Hong Kong Passes "Stablecoin Bill," Establishing a Fiat-Backed Stablecoin Licensing System

On May 21, just two days after the U.S. stablecoin bill GENIUS Act was passed by the Senate, the Legislative Council of the Hong Kong Special Administrative Region passed the "Stablecoin Bill"

The Legislative Council of the Hong Kong Special Administrative Region passed the "Stablecoin Bill," which will establish a fiat-backed stablecoin licensing system in Hong Kong to improve the regulatory framework for virtual asset activities in the region.

As Hong Kong's central bank, the Hong Kong Monetary Authority (HKMA) is responsible for regulating virtual assets with financial attributes, including stablecoins.

The Hong Kong government stated that it will continue to support the development of virtual assets. With the implementation of the regulatory framework for virtual asset trading platforms and stablecoin issuers, the government will soon consult on over-the-counter (OTC) trading of virtual assets and custodial services, and will issue a second policy declaration on the development of virtual assets.

Excerpt from the regulations: Conditions for issuing and selling stablecoins in Hong Kong

1. Licensing requirements for issuers

After the implementation of the "Stablecoin Bill," anyone who issues fiat-backed stablecoins in Hong Kong during their business process, or issues fiat-backed stablecoins claiming to be pegged to the value of the Hong Kong dollar in or outside Hong Kong, must apply for a license from the Financial Commissioner.

License holders will be subject to ongoing supervision by the Financial Commissioner. The Financial Commissioner has the authority to temporarily suspend or revoke licenses and impose fines for violations by license holders, designated stablecoin entities, and their senior personnel.

The regulations only allow designated licensed institutions to sell fiat-backed stablecoins in Hong Kong, and only fiat-backed stablecoins issued by licensed issuers can be sold to retail investors.

In addition, to prevent fraud, at any time (including the 6-month transition period), only advertisements related to licensed fiat-backed stablecoin issuance will be permitted. Citizens should pay attention to these matters and remain cautious when receiving advertisements or information related to fiat-backed stablecoins.

* 3 "sandbox" companies still need to apply for licenses

Previously, the HKMA launched a stablecoin issuer sandbox arrangement as early as March 2024, providing interested issuers with the opportunity to pilot the issuance of stablecoins in a limited and controlled risk environment before the relevant legislation comes into effect.

As of now, the HKMA has announced three "sandbox" participant companies: JD Coin Chain, Yuan Coin Technology, and a joint venture of Standard Chartered Bank, Animoca, and HKT.

The regulations for the "sandbox" state that approval to participate in the sandbox arrangement does not imply recognition or regulation of the relevant stablecoin projects by the HKMA or other financial regulatory bodies. Once the stablecoin issuer licensing system is officially introduced, sandbox participants will still need to submit license applications to the HKMA.

2. Other requirements for issuers

Issuers must comply with regulations regarding reserve asset management and redemption, including properly segregating customer assets, maintaining sound stabilization mechanisms, and processing redemption requests from stablecoin holders at face value under reasonable conditions.

Issuers must also meet a series of requirements related to anti-money laundering and counter-terrorism financing, risk management, disclosure regulations, and auditing and appropriate personnel. The Financial Commissioner will consult further on the detailed regulatory requirements of the system in due course.

Specifically, according to the "Legislative Council Reference Material Summary," the licensing criteria for stablecoin issuers include the following key elements:

(a) Management of reserve assets and stabilization mechanisms: The market value of the reserve assets backing the stablecoin must always be at least equal to its circulating value. License holders must have robust stabilization mechanisms, proper segregation and management arrangements for reserve assets, and adequate disclosure policies;

(b) Redemption: To ensure that holders of the specified stablecoin are adequately protected, license holders must pay the face value of the specified stablecoin to holders who submit valid redemption requests, without imposing overly cumbersome conditions or unreasonable fees. The redemption procedures, timelines, any conditions or fees involved, and rights must also be clearly disclosed for holders' reference;

(c) Physical presence in Hong Kong: To ensure effective supervision and enforcement by the Financial Commissioner, license holders must have a physical presence in Hong Kong;

(d) Financial resources: License holders must have sufficient financial resources to operate their business, including a minimum paid-up capital requirement of HKD 25 million;

(e) Appropriate personnel: The controlling persons, CEOs, and directors of license holders must be appropriate candidates, and personnel responsible for managing and operating regulated stablecoin activities must possess the necessary knowledge and experience; and

(f) Prudential and risk management: License holders must have appropriate risk management policies and procedures to manage risks arising from their business operations, and these policies and procedures must be commensurate with the scale and complexity of their operations. License holders should also have sound and appropriate control systems to prevent and combat potential money laundering and terrorist financing activities.

3. Temporary licenses during the transition period

The "Stablecoin Bill" is expected to come into effect in 2025, allowing the industry sufficient time to understand the requirements under the licensing system