redemption rights and institutional accountability? These challenges are further magnified by the following unresolved cracks: How to balance AML/CFT regulation while retaining anonymity features; and how mainland capital controls interact with the cross-border circulation of HKD stablecoins or the tokenization of mainland assets.

These tensions reinforce the core proposition of Hong Kong: the key to financial evolution lies not in speed, but in sovereignty, stability, and systemic integrity. Only regulation can establish trust where technology cannot self-validate trust. Without trust, innovation will ultimately fail.