Hong Kong passes stablecoin regulation bill, laying the foundation 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 bill is expected to come into effect within this year and aims to regulate three types of activities related to stablecoins: issuing fiat stablecoins in Hong Kong, issuing Hong Kong dollar stablecoins, and actively promoting the issuance of fiat stablecoins to the public in Hong Kong.

According to the new 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. Applicants must meet a series of strict standards, including sufficient capital strength, a sound risk management system, a robust corporate governance structure, and internal control systems, among others. For example, the licensed entity's equity must reach at least HKD 25 million.

Once a license is granted, it will remain valid unless revoked or the licensee loses qualification. However, if the licensee no longer meets the minimum standards or encounters significant issues, the regulatory authority has the right to revoke or suspend the license, and if necessary, appoint a statutory manager to take over the business to protect the public interest.

The new legislation also stipulates that only authorized institutions can sell fiat stablecoins in Hong Kong, and stablecoins intended for retail investors must be issued by licensed issuers. Institutions authorized to sell stablecoins include licensed stablecoin issuers, banks, institutions with securities trading licenses, and licensed virtual asset trading platforms.

To ensure market order, engaging in regulated stablecoin activities without a license or unauthorized sale of designated stablecoins will be regarded as a criminal offense, punishable by a fine of up to HKD 5 million and 7 years of imprisonment.

In addition, the bill imposes strict requirements on stablecoin issuers:

1. 100% reserve and segregated custody: The issuer must maintain high-quality, highly liquid reserve assets equivalent to the circulating stablecoin and strictly separate them from its own assets.

2. Unconditional redemption mechanism: Stablecoin holders have the right to redeem stablecoins at face value without incurring additional fees.

3. Compliance Framework: Issuers must comply with a series of regulatory requirements such as anti-money laundering, risk management, information disclosure, and auditing.

At the same time, the Hong Kong Monetary Authority launched a stablecoin issuer sandbox program, with three groups of participants selected, including a consortium formed by Standard Chartered Hong Kong, Ant Group, and Hong Kong Telecom, as well as JD Coin Chain Technology (Hong Kong) and Yuan Coin Innovation Technology. These companies will test their stablecoin solutions in the regulatory sandbox.

Industry insiders generally believe that the passage of this bill marks an important step for Hong Kong in building Web3 infrastructure. In the future, stablecoins are expected to be more widely used in areas such as physical retail and cross-border trade. Some experts have also suggested considering the inclusion of offshore RMB and other assets into the category of underlying assets for stablecoins, and exploring the possibility of directly distributing stablecoin interest to holders.

With the passage of the bill, some institutions have begun to actively position themselves. A virtual asset service provider announced that it will provide comprehensive support for Hong Kong's stablecoin and its reserve asset project, and plans to launch an on-chain stablecoin swap tool. Another licensed virtual asset trading platform also expressed strong support for this initiative, believing that it will provide strong momentum for the development of the digital asset market.

Overall, the stablecoin regulatory bill passed by Hong Kong sets clear standards for the industry, which is expected to enhance market transparency and long-term stability, laying a solid foundation for the development of stablecoins in Hong Kong and globally.