Interpretation of Hong Kong Stablecoin Regulations Series: Market Impact, Industry Opportunities and Challenges

The "Stablecoin Ordinance" (hereinafter referred to as the "Ordinance") officially issued by the Hong Kong Special Administrative Region Government in May 2025 marks Hong Kong as the world's first major financial center to implement comprehensive legal regulation of stablecoins. This systematic legal framework not only reshapes local market rules but also has far-reaching effects on the global digital asset landscape (referred to as virtual assets in Hong Kong before June 26, 2025). This article combines the specific provisions of the Ordinance to deeply analyze its market impact, industry opportunities, and potential challenges.

1. Core Regulatory Framework Analysis

The regulations establish a three-in-one regulatory system of "issuance access + activity supervision + entity designation:"

(1) Definition and Scope (Articles 3-7)

Stablecoin: Clearly defined as a digitally protected value that must meet four main characteristics: as a medium of exchange, electronically transferable, based on distributed ledger technology, and value pegged to a single or a basket of assets (point 3).

Designated stablecoin: Specifically refers to stablecoins that are fully or partially pegged to fiat currencies (such as the Hong Kong dollar), specific units of account, or forms of economic value storage (Article 4). This definition includes mainstream fiat stablecoins (such as USDT, USDC) within the core regulatory scope.

Regulated Activities: Covering the issuance of stablecoins in Hong Kong, stablecoins issued overseas but pegged to the Hong Kong dollar, and other related activities designated by the Monetary Authority (Article 5). Exchanges providing stablecoin trading services must comply with the strict regulations of "offer provision" (Articles 6 and 9).

(2) Licensing System (Articles 14-21)

Mandatory Licensing: Any institution conducting "regulated stablecoin activities" in Hong Kong must be licensed (Article 8), and violators can face a maximum fine of HKD 5 million and 7 years of imprisonment.

Dual Application Entity: Only Hong Kong registered companies or recognized institutions established overseas (such as licensed banks) can apply (Article 14).

Dynamic Regulation: Licenses come with variable conditions (Article 17), and the Monetary Authority may add new conditions at any time (such as increasing capital requirements or limiting issuance scale). License holders must continuously meet the "minimum standards" (Appendix 2).

(3) Licensed Person Governance Requirements (Articles 36-75)

Control Person Review: Implement pre-approval for major shareholders (holding >50%) and minor shareholders (holding 10%-50%). The Monetary Authority can oppose "unsuitable" controllers (Articles 37-42).

Key Personnel Appointment: The Chief Executive Officer and the stablecoin manager must reside in Hong Kong and have approval from the Monetary Authority (Articles 53, 66), and directors must pass the "fit and proper" test (Article 58).

Reserve Asset Isolation: Clearly requires licensees to independently custody and strictly manage reserve assets (Article 17(2)(b)), prioritizing the protection of holder interests during liquidation (Article 98).

(IV) Cross-Border Regulation (Articles 100-107)

Designated Entity System: The Monetary Authority may classify stablecoin issuers operating outside Hong Kong but having a significant impact on Hong Kong as "Designated Stablecoin Entities," imposing information disclosure and other requirements (Article 101), reserving interfaces for global collaborative regulation.

2. The Far-reaching Impact on Market Participants

(1) Stablecoin issuers: Compliance costs surge, market landscape reshuffles

License Barriers: New issuers must meet requirements for capital (Schedule 2), company structure, reserve management, etc., with estimated compliance costs exceeding ten million HKD. Existing issuers that fail to meet standards within the transition period (Article 175) may be forced to exit the Hong Kong market (Article 28).

Reserve Management Pressure: The regulations require that reserve assets "be available for immediate redemption" (Section 2(1)) and are subject to audit by the Monetary Authority (Section 111), imposing extremely high demands on the liquidity and asset management capabilities of issuers.

Market Concentration Risk: Traditional financial institutions (such as licensed banks) may find it easier to obtain licenses due to existing compliance foundations (Article 13 exemption clause), which could lead to the stablecoin market skewing towards traditional financial giants.

(2) Exchanges and Wallet Service Providers: Business Model Restructuring

"Approved Provider" Privilege: Only licensed exchanges (such as holders of the CSRC VASP license), approved financial institutions, etc., may offer stablecoin trading services to the public (Article 9(5)). Unlicensed platforms displaying stablecoin trading interfaces may constitute a criminal act of "displaying one's own offer" (Article 9(3)).

Advertising Compliance Risks: Promoting stablecoin services for unlicensed issuers can lead to a maximum of 6 months imprisonment (Article 10), forcing platforms to strictly review listed assets.

(3) Traditional Financial Institutions: New Track Opportunities

Banking Advantages Highlighted: Recognized institutions (banks) enjoy privileges in applying for licenses and exemptions for cross-border services (Article 13), allowing them to quickly launch products related to stablecoin.

Custody Business Expansion: The regulations require the independent custody of reserve assets (Article 17), giving rise to a new demand for institutional-level custody services.

Payment Innovation Accelerates: Banks can integrate stablecoin payment systems (Definition No. 2(1)) to enhance cross-border settlement efficiency.

3. Industry Opportunities: Hong Kong's Global Ambitions

(1) Attract global institutions to settle

Clear Licensing Path: The Monetary Authority must approve the controller's application (Article 38) and the licensing application (Article 15) within 3 months, reducing policy uncertainty through transparency in procedures.

Legal Certainty Advantage: Compared with the fragmented regulations of the US and Europe, Hong Kong's single license covers the entire chain of issuance, reserve, and redemption, providing institutions with a "regulatory sandbox" type of safe zone.

(2) Promote the upgrading of financial infrastructure

Stablecoin Payment System: Encourages the development of compliant stablecoin clearing networks (defined by 2(), which may challenge traditional systems such as SWIFT.

Cross-chain Interoperability Requirements: The compliant application of distributed ledger technology (Article 3) will stimulate the development of technologies such as cross-chain bridges and compliant wallets.

(3) Catalyzing Innovative Application Scenarios

Tokenized Real World Assets (RWA): Compliant stablecoins become the ideal anchoring tool for tokenized assets such as bonds and real estate.

Central Bank Digital Currency (CBDC) Bridge: The regulation excludes the application of central bank digital currency (Article 3)2()a(), paving the way for future collaboration between the Hong Kong dollar CBDC and private stablecoins.

4. Risks and Challenges: Unresolved Issues

(1) Compliance Costs and Market Barriers

Small and Medium Enterprises Exit: Appendix 2 "Minimum Criteria" requires strict management systems, financial resources, and risk management capabilities, which startup companies find difficult to meet.

Continuous Compliance Pressure: Licensees must report financial deterioration (Article 25), changes in equity (Article 43), etc., resulting in high operational costs.

(2) Technical and Operational Risks

Audit Blind Spots of Reserves: Although reserves are required to be auditable (Article 111), there is still a lack of technical standards on how to verify the transparency of on-chain reserves in real-time.

Smart Contract Vulnerability: The regulations do not clearly specify code audit requirements. If a stablecoin contract is attacked by hackers, the liability is ambiguous (Article 164 only mentions executive responsibility).

(3) Cross-border coordination dilemma

Jurisdictional Conflicts: Designating overseas entities (Article 101) may trigger regulatory resistance from other countries.

Regulatory Arbitrage Risk: Strict regulations in Hong Kong may drive issuers to migrate to more lenient jurisdictions like Singapore and Dubai, where they are indirectly regulated through the "designated entity" system.

(4) Concerns of Market Centralization

Bank-led Ecosystem: Traditional financial institutions find it easier to obtain licenses, which may suppress innovation in decentralized stablecoins (such as algorithmic stablecoins being excluded from "designated stablecoins").

Systemic Risk Transfer: If banks issue stablecoins on a large scale, their redemption risk may transmit to the traditional financial system (Article 5) mentions financial stability but does not set a limit on issuance concentration).

V. The Balancing Act of Stablecoin Regulation in Hong Kong

The "Stablecoin Regulation" highlights Hong Kong's regulatory philosophy of "same business, same risks, same rules," with its core value being:

• Investor Protection: Reduce risks such as "Tether de-pegging" through reserve custody, licensed reviews, and other systems;
• Financial Stability: Incorporating stablecoins into the macroprudential framework to prevent systemic risks (Article 77 Monetary Authority intervention rights);
• Innovative Inclusiveness: Exemptions for specific institutions (Article 13) and transitional arrangements (Article 175) reserve adaptation space for the market.

In the future, the effectiveness of the regulations and the formulation of detailed rules (such as the HKMA Guideline No. 171) will be closely related to the progress of cross-border collaboration. If Hong Kong can resolve compliance costs and technical validation challenges while maintaining regulatory flexibility, it is expected to become a global stablecoin hub, reshaping the digital asset value chain. Conversely, excessive rigor may drive innovation away, undermining its competitiveness as a Web3 center. The observation of the transitional period (Article 175) over the next two years will provide a key template for global stablecoin regulation.