Understanding Stablecoins: A Quick Guide for Hong Kongers
In the rapidly evolving world of fintech and virtual assets, stablecoins have emerged as a fascinating and increasingly important innovation. In light of this, Hong Kong has taken a landmark step in digital asset regulation with the implementation of the Stablecoins Ordinance (Cap. 656) (the “Stablecoins Ordinance”) on 1 August 2025, establishing one of the world’s most comprehensive regulatory frameworks for stablecoin issuers. But what exactly are stablecoins, and why are they generating so much buzz, especially here in Hong Kong? How will the issuing of licences help, and what does this mean for the everyday consumer?
What is Stablecoin? (And Why It Matters)
A stablecoin is essentially a cryptocurrency designed to avoid the significant price volatility often seen with assets like Bitcoin or Ethereum. Its core purpose is to maintain a stable value, unlike other cryptocurrencies that fluctuate with market demand. This stability is achieved by linking its market value to a stable external asset, such as the US dollar or even physical commodities like gold.
Stablecoins bridge traditional finance and digital assets by offering a stable, digital representation of value. Their appeal lies in their ability to facilitate instant, cross-border transfers and electronic storage for various financial applications, all while mitigating the price volatility common to most cryptocurrencies. This inherent stability makes stablecoins a more dependable medium for everyday transactions and remittances and a secure alternative during volatile cryptocurrency market conditions. For the Hong Kong public, this translates to a predictable digital asset, seamlessly connecting traditional financial practices with the innovative realm of blockchain technology. Because of this, licences will be issued to entities that work with this to prevent and avoid any misuse of stablecoins.
How Do Stablecoins Work?
The stability of a stablecoin is typically maintained through various mechanisms:
● Fiat-backed stablecoins: These are the most common type. For every stablecoin issued, an equivalent amount of fiat currency (e.g., US dollars, Hong Kong dollars) is held in reserve by the issuer. This reserve acts as collateral, ensuring that the stablecoin can be redeemed for its pegged value. Think of it like a digital IOU for real money.
● Commodity-backed stablecoins: These stablecoins are backed by physical assets like gold or other commodities.
● Crypto-backed stablecoins: These are backed by other cryptocurrencies, often over-collateralised to account for volatility in the underlying crypto assets.
● Algorithmic stablecoins: These stablecoins use complex algorithms and smart contracts to maintain their price stability, without direct collateral. However, these have proven to be more volatile and less reliable in practice.
For the purpose of Hong Kong’s new law, the primary focus is on fiat-referenced stablecoins, which are pegged to traditional currencies.
Hong Kong’s New Stablecoin Law (2025): A Landmark for Digital Finance
Hong Kong has long been a global financial hub, and its proactive approach to regulating digital assets reinforces this position. The much-anticipated Stablecoins Ordinance marks a significant milestone in the city’s journey to become a leading crypto-friendly jurisdiction.
The city initiated its comprehensive stablecoin regulation with the Hong Kong Monetary Authority’s discussion paper on crypto-assets and stablecoins in January 2022. Following extensive consultations with industry stakeholders, the Stablecoins Bill was passed by the Legislative Council on May 21, 2025, and implemented on August 1, 2025.
The Stablecoins Ordinance aims to provide a clear and comprehensive regulatory framework for stablecoin issuers, ensuring investor protection and fostering innovation within a secure environment.
Key Changes Introduced by the Stablecoins Ordinance
The Stablecoins Ordinance applies specifically to specified stablecoins, defined as digital assets that purport to maintain a stable value with reference wholly to one or more official currencies. The regulatory framework currently focuses on fiat-referenced stablecoins (FRS) but grants the Hong Kong Monetary Authority (“HKMA”) flexibility to expand coverage to other types of stablecoins, including commodity-backed varieties, through gazette notices. Here are some of the key changes and requirements:
● Licensing Regime: Under the Stablecoins Ordinance, any entity wishing to issue fiat-referenced stablecoins in Hong Kong must obtain a licence from the HKMA. This licensing requirement ensures that issuers meet stringent standards for financial soundness, risk management, and operational integrity.
● Reserve Requirements: Licensed stablecoin issuers are mandated to hold reserves equivalent to the value of the stablecoins they issue. These reserves must be held in highly liquid and secure assets, providing a strong backing for the stablecoins and mitigating risks of insolvency.
○ Further, the reserve asset composition requirements shall permit only high-quality, highly liquid assets with minimal investment risk. Acceptable assets include cash, bank deposits with terms not exceeding three months, government and central bank securities with residual maturity of one year or less, and tokenised representations of eligible assets.
○ Currency Matching Requirements adds a further layer of protection, mandating that reserve assets be denominated in the same reference currency as the stablecoin. However, certain exceptions will apply to multicurrency stablecoins.
○ Additional requirements will ensure that reserve assets are completely segregated from the issuer’s other assets and protected against creditor claims in all circumstances. Licensed issuers must establish effective trust arrangements and engage qualified custodians, typically licensed banks, for the safekeeping of reserve assets.
● Financial Resources Requirements: Licensed issuers must maintain a minimum paid-up share capital of HK$25 million (or equivalent in a freely convertible currency), along with HK$3 million in liquid capital and excess liquid capital equivalent to at least 12 months of operating expenses.
● Localisation Requirements: Stablecoin issuers must be incorporated as Hong Kong companies or be authorised institutions (banks) incorporated outside Hong Kong, with key management personnel based in Hong Kong.
● Redemption Rights: The Stablecoins Ordinance grants stablecoin holders an absolute right to redeem stablecoins at par value, with processing required within one business day unless the HKMA grants specific consent for delays. Issuers cannot impose unreasonable fees or unduly burdensome conditions on redemption requests, ensuring that holders can access the underlying value of their stablecoins without excessive barriers.
● Customer Identification (KYC) and Anti-Money Laundering (AML): The law introduces strict Know Your Customer (KYC) and Anti-Money Laundering (AML) rules. While these measures are crucial for combating illicit financial activities, they have also sparked some industry concern regarding potential impacts on adoption [7, 8]. For the general public, this means that stablecoin transactions will be subject to similar identification processes as traditional banking services, enhancing security and trust.
● Transitional Period: The Stablecoins Ordinance includes a six-month transitional period for existing operators, allowing them time to comply with the new regulations and obtain the necessary licences.
What Changes for the General Public in Hong Kong?
For the average person in Hong Kong, the implementation of the Stablecoins Ordinance brings both new opportunities and important considerations. While the immediate impact might not be a drastic change in daily life, the long-term implications for how we interact with digital finance are significant.
The regulatory framework for stablecoins establishes a two-tiered access system, differentiating between stablecoins issued by HKMA-licensed entities and those from unlicensed entities. Stablecoins from HKMA-licensed issuers, benefiting from a robust licensing regime and enhanced consumer protection, can be offered to both retail and professional investors. Conversely, stablecoins issued by unlicensed entities (those not requiring a licence) are restricted to professional investors, thereby limiting retail exposure to potentially higher-risk products.
It is expected that it will significantly enhance protection for Hong Kong consumers engaging with stablecoin products. The licensing regime ensures that retail investors can only access stablecoins issued by entities that meet rigorous regulatory standards, including full reserve backing, professional management, and comprehensive oversight.
Increased Trust and Security
For the general public, the most significant change is the enhanced trust and security surrounding stablecoins. The HKMA’s strict licensing and reserve requirements for issuers substantially mitigate the risk of stablecoin projects failing or losing their peg due to mismanagement or fraud. This regulatory oversight offers a vital layer of protection for users, establishing stablecoins as a more dependable and secure digital asset for holding and transacting.
Fraud Prevention measures include strict prohibitions on unlicensed stablecoin marketing and clear penalties for false representations about licensing status. The HKMA maintains a public register of stablecoin issuers with a licence, enabling consumers to verify the legitimacy of stablecoin products before investing.
The above-noted redemption guarantees provide consumers with confidence that licensed stablecoins can be converted back to fiat currency at par value within one business day, eliminating concerns about liquidity or access to underlying value.
Potential for New Digital Services
The clear regulatory framework is expected to encourage more financial institutions and technology companies to explore and develop stablecoin-related services. This could lead to:
● Easier Cross-Border Payments: Stablecoins offer the potential for real-time, low-cost international transactions, which could benefit individuals sending money to family abroad or engaging in international e-commerce [9].
● Innovative Financial Products: Hong Kong licence holders may use this opportunity to create new financial products and services built on stablecoins, such as lending platforms, decentralised finance (DeFi) applications, and even new ways to earn interest on digital assets, all operating within a regulated environment.
● Integration with Existing Systems: As stablecoins become more regulated, their integration into existing payment systems and financial infrastructure could accelerate, making them more accessible and user-friendly for the general public.
Importance of KYC/AML
While beneficial for security, the stringent KYC and AML/CFT requirements mean that individuals using regulated stablecoins will need to undergo identity verification processes similar to opening a bank account. This is a necessary step to prevent illicit activities and ensure the integrity of the financial system, but it’s an important point for new users to understand.
Under Hong Kong’s anti-money laundering and counter-financing of terrorism (AML/CFT) legislation, stablecoin issuers with a licence are classified as “financial institutions.” The HKMA has implemented extensive guidelines, obligating these licensed issuers to establish strong AML/CFT controls. These controls include measures such as customer due diligence, continuous monitoring of stablecoin transactions, and adherence to travel rule compliance for stablecoin transfers. Specifically, customer due diligence requires licensed issuers to verify customer identities appropriately and evaluate potential money laundering and terrorist financing risks.
Licensed stablecoin issuers have an obligation to monitor transactions throughout the stablecoin’s lifecycle. This includes not only the initial issuance and redemption but also ongoing monitoring of stablecoin transactions in the secondary market, even when non-customers hold the stablecoins. This extensive monitoring ensures issuers with licences are fully aware of how their stablecoins are being utilised.
Further, licensed issuers must maintain transparent operations through extensive disclosure and reporting obligations. Public disclosure requirements include the issuer’s reserve asset management policy, assessment of risks arising from reserve assets, composition and market value of reserve assets, results of regular independent attestation and audit, and detailed information about redemption rights.
To underpin the transparent approach taken with the Stablecoins Ordinance, there will be mandated regular reporting to the HKMA. This includes daily statements on reserves and outstanding stablecoins, weekly reporting, and regular updates to websites publicly available to the HK public. Issuers with the licence must engage qualified and independent auditors acceptable to the HKMA to perform regular attestation of reserve assets.
Benefits and Potential Impacts for Hong Kong
The Stablecoins Ordinance’s implementation is set to deliver substantial benefits and potential impacts for Hong Kong, strengthening its standing as a progressive financial centre in the digital era.
Fostering Innovation and Economic Growth
By providing regulatory clarity, Hong Kong is creating an environment conducive to innovation in the Web3 and blockchain space. This clarity is crucial for businesses and entrepreneurs looking to build related applications and services. The ability to operate within a well-defined legal framework reduces uncertainty in stablecoins and encourages investment, potentially leading to job creation and economic growth in the digital economy sector.
Enhancing Financial Stability
The stringent regulatory requirements, particularly regarding reserve backing and AML/KYC, are designed to enhance the overall financial stability of the stablecoin ecosystem. This reduces systemic risks and protects consumers from potential failures of unregulated stablecoin projects, thereby building confidence in digital assets as a legitimate part of the financial landscape.
Strengthening Hong Kong’s Position as a Digital Asset Hub
Hong Kong has been actively working to establish itself as a leading global hub for virtual assets. The new stablecoin law is a critical piece of this puzzle, demonstrating the city’s commitment to embracing digital finance while maintaining robust regulatory oversight. This proactive approach differentiates Hong Kong from other jurisdictions and makes it an attractive destination for legitimate stablecoin businesses and users.
Potential for Cross-Border Collaboration
The regulated environment for stablecoins could also facilitate greater cross-border collaboration and interoperability with other jurisdictions that are developing similar regulatory frameworks. This could streamline international transactions and foster a more interconnected global digital financial system.
Conclusion: A New Era for Digital Finance in Hong Kong
The Stablecoins Ordinance marks a pivotal moment in the city’s embrace of digital finance. By establishing a clear and robust regulatory framework for stablecoins, Hong Kong is not only enhancing consumer protection and financial stability but also fostering an environment ripe for innovation and growth in the digital asset space. For the general public in Hong Kong, this means a more secure, transparent, and potentially more accessible way to engage with digital currencies, paving the way for a new era of financial services.
The strict requirements for stablecoin licences, which include significant capital commitments, thorough reserve management protocols, and extensive compliance obligations, provide a strong basis for the long-term development of stablecoins. With features like guaranteed redemption rights and limited retail access to licensed products, the framework prioritises consumer protection, setting new benchmarks for investor safeguards within the digital asset sector.
For Hong Kong, the Stablecoins Ordinance strengthens the city’s position as a global financial hub and digital asset centre, attracting international participants while contributing to the broader development of the digital economy. The legislation’s extraterritorial reach regarding Hong Kong dollar-referenced stablecoins reinforces the currency’s international role and supports monetary policy objectives
As the world increasingly moves towards digitalisation, Hong Kong’s proactive stance on stablecoin regulation positions it at the forefront of this transformation, ensuring that its financial landscape remains dynamic, competitive, and secure for years to come. The success of Hong Kong’s stablecoin regulatory framework will likely influence regulatory developments in other jurisdictions, contributing to the evolution of international standards for digital asset oversight.
The implementation of the Stablecoins Ordinance signifies a new era in Hong Kong’s financial development. This chapter embraces technological innovation while upholding the trust and stability that have solidified Hong Kong’s position as a leading international financial hub. The framework’s success will be determined not only by the number of licences issued but also by its role in fostering a safer, more efficient, and inclusive financial system that caters to both local and international participants in the digital economy.