In the past two days, the team’s circle of friends has been flooded with a message: According to the Hong Kong Government News Network, on May 5, the Hong Kong Legislative Council passed the Stablecoin Bill to establish a licensing system for issuers of fiat stablecoins in Hong Kong, China. It is said that after the implementation of the ordinance, anyone who issues fiat stablecoins in Hong Kong during the course of business, or issues fiat stablecoins in Hong Kong or abroad that claim to be anchored to the value of the Hong Kong dollar, must apply for a license from the Monetary Authority.
In fact, the Hong Kong Legislative Council had already shown signs of passing the Stablecoin Ordinance as early as April this year. Hong Kong Financial Secretary Paul Chan Mo-po revealed in his speech at the 4 Hong Kong Web4 Carnival on April 7 this year that Hong Kong is looking for innovative and balanced regulatory methods for Web2025, and that Hong Kong's stablecoin legislation is about to be passed, and that Hong Kong will issue a second statement on the development of virtual assets this year. Also at that Web3 Carnival, SAR Legislative Council member Darren Chiu stated in his keynote speech that stablecoins will be products, not securities. Sure enough, just over a month later, Hong Kong's "Stablecoin Bill" was passed in the third reading in the Legislative Council.
Today, let’s talk about the impact of the Stablecoin Ordinance on subsequent practitioners and the future direction of virtual asset regulation in Hong Kong.
1. Why does the Stablecoin Regulation exclude small and medium-sized institutions?
The most direct reason for Hong Kong to introduce the Stablecoin Ordinance is to improve the virtual asset regulatory framework in order to further find a balance between innovation and risk in the field of virtual assets. We can note that Hong Kong, as an international financial center, has actively promoted the development of virtual assets since 2022, but lacks a special regulatory system for stablecoins. This ordinance aims to fill the regulatory gap by establishing a licensing system and clarifying requirements such as reserve management, anti-money laundering, and redemption mechanisms. This is the most direct reason for the introduction of the Stablecoin Ordinance.
Improving the regulatory framework for virtual assets actually means stricter regulation from a certain perspective. These regulations require that stablecoin issuers must have a minimum paid-in capital of HK$2500 million and at least ensure that assets cover 100% of the circulation and can be redeemed at any time. This threshold can basically screen out large institutions with strong strength and exclude small and medium-sized financial institutions.
Secondly, it is to consolidate the position of financial center and attract compliant capital by improving the regulatory framework.
After issuing the Virtual Asset Policy Declaration in 2022, Hong Kong gradually built a regulatory system covering exchanges and custody services. As a key tool connecting traditional finance and the crypto ecosystem, the compliance of stablecoins will help attract global institutions and promote the development of the Web3 ecosystem. This is also a necessary approach to enhance Hong Kong's competitiveness in the field of virtual assets.
This point is actually in line with the first reason. Issuers need to establish systems that comply with anti-money laundering (AML) and counter-terrorism financing (CFT) and ensure technical security and transparency of reserve assets. Small and medium-sized companies need to upgrade their existing systems and may face higher technical investment and compliance costs. This basically cuts off the possibility of small and medium-sized institutions "playing" with stablecoins in Hong Kong.
The last reason is to respond to the global regulatory trend. Major jurisdictions around the world have strengthened stablecoin regulation. The regulations introduced by Hong Kong this time are also consistent with the regulatory framework of major foreign jurisdictions. This move not only meets international compliance requirements, but also lays the foundation for mutual recognition and cooperation with other jurisdictions in the future.
2. What far-reaching impact will the Stablecoin Regulations have on the virtual currency market?
The impact can basically be summarized in one sentence, that is, the concentration of top players in the virtual currency market and the differentiation of the ecosystem. Small and medium-sized institutions may be forced to transform. Of course, the "Stablecoin Regulations" will also accelerate the integration of traditional finance and the encryption ecosystem, and promote cross-border payments and penetration into emerging markets.
Let's first talk about the impact on the fate of small and medium-sized institutions. The Sister Sa team has mentioned before that the "Regulations" require that stablecoin issuers must be registered entities in Hong Kong, with a minimum paid-in capital of HK$2500 million, and reserve assets must cover 100% of the circulation and be subject to regular audits. This will force small and medium-sized institutions with insufficient funds and technical capabilities to exit the direct issuance market and turn to technical services or cooperate with licensed institutions. For example, a well-known international bank has already deployed compliant stablecoins in Hong Kong, while small and medium-sized institutions may only be able to participate in the ecosystem by providing underlying technical support (such as blockchain development or risk control systems).
Furthermore, to accelerate the integration of traditional finance and the crypto ecosystem, compliant stablecoins can serve as an entry point for traditional financial institutions to enter the crypto market. For example, banks may participate in cross-border payments by issuing Hong Kong dollar stablecoins, or cooperate with DeFi protocols to develop mortgage lending products. Family offices and asset management institutions in Hong Kong may also increase their stablecoin allocations and promote innovative financial instruments such as tokenized bonds and real estate.
The final outlook is to promote cross-border payments and penetration into emerging markets. The regulations support the cross-border application of Hong Kong dollar stablecoins, which, combined with Hong Kong’s mature financial infrastructure, may challenge the SWIFT system. For example, small and medium-sized enterprises in Southeast Asia can achieve low-cost cross-border settlement through Hong Kong dollar stablecoins.
3. What is the trend of global regulation of stablecoins?
Overall, the regulation of global stablecoins generally shows three major trends, namely, the popularization of license access and localization requirements, reserve management approaching traditional financial standards, and the functional positioning being concentrated on payment tools.
First, the requirements for license access and localization are becoming more widespread. Major economies generally require stablecoin issuers to operate with a license and set up local entities. For example, Hong Kong requires licensed issuers to register in Hong Kong and set up management, and the United States intends to limit the issuance of stablecoins to banks or trust companies. Such measures strengthen local regulatory capabilities and prevent cross-border regulatory arbitrage.
Secondly, reserve management is approaching traditional financial standards. Countries emphasize the liquidity of reserve assets (such as cash and government bonds) and independent custody, and introduce regular audits. Hong Kong requires that the value of reserve assets should not be less than the face value of the circulating stablecoins. The EU MiCA rules even require algorithmic stablecoins to hold 300% excess reserves, reflecting strict control of credit risks. Its supervision is approaching traditional financial standards.
Secondly, the functional positioning is concentrated on payment tools. Regulators tend to define stablecoins as "payment tools" rather than investment products, limiting their financial intermediary functions. For example, Hong Kong prohibits licensed issuers from engaging in lending business to avoid credit creation risks, which is consistent with the regulatory logic of payment institutions.
Finally, it should be said that from a macro perspective, the implementation of the Hong Kong Stablecoin Ordinance marks a new era for global digital financial regulation. This regulation not only paves a clear path for the compliant development of stablecoins, but also redefines the "rules of the game" in the virtual asset market through high-standard access mechanisms and risk control. But if we are to be honest, it is very likely that small and medium-sized institutions have been excluded from the ranks of stablecoin players and can basically only turn to peripheral services. Of course, this is also the trend of stablecoin regulation worldwide-Web3 is moving closer to traditional finance, and the wave of compliance and specialization is irreversible.