Hong Kong announces the Stable Coin Bill: an important 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 a global center for digital assets. This long-awaited legislative initiative lays the foundation for comprehensive regulation of stablecoins anchored to legal tender coins (FRS), meeting global standards while addressing financial stability risks and 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 operation process, issuance claims to be FRS with the Hong Kong dollar as the reference for stable value; or

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

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

Stablecoin regulation’s robust approach

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 a high-quality and highly liquid reserve that is equivalent to the value of the issuance Stable Coin.

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

·Risk Mitigation: Obligations include annual risk assessments, Compliance for Anti-Money Laundering/Counter-Terrorist Financing, and strict redemption policies.

The bill follows the Financial Stability Committee’s principle of ‘same activities, same risks, same supervision’, ensuring that FRS issuers meet standards similar to those of traditional Financial Institutions.

Comparison of Jurisdictions: Global Stable Coin Regulatory Approaches

With the stablecoin gaining follow globally, different jurisdictions have adopted different regulatory approaches. Hong Kong has joined the ranks of jurisdictions taking specific steps to regulate the issuance of stablecoins by country. The following is a comparison of the regulatory progress in key jurisdictions:

The proposed system in Hong Kong stands out for its follow of a single currency and multiple stablecoins, as well as the inclusion of Decentralization and centralization systems.

From consultation to legislation

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

Currently, the HKMA regulates stored value facilities under the Payment Systems and Stored Value Facilities Ordinance, while the SFC regulates virtual asset services 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’s Legal Tender Coin Reference Stable Coin License Requirements

The licensing framework under the Hong Kong Stablecoin Bill 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 counter-terrorist financing (AML/CFT) standards.

Key License Plate 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. Algorithmic or arbitrage-type Stable Coins lacking reserve support are prohibited.

·High-Quality Investment: Reserve assets must have Liquidity, low risk, and diversification, 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

· Under normal circumstances, the issuer must ensure that stablecoins are redeemed at face value within one day to ensure user Liquidity.

3. Governance and local presence

** · ** The issuer is registered and established in Hong Kong, with offices and senior management in Hong Kong for effective supervision by HKMA.

4. Financial Resources and Risk Management

The issuer’s minimum capital requirement is 25 million Hong Kong dollars or 1% of the circulating stable coin, 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

**·**Stablecoins must regularly disclose circulation, reserve composition, and undergo independent audits.

· License applications must be accompanied by a White Paper that provides detailed explanations of Stable Coin governance, risks, and operational frameworks, which should be made available for public access.

6. AML/CFT Compliance

**·**The 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 undergo its first reading in the Legislative Council on December 18, 2024, marking the next step in the legislative process. Once implemented, Hong Kong will join the ranks of global leaders in Stable Coin regulation, reinforcing 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 tools.