This article analyzes the key provisions, strategic positioning, and actual impact of the regulation, and clarifies its distinction from related technologies such as Real-World Asset Tokenization (RWA).
Written by: Bai Zhen, Head of the Hong Kong Office of Mankun Law Firm;
Huang Wenjing, Legal Assistant at Mankun (Shenzhen) Law Firm
Introduction
The passage of the "Hong Kong Stablecoin Regulation" by the Legislative Council of Hong Kong on May 21, 2025, marks a critical turning point in regulation. The regulation was published in the gazette on May 30, 2025, and is set to officially take effect on August 1, 2025. Fiat-backed stablecoins (FRS) are no longer in the gray area of crypto finance within Hong Kong, but are instead incorporated into a formal and institutionally regulated legal framework. This regulation reflects a deliberate recalibration: it aims to position Hong Kong as a compliant and forward-looking virtual asset hub capable of supporting the next generation of programmable finance under the rule of law. This article analyzes the key provisions, strategic positioning, and actual impact of the regulation, and clarifies its distinction from related technologies such as Real-World Asset Tokenization (RWA).
Legal Infrastructure
The legislation constructs a complex semantic system regarding digital value. Stablecoins are defined not only as functional tools but are also delineated from technical, economic, and legal dimensions: they must be cryptographically secured, used as a medium of value storage or exchange, and operate on distributed ledger technology (DLT). "Specific stablecoins" further narrow the scope to tokens pegged to official currencies or other units approved by the Hong Kong Monetary Authority ("HKMA").
The regulated activities are extensive, covering not only issuance and redemption but also marketing, operational participation, and even indirect inducement involving Hong Kong residents. This broad definition ensures regulatory coverage while minimizing the space for regulatory arbitrage based on geography or activity type.
The principle of fiat backing is central. The regulation explicitly states that any "specific stablecoin" must be fully redeemable in its pegged fiat currency, particularly the Hong Kong dollar. This is not merely a mechanical requirement but a fundamental safeguard mechanism. Fiat backing ensures that stablecoins can operate as credible monetary instruments rather than speculative crypto assets. The HKMA requires that reserve assets must be high-quality, liquid assets (such as cash or short-term government bonds) and denominated in the same fiat currency to which the stablecoin is pegged. This measure eliminates the risk of currency mismatch, where a discrepancy between the reserve asset currency and the stablecoin currency could lead to value depreciation. Additionally, it also isolates users from exposure to volatility contagion risks—namely, the panic selling triggered by the collapse of non-pegged crypto assets impacting the stablecoin market.
The regulation explicitly prohibits using highly volatile or illiquid assets as a pegging basis, such as real estate tokens, commodity baskets, or mixed asset indices. If a token cannot be clearly redeemed for fiat currency and lacks clear fiat backing, it is not considered a stablecoin and cannot enjoy legal protection. This approach effectively prevents regulatory arbitrage and stops financial engineering from blurring the lines between asset-backed securities and monetary instruments, thereby reflecting Hong Kong's prioritization of financial stability over speculative or synthetic innovation.
Licensing Framework
The regulation introduces a comprehensive prudential licensing system, emphasizing the systemic importance of stablecoin issuers. Key requirements include:
Capital floor: Minimum paid-up capital of HKD 25 million.
Reserve structure: Issuers must maintain high-quality, liquid reserve assets (such as cash or short-term government bonds) corresponding to the circulating stablecoins on a 1:1 basis.
Isolation and legal protection: Reserve assets must be placed in a trust or similar closed mechanism, and cannot be used for other creditors in the event of bankruptcy.
Redemption mechanism: A mechanism must be in place to ensure real-time fulfillment of redemption requests at face value; delays or additional fees constitute a statutory violation.
Governance review: The appointment of shareholders, directors, and stablecoin management personnel must be approved by the HKMA, and they must continuously meet "fit and proper" standards and disclosure obligations.
License holders must also continuously fulfill related obligations, including paying annual fees, reporting significant changes, and submitting annual compliance reports.
Additionally, the Financial Secretary announced on June 6 that unlicensed issuers are allowed to offer non-regulated stablecoin offers to professional investors as defined under the Securities and Futures Ordinance, retaining some operational space without crossing regulatory lines.
Regulatory Authority and Enforcement Tools
The HKMA's regulatory powers are equipped with strong tools:
Investigative authority: Authorized investigators can request documents, conduct on-site inspections, and require sworn statements.
Sanction mechanisms: The regulation grants the HKMA multi-tiered sanctioning authority, including fines, revocation or cancellation of licenses, public warnings, confiscation orders, and appointment of statutory managers; the HKMA has also conducted public consultations on detailed regulatory requirements under the regulation, focusing on core compliance provisions such as anti-money laundering and combating the financing of terrorism, laying the groundwork for future enforcement.
Management intervention: The HKMA can appoint statutory managers to take over struggling license holders—this was originally a tool exclusive to systemic banks.
Adjudication mechanism: An independent "Stablecoin Adjudication Panel" is responsible for judicial review of sanction decisions, license approvals, and investigative actions.
Prohibited Activities and Criminal Liability: Clarifying Legal Boundaries
The regulation clearly outlines activities that market participants in the virtual asset market are prohibited from engaging in, enhancing legal certainty and strengthening market discipline. Key prohibitions include:
Unlicensed operation (Article 9): Engaging in regulated activities related to stablecoins (including issuance, redemption, management) or claiming to engage in related activities constitutes a criminal offense, regardless of whether the activities are based in Hong Kong, as long as they target the Hong Kong market.
Illegal issuance of specific stablecoins (Article 9): Offering specific stablecoins to the public without obtaining appropriate licenses constitutes an independent criminal offense.
Advertising restrictions (Article 10): If a party is unlicensed or not exempt, publishing or preparing to publish advertisements indicating their participation in stablecoin activities or issuance of stablecoins constitutes a crime.
Fraud and misrepresentation (Article 11): Any attempts to commit fraud, mislead, or falsely advertise regarding stablecoin transactions, including false statements about reserve support, redemption rights, or relationships with licensed entities, are criminal offenses.
Inducement offenses (Article 12): Inducing others to purchase, dispose of, subscribe for, or underwrite specific stablecoins through false statements or disregard for the truth constitutes a criminal offense.
Transitional Provisions
The regulation is set to take effect on August 1, 2025, and includes a time-limited transitional arrangement: stablecoin issuers that have been operating substantively in Hong Kong prior to the formal implementation of the regulation may continue to operate for six months if they submit a license application within the first three months. However, this is not an indefinite or unconditional exemption; unlicensed issuers must exit the market or complete the authorization process in accordance with the law.
International Comparison and Hong Kong's Differentiated Positioning
Compared to the EU's "Regulation on Markets in Crypto-Assets" (MiCA), Singapore's "Payment Services Act 2019," and the state-level remittance licensing system in the United States, Hong Kong's regulation exhibits unique regulatory choices:
Mandatory face value redemption obligation: Most jurisdictions (including MiCA and the U.S. MTL system) allow for redemption delays or issuer discretion; for example, MiCA permits redemption within five working days, while Hong Kong mandates immediate fulfillment at face value.
Introduction of statutory management mechanisms: The "pre-bankruptcy intervention rights," which are rare in crypto asset legislation, are explicitly introduced in Hong Kong's regulation, originally a tool exclusive to banks.
Overlap with banking regulation: Regulatory requirements such as capital requirements, reserve isolation, and "fit and proper" standards are similar to those for traditional deposit-taking institutions, blurring the lines between token issuers and traditional financial intermediaries.
This strategic difference reflects Hong Kong's prioritization of stability and fiat anchoring over merely pursuing market growth or issuer flexibility.
Real-World Asset Tokenization: Key Distinctions
A common misconception is that the compliance of stablecoins implies the indirect recognition of RWAs. This is not the case. The regulation does not provide a direct pathway or legal recognition for RWA projects.
Stablecoins operate within a fiat framework, while RWAs involve tokenizing domestic assets (such as real estate, stocks, and bonds). The regulation emphasizes that there are still regulatory gaps for RWAs, with key challenges including:
Cross-border asset transfer: Tokenizing assets located in mainland China involves foreign exchange controls, securities regulations, and capital account supervision.
QFII restrictions: Domestic assets cannot be tokenized for cross-border use unless QFII/RQFII licenses are obtained through traditional channels.
Stablecoin license ≠ RWA legality: Obtaining FRS licensing does not equate to the legal ability to engage in RWA business, especially for illiquid, unverified, or "firewalled" assets.
RWA projects must address their independent legal challenges. Stablecoins can serve as payment or collateral tools within the RWA ecosystem, but they do not resolve the core legal issues of cross-border asset circulation.
Actual Impact and Industry Adjustments
The new regulations will fundamentally change how virtual asset businesses operate in Hong Kong. Both issuers and investors must reassess their strategies, partnerships, and legal risks:
Issuers: The era of quickly launching products is over. Stablecoin issuance requires robust financial governance, genuine monetary support, and clear legal responsibilities. The capital requirement starting at HKD 25 million, along with auditing costs, reserve checks, and real-time redemption systems, significantly raises the threshold. Unlicensed issuance is no longer a "risk" but a criminal offense.
Banks and trust institutions: Naturally positioned to become reserve custodians, compliance verifiers, and risk managers, they may develop services such as stablecoin treasury management and KYC support in the future, but they also need to upgrade systems to support tokenized transactions and assess legal liabilities.
Investors: Enhanced protections come with reduced choices. The mandatory redemption rights and reserve isolation increase investor confidence, although the initial selection of stablecoins may decrease; in the long run, it will be easier to identify truly compliant, fiat-backed stablecoins.
Global platforms: They can no longer "casually" offer stablecoins to Hong Kong. Under the new regulations, they must establish dedicated compliance strategies. Unlike the EU's MiCA passporting system, Hong Kong does not recognize external licenses. Promoting or providing asset basket-pegged tokens to Hong Kong users is likely to violate advertising laws.
Developers and DeFi builders: Technology cannot surpass the law. Any protocol development interacting with fiat stablecoins must prioritize compliance from the outset, embedding a verification system for stablecoin issuer status.
Conclusion
Hong Kong's stablecoin regulation is a strategic choice made with intent: to incorporate crypto finance into a system of accountability. By integrating licensing, regulation, and enforcement into a unified framework, Hong Kong sends a clear signal to the global market: digital finance must operate under the rule of law. Market participants should prepare for rigorous audits, reserve checks, and ongoing regulatory dialogues. Those who adapt will not only survive but will also shape the future of compliant digital finance in Asia.
However, deeper questions remain: Can programmable currency thrive in a rule-of-law economy? Can decentralized technology coexist with centralized regulation? Can crypto innovation gain public trust without enforceable redemption rights and institutional accountability? These challenges are further amplified by unresolved fractures: how to balance AML/CFT regulation while retaining anonymity features; and how mainland capital controls interact with the cross-border circulation of Hong Kong dollar stablecoins or the tokenization of mainland assets.
These tensions reinforce Hong Kong's core proposition: the key to financial evolution lies not in speed, but in sovereignty, stability, and systemic integrity. Only regulation can establish trust where technology cannot self-validate trust. Without trust, innovation will ultimately fail.
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