Hong Kong Announces Stable Coin Bill: A Crucial Step Towards the Regulation of Digital Assets

On December 6, 2024, the Hong Kong government officially announced the Stable Coin Act, marking an important moment for Hong Kong to become the global center for digital assets. The long-awaited legislative initiative lays the foundation for comprehensive regulation of Stable Coins anchored to fiat currency, which not only complies with global standards but also addresses financial stability risks, while promoting innovation in the virtual asset industry.

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The proposed framework requires any individual or entity to obtain the appropriate license from the Hong Kong Monetary Authority (HKMA) when engaging in the following activities:

1. In the process of operating in Hong Kong, issuanceFRS;

2. In the course of business, issuance claims to be FRS referenced to the value stability of Hong Kong dollars; or

3. Actively promote the FRS issuance to the Hong Kong public.

The bill also empowers the HKMA to supervise, investigate, and enforce Compliance.

Robust Approaches to Stable Coin Regulation

The Stable Coin Act is the result of extensive consultation with industry stakeholders and international best practices. It introduces key requirements for stablecoin issuers, including:

·License: Mandatory licensing for issuers operating in Hong Kong or marketing FRS to the Hong Kong public.

· Reserve Management: The issuer must maintain high-quality and highly liquid reserves that are equivalent to the value of issuance stablecoin.

Capital Requirements: The minimum paid-up capital requirement is set at HKD 25 million (approximately USD 3.2 million) or 1% of the face value of the stablecoin anchored to the legal tender currency in circulation.

Risk Mitigation: Obligations include annual risk assessment, anti-Money Laundering/anti-terrorism financing Compliance, and strict redemption policies.

The bill follows the principle of “same activities, same risks, same regulation” of the Financial Stability Committee to ensure that FRS issuers meet standards similar to those of traditional Financial Institution.

Comparison of Jurisdiction: Global Regulatory Approaches to Stablecoin

As stablecoins gain follow worldwide, different jurisdictions have adopted various regulatory approaches. Hong Kong has joined the ranks of jurisdictions taking specific steps to regulate stablecoin issuance countries. Here is a comparison of key jurisdictions in terms of regulatory progress:

Hong Kong’s proposed system stands out for its follow single currency and multiple stablecoins, as well as its inclusion of decentralization and centralized systems.

From Consultation to Legislation

The discussion paper on encryption assets and Stablecoin released by HKMA in 2022, as well as the subsequent consultation papers in 2023 and 2024, mark the beginning of the journey towards the Stablecoin legislation. Recognizing the risks brought by FRS, especially the potential spillover effects between virtual assets and TradFi systems, Hong Kong has been steadily advancing this legislation. The legislation reflects feedback from global regulatory authorities and local industry stakeholders, aiming to establish Hong Kong as a safe and innovative digital asset environment.

Currently, HKMA regulates stored value facilities under the Payment Systems and Stored Value Facilities Ordinance, while the Securities and Futures Commission regulates virtual asset service providers under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance. The new legislation will further complement these frameworks and fill the regulatory gap for stablecoins.

Hong Kong fiat coin refers to the license requirements of Stable Coin

The licensing framework under the Hong Kong Stable Coin Act sets strict requirements for the issuance or marketing of FRS entities. These measures aim to ensure financial stability, consumer protection, and compliance with anti-Money Laundering and anti-terrorist financing (AML/CFT) standards.

Key License Standards

1. Reserve Management and Stability

·Full asset support: The issuer must maintain reserves equal to or greater than the value of the circulating Stable Coin. Algorithm or arbitrage-type Stable Coins lacking reserve support are prohibited.

· High-quality investment: Reserve assets must be Liquidity, low-risk, and diversified, including cash, deposits in licensed banks, government-supported securities, and similar instruments.

·Reserve Separation: Reserves must be held in a separate account of an approved custodian and protected through trust arrangements.

2. Cash-out policy

**·**The issuer must ensure that the stablecoin is redeemed at face value within one day under normal circumstances to ensure user Liquidity.

3. Governance and local presence

· The issuer is incorporated in Hong Kong and has offices and senior management in Hong Kong to facilitate effective supervision by HKMA.

4. Financial Resources and Risk Management

The issuer’s minimum capital requirement is HK$25 million or 1% of the stablecoin in circulation, whichever is higher.

** · ** Regular risk assessments, stress tests, and comprehensive Liquidity management practices are mandatory to address operational and financial risks.

5. Transparency and Disclosure

**·**Stablecoin circulation, reserve composition, and independent audit must be disclosed regularly.

· The license application must be accompanied by a White Paper that provides detailed explanations of the governance, risks, and operational framework of the Stable Coin, which should be available for public review.

6. AML/CFT Compliance

**·**Issuance personnel must implement strict AML/CFT measures, including customer due diligence, transaction monitoring, and compliance with the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.

7. Business Activity Restrictions

· Issuance personnel are prohibited from engaging in high-risk financial activities, such as loans or Financial Intermediary, and must seek HKMA approval for any new business lines.

Looking to the Future

The Stable Coin Bill will have its first reading in the Legislative Council on December 18, 2024, marking the next step in its process of becoming law. Once implemented, Hong Kong will join the ranks of global leaders in regulating Stable Coins, strengthening its commitment to financial innovation and stability. As the global Stable Coin ecosystem evolves, Hong Kong’s proactive regulatory stance may serve as a model for other jurisdictions, ensuring that Stable Coins fulfill their promise as secure, efficient, and inclusive financial instruments.