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 establishes a complex semantic system regarding digital value. Stablecoins are defined not only as functional tools but also delineated from technical, economic, and legal dimensions: they must have encryption protection, serve as a medium for value storage or exchange, and operate on distributed ledger technology (DLT). "Specific stablecoins" further limits the scope to tokens anchored to official currencies or other units approved by the Hong Kong Monetary Authority ("HKMA").
Regulated activities are broad in scope, covering not only issuance and redemption but also marketing, operational participation, and even indirect inducement involving Hong Kong residents. This broad definition ensures the regulatory coverage capability while minimizing the regulatory arbitrage space based on geography or activity type.
The principle of fiat support is at the core. The regulations clearly stipulate that any "specific stablecoin" must be fully redeemable in the fiat currency to which it is pegged, 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 a reliable monetary tool rather than speculative encryption assets. The Monetary Authority requires that reserve assets must be high-quality, liquid assets (such as cash and short-term government bonds), and denominated in the same fiat currency to which the stablecoin is pegged. This move eliminates currency mismatch risks, meaning that a mismatch between the reserve asset currency and the stablecoin currency could lead to a depreciation of value. Furthermore, it also isolates users from exposure to volatility contagion risks—namely, the impact of panic selling triggered by the plummeting of non-pegged encryption assets on the stablecoin market.
The regulations explicitly prohibit using assets with high volatility or low liquidity as the anchoring basis, such as real estate Tokens, commodity portfolios, or mixed asset indices. If Tokens cannot be clearly redeemed for fiat, and there is no clear fiat support, they are not considered stablecoins and cannot enjoy legal protection. This approach effectively prevents regulatory arbitrage and stops financial engineering from blurring the lines between asset-backed securities and monetary instruments, thereby reflecting Hong Kong's position prioritizing financial stability over speculative or synthetic innovations.
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, short-term government bonds) corresponding to the circulating stablecoins at a 1:1 ratio. Isolation and legal protection: The reserve assets must be placed in a trust or similar closed mechanism, and cannot be used by other creditors in the event of bankruptcy. Redemption mechanism: There must be a mechanism in place to ensure real-time fulfillment of redemption requests at face value, with delays or additional fees constituting a legal violation. Governance review: The appointment of shareholders, directors, and stablecoin management personnel must be approved by the Monetary Authority and must continually meet the 'fit and proper' standards and disclosure obligations.
Licensees must also continuously fulfill relevant obligations, including paying annual fees, reporting significant changes, and submitting annual compliance reports.
In addition, the Financial Secretary announced on June 6 that unlicensed issuers are allowed to offer non-regulated stablecoin proposals to professional investors as defined under the Securities and Futures Ordinance, while retaining some operational space without crossing regulatory red lines.
Regulatory Authority and Law Enforcement Tools
The regulatory power of the Monetary Authority is equipped with strong tools:
Investigation Authority: Authorized investigators may request documents, conduct on-site inspections, and demand sworn statements. Sanction Mechanism: The regulations grant the Monetary Authority multi-tiered sanctioning powers, including fines, suspension or revocation of licenses, public warnings, confiscation orders, and the appointment of statutory managers; the Monetary Authority has also conducted public consultations on detailed regulatory requirements under the regulations, focusing on core compliance provisions such as anti-money laundering and combating the financing of terrorism, laying the operational groundwork for future law enforcement. Management Intervention: The Monetary Authority may appoint a statutory manager to take over the operations of licensed entities in financial distress - this was originally a measure reserved for systemic banks.
Arbitration mechanism: An independent "stablecoin arbitration office" is responsible for judicial review of sanction decisions, license approvals, and investigative actions.
Prohibited Acts and Criminal Liability: Clarifying Legal Boundaries
The regulations clearly outline the activities that participants in the virtual asset market are prohibited from engaging in, enhancing legal certainty and reinforcing market discipline. Key prohibitions include:
Unlicensed Operations (Article 9): Engaging in regulated activities related to stablecoins (including issuance, redemption, management) or claiming to engage in related activities constitutes a criminal offense, regardless of whether they are based in Hong Kong, as long as their activities are directed at the Hong Kong market; Illegal Issuance of Specific Stablecoins (Article 9): Providing specific stablecoins to the public without obtaining the appropriate license constitutes an independent criminal offense;
Advertising Restrictions (Article 10): If a party is unlicensed or not exempt, publishing or preparing to publish advertisements that indicate their participation in stablecoin activities or issuance of stablecoins constitutes a crime;
Fraud and Misrepresentation (Article 11): Any attempt to commit fraud, misrepresentation, false advertising, etc., regarding stablecoin transactions is a crime, 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 for, or underwrite specific stablecoins through false statements or disregard for the truth.
transitional provisions
The Ordinance is set to come into effect on 1 August 2025 with a limited-time transitional arrangement: stablecoin issuers that have been physically operating in Hong Kong before the Ordinance comes into effect can continue to operate for six months if they submit a licence application within the first three months. However, this is not an indefinite or unconditional exemption, and those who are not licensed are required to withdraw from the market or complete the authorisation process in accordance with the law.
International comparison and differentiated positioning of Hong Kong
Compared to the EU's Markets 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 unique regulatory choices:
Mandatory par value redemption obligation: Most jurisdictions (including MiCA and the U.S. MTL system) allow for redemption delays or issuer discretion; for example, MiCA permits redemption within five working days, while Hong Kong mandates immediate redemption at par value. Introduction of a statutory management mechanism: The "pre-bankruptcy intervention rights," which are rarely seen in cryptocurrency legislation, are explicitly introduced in Hong Kong regulations, originally an exclusive tool for banks.
Crossing with bank regulation: Capital requirements, reserve segregation, "fit and proper" standards and other regulatory requirements 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 anchoring, rather than merely pursuing market growth or issuer flexibility.
Tokenization of Physical Assets: Key Distinctions
A common misconception is that the compliance of stablecoins means that RWA is 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 a fiat framework, while RWA involves bringing domestic assets (such as real estate, stocks, bonds) into token form. 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 legality: Obtaining FRS approval does not equate to the legal ability to conduct RWA business, 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 resolve 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 launching products is over. The issuance of stablecoins requires robust financial governance, real currency backing, and clear legal responsibilities. The capital requirement starting from HKD 25 million, along with audit fees, reserve checks, and real-time redemption systems significantly raise 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, there may be developments in stablecoin treasury management, KYC support, and other services, but systems must also be upgraded to support tokenization transactions and assess legal liabilities.
Investors: Enhanced protection, reduced choices for now. The isolation of forced redemption rights and reserves has boosted investment confidence. Although the initial choices for stablecoins may decrease, in the long run, it will be easier to identify truly compliant stablecoins supported by fiat.
Global platforms: 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 Hong Kong users is highly likely to violate advertising laws.
Developers and DeFi builders: Technology cannot surpass the law. Any protocol development that interacts with fiat stablecoins must prioritize compliance from the very beginning and embed a stablecoin issuer status verification system.
Conclusion
Hong Kong's stablecoin regulations are a strategic choice made with intention: to incorporate cryptocurrency finance into a system of institutional accountability. By integrating licensing, regulation, and enforcement within a unified framework, Hong Kong sends a clear signal to the global market: 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 currency thrive in a rule-of-law economy? Can decentralized technology coexist with centralized regulation? Can encryption innovation gain public trust without enforceable redemption rights and institutional accountability? These challenges are further amplified by the following unresolved fractures: How to balance AML/CFT regulation while retaining anonymity features; and how mainland capital controls interact with the cross-border circulation of Hong Kong dollar 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.
The content is for reference only, not a solicitation or offer. No investment, tax, or legal advice provided. See Disclaimer for more risks disclosure.
Mankiw Research | Interpretation of Hong Kong's new stablecoin regulations, how will it reshape the industry landscape?
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 establishes a complex semantic system regarding digital value. Stablecoins are defined not only as functional tools but also delineated from technical, economic, and legal dimensions: they must have encryption protection, serve as a medium for value storage or exchange, and operate on distributed ledger technology (DLT). "Specific stablecoins" further limits the scope to tokens anchored to official currencies or other units approved by the Hong Kong Monetary Authority ("HKMA"). Regulated activities are broad in scope, covering not only issuance and redemption but also marketing, operational participation, and even indirect inducement involving Hong Kong residents. This broad definition ensures the regulatory coverage capability while minimizing the regulatory arbitrage space based on geography or activity type. The principle of fiat support is at the core. The regulations clearly stipulate that any "specific stablecoin" must be fully redeemable in the fiat currency to which it is pegged, 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 a reliable monetary tool rather than speculative encryption assets. The Monetary Authority requires that reserve assets must be high-quality, liquid assets (such as cash and short-term government bonds), and denominated in the same fiat currency to which the stablecoin is pegged. This move eliminates currency mismatch risks, meaning that a mismatch between the reserve asset currency and the stablecoin currency could lead to a depreciation of value. Furthermore, it also isolates users from exposure to volatility contagion risks—namely, the impact of panic selling triggered by the plummeting of non-pegged encryption assets on the stablecoin market. The regulations explicitly prohibit using assets with high volatility or low liquidity as the anchoring basis, such as real estate Tokens, commodity portfolios, or mixed asset indices. If Tokens cannot be clearly redeemed for fiat, and there is no clear fiat support, they are not considered stablecoins and cannot enjoy legal protection. This approach effectively prevents regulatory arbitrage and stops financial engineering from blurring the lines between asset-backed securities and monetary instruments, thereby reflecting Hong Kong's position prioritizing financial stability over speculative or synthetic innovations. 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, short-term government bonds) corresponding to the circulating stablecoins at a 1:1 ratio. Isolation and legal protection: The reserve assets must be placed in a trust or similar closed mechanism, and cannot be used by other creditors in the event of bankruptcy. Redemption mechanism: There must be a mechanism in place to ensure real-time fulfillment of redemption requests at face value, with delays or additional fees constituting a legal violation. Governance review: The appointment of shareholders, directors, and stablecoin management personnel must be approved by the Monetary Authority and must continually meet the 'fit and proper' standards and disclosure obligations. Licensees must also continuously fulfill relevant obligations, including paying annual fees, reporting significant changes, and submitting annual compliance reports. In addition, the Financial Secretary announced on June 6 that unlicensed issuers are allowed to offer non-regulated stablecoin proposals to professional investors as defined under the Securities and Futures Ordinance, while retaining some operational space without crossing regulatory red lines. Regulatory Authority and Law Enforcement Tools The regulatory power of the Monetary Authority is equipped with strong tools: Investigation Authority: Authorized investigators may request documents, conduct on-site inspections, and demand sworn statements. Sanction Mechanism: The regulations grant the Monetary Authority multi-tiered sanctioning powers, including fines, suspension or revocation of licenses, public warnings, confiscation orders, and the appointment of statutory managers; the Monetary Authority has also conducted public consultations on detailed regulatory requirements under the regulations, focusing on core compliance provisions such as anti-money laundering and combating the financing of terrorism, laying the operational groundwork for future law enforcement. Management Intervention: The Monetary Authority may appoint a statutory manager to take over the operations of licensed entities in financial distress - this was originally a measure reserved for systemic banks.
Arbitration mechanism: An independent "stablecoin arbitration office" is responsible for judicial review of sanction decisions, license approvals, and investigative actions. Prohibited Acts and Criminal Liability: Clarifying Legal Boundaries The regulations clearly outline the activities that participants in the virtual asset market are prohibited from engaging in, enhancing legal certainty and reinforcing market discipline. Key prohibitions include: Unlicensed Operations (Article 9): Engaging in regulated activities related to stablecoins (including issuance, redemption, management) or claiming to engage in related activities constitutes a criminal offense, regardless of whether they are based in Hong Kong, as long as their activities are directed at the Hong Kong market; Illegal Issuance of Specific Stablecoins (Article 9): Providing specific stablecoins to the public without obtaining the appropriate license constitutes an independent criminal offense; Advertising Restrictions (Article 10): If a party is unlicensed or not exempt, publishing or preparing to publish advertisements that indicate their participation in stablecoin activities or issuance of stablecoins constitutes a crime; Fraud and Misrepresentation (Article 11): Any attempt to commit fraud, misrepresentation, false advertising, etc., regarding stablecoin transactions is a crime, 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 for, or underwrite specific stablecoins through false statements or disregard for the truth. transitional provisions The Ordinance is set to come into effect on 1 August 2025 with a limited-time transitional arrangement: stablecoin issuers that have been physically operating in Hong Kong before the Ordinance comes into effect can continue to operate for six months if they submit a licence application within the first three months. However, this is not an indefinite or unconditional exemption, and those who are not licensed are required to withdraw from the market or complete the authorisation process in accordance with the law. International comparison and differentiated positioning of Hong Kong Compared to the EU's Markets 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 unique regulatory choices: Mandatory par value redemption obligation: Most jurisdictions (including MiCA and the U.S. MTL system) allow for redemption delays or issuer discretion; for example, MiCA permits redemption within five working days, while Hong Kong mandates immediate redemption at par value. Introduction of a statutory management mechanism: The "pre-bankruptcy intervention rights," which are rarely seen in cryptocurrency legislation, are explicitly introduced in Hong Kong regulations, originally an exclusive tool for banks. Crossing with bank regulation: Capital requirements, reserve segregation, "fit and proper" standards and other regulatory requirements 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 anchoring, rather than merely pursuing market growth or issuer flexibility. Tokenization of Physical Assets: Key Distinctions A common misconception is that the compliance of stablecoins means that RWA is 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 a fiat framework, while RWA involves bringing domestic assets (such as real estate, stocks, bonds) into token form. 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 legality: Obtaining FRS approval does not equate to the legal ability to conduct RWA business, 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 resolve 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 launching products is over. The issuance of stablecoins requires robust financial governance, real currency backing, and clear legal responsibilities. The capital requirement starting from HKD 25 million, along with audit fees, reserve checks, and real-time redemption systems significantly raise 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, there may be developments in stablecoin treasury management, KYC support, and other services, but systems must also be upgraded to support tokenization transactions and assess legal liabilities. Investors: Enhanced protection, reduced choices for now. The isolation of forced redemption rights and reserves has boosted investment confidence. Although the initial choices for stablecoins may decrease, in the long run, it will be easier to identify truly compliant stablecoins supported by fiat. Global platforms: 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 Hong Kong users is highly likely to violate advertising laws. Developers and DeFi builders: Technology cannot surpass the law. Any protocol development that interacts with fiat stablecoins must prioritize compliance from the very beginning and embed a stablecoin issuer status verification system. Conclusion Hong Kong's stablecoin regulations are a strategic choice made with intention: to incorporate cryptocurrency finance into a system of institutional accountability. By integrating licensing, regulation, and enforcement within a unified framework, Hong Kong sends a clear signal to the global market: 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 currency thrive in a rule-of-law economy? Can decentralized technology coexist with centralized regulation? Can encryption innovation gain public trust without enforceable redemption rights and institutional accountability? These challenges are further amplified by the following unresolved fractures: How to balance AML/CFT regulation while retaining anonymity features; and how mainland capital controls interact with the cross-border circulation of Hong Kong dollar 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.
/ END.
Article author: Bai Zhen Jen, Huang Wenjing