Hong Kong passes legislation on stablecoins, multiple tech companies poised for action

The Hong Kong Legislative Council passed the "Stablecoin Ordinance Bill" on May 21, laying the legal foundation for a licensing system for fiat stablecoin issuers in Hong Kong. This initiative aims to improve the regulatory framework for virtual asset activities, ensuring both financial stability and promoting financial innovation. The Hong Kong SAR government anticipates that the ordinance will come into effect within this year.

Currently, regulators have conducted preliminary supervision and testing of the operational plans of three issuers in the sandbox. Legislative council members expressed support for promoting the establishment of stablecoins pegged to the Hong Kong dollar and the Renminbi, to strengthen Hong Kong's role as a digital bridge connecting the mainland and other countries, while calling on the government to maintain flexibility in the licensing process and accelerate the approval process.

Regulatory Requirements for Stablecoin Activities

According to the newly passed regulations, the following three types of activities require a license:

1. Issue fiat stablecoin in Hong Kong
2. Issue Hong Kong dollar stablecoin in Hong Kong or outside Hong Kong
3. Actively promote the issuance of its fiat stablecoin to the public in Hong Kong.

The regulations impose four important requirements on issuers:

1. Reserve assets must be high-quality, highly liquid assets, such as cash, bank deposits, government bonds, etc., and the total amount should equal the face value of the circulating stablecoin.
2. Stablecoin holders have the right to redeem stablecoins at face value without any fees, and redemption requests must be processed within a reasonable time.
3. Compliance with anti-money laundering, risk management, information disclosure, and auditing requirements.
4. Stablecoin transactions must be conducted on licensed virtual asset trading platforms.

Regarding the qualifications of the issuer, the regulations stipulate that license holders must have a minimum capital of 25 million HKD. The license has no fixed validity period unless revoked or the license holder loses eligibility.

To protect investors, the regulations restrict the sale of fiat stablecoins in Hong Kong to designated licensed entities, including stablecoin issuers licensed by the Financial Commissioner, banks, institutions holding Type 1 licenses issued by the Securities and Futures Commission, and licensed virtual asset trading platforms.

The regulations also set severe penalties for violations, such as operating without a license or selling stablecoins through non-designated institutions, which may result in a fine of 5 million HKD and 7 years of imprisonment.

Enterprises Actively Layout Stablecoin Business

The Hong Kong Monetary Authority has launched a stablecoin issuer sandbox, with the first batch of three participating institutions granted entry in July 2024. These institutions include an alliance formed by Standard Chartered Hong Kong, ANX Group, and Hong Kong Telecom, as well as two technology companies.

It is worth noting that a well-known technology group recently released multiple recruitment notices related to the tokenization of real-world assets (RWA), explicitly requiring that product design seamlessly integrates with its stablecoin and digital RMB. The group is also recruiting overseas financial business development talents, focusing on promoting the implementation of stablecoin business, indicating that with the passage of the legislation, companies are ready to quickly enter the market.

After the regulation comes into effect, issuers engaged in relevant stablecoin activities in Hong Kong will have a 6-month transition period. Issuing institutions that existed before the law comes into effect can apply for a license within the first 3 months after the licensing system takes effect.

Global Stablecoin Competitive Landscape

As Hong Kong passes legislation on stablecoins, the U.S. GENIUS Act stablecoin bill is also making progress in the legislative process. On May 22, the U.S. Senate voted 69 to 31 to begin debate on the bill, marking the official entry of this legislation, which could become the first federal-level stablecoin regulatory framework in the United States, into the amendment discussion stage.

The draft regulations for stablecoins in Hong Kong reference existing and under-review international stablecoin regulatory frameworks during their formulation. Legislative Council members expressed support for including the renminbi in the locally issued stablecoin system, arguing that this would help Hong Kong become a digital financial bridge connecting the mainland and other countries, attract more blockchain projects and institutional investors, and potentially accelerate the internationalization of the renminbi.

Under the global trend of de-dollarization, the renminbi stablecoin is expected to become a diversified choice for many countries, especially those along the "Belt and Road" and in the Middle East, in terms of trade, investment, and reserves, which will help enhance the status of the renminbi in international trade and as a safe-haven asset.

Lawmakers are calling on the government to maintain an open and flexible approach to licensing policies, allowing more capable and resourceful institutions to participate in competition. They hope that the financial regulatory authority can expedite the licensing process to attract more potential operators to launch and test different coins and different collateral stablecoins in Hong Kong.

With the implementation of regulatory systems for virtual asset trading platforms and stablecoin issuers, the Hong Kong Monetary Authority stated that the government will continue to support the development of the virtual asset industry. Next, the government plans to launch consultations on over-the-counter trading and custodial services for virtual assets, and will issue a second policy declaration on the development of virtual assets.