Author: Aki Chen Wu on Blockchain

This article is organized with the participation of GPT, intended for information sharing only, and does not constitute any investment advice. Readers are advised to strictly comply with the laws and regulations of their location and not to engage in illegal financial activities.

Introduction

On August 1, 2025, Hong Kong's "Stablecoin Regulation" officially came into effect. The regulation clearly states that any institution issuing or providing fiat-pegged stablecoins to local retail in Hong Kong must apply for a license issued by the Monetary Authority, strictly adhering to reserve mechanisms, AML/KYC obligations, and requirements for transparency. The Hong Kong Monetary Authority also announced the launch of the stablecoin license application, with the first round of applications closing on September 30, and the first batch of licenses expected to be issued in early 2026. This series of actions is seen by the industry as "an important milestone in the global compliance of stablecoins," but due to its strict KYC requirements and high barriers to entry, it is comparable to the world's most stringent stablecoin legislation, sparking intense debate among Web3 project teams and communities. Meanwhile, the U.S. SEC has launched the Project Crypto initiative, proposing an "innovation exemption" that sharply contrasts with Hong Kong's approach.

Overview of Core Stablecoin Regulations

According to the new regulations, all activities related to the issuance, circulation, or provision of fiat-pegged stablecoins to local retail users in Hong Kong must obtain a special license from the Monetary Authority. Core requirements include:

· Capital Requirement: Minimum paid-up capital of HKD 25 million;

· Reserve Mechanism: 100% backing by high-quality liquid assets (cash, short-term government bonds), with mandatory custody isolation and prohibition of re-hypothecation;

· Redemption Mechanism: Users must be able to redeem at face value within one day;

· Real-name System (KYC): All user identities must be retained for over 5 years, with DeFi scenarios and anonymous wallet access explicitly prohibited;

· Prohibition on Promotion: Unlicensed stablecoins cannot be marketed to the public, with violators facing fines and criminal liability.

Among all regulatory provisions, the KYC real-name verification requirement has become the focal point of the greatest controversy within the Web3 community. According to the Monetary Authority's requirements, stablecoin issuers must not only verify user identity information and retain data records for over 5 years but also cannot provide services to anonymous users. Additionally, initially, identity verification is required for every compliant stablecoin holder in Hong Kong. In response, Hong Kong Legislative Council members stated that the Monetary Authority would indeed implement KYC rules, but the specific implementation methods are not yet determined, with real-name systems being one of the options. The Assistant Chief Executive of the Hong Kong Monetary Authority (Regulation and Anti-Money Laundering), Chen Jinghong, also pointed out that this arrangement is stricter than the "whitelist" mechanism proposed in earlier anti-money laundering consultation documents. However, he also mentioned that with the gradual maturity of related technologies, there may be a possibility of moderately relaxing regulations in the future.

This means that initially, Hong Kong's stablecoins may not have the capability to interact directly with DeFi protocols, and decentralized wallets and unlicensed addresses will be isolated from the compliance system. Such interactions will also be legally regarded as "unauthorized use." It is evident that compared to the scalability and freedom of on-chain protocols, Hong Kong regulators focus more on controlling the regulatory authority over the circulation of stablecoins. This move and attitude have been viewed by some industry players as a cold shower on the application of stablecoins in on-chain open financial scenarios. This creates a significant divergence from the existing mainstream stablecoins (such as USDT, USDC), which allow free transfers between wallets and seamless integration with DeFi protocols, inevitably impacting user experience and adoption.

Compounding the issue, according to the Hong Kong Monetary Authority's "Regulatory Framework for Stablecoin Issuers," when "offering specified stablecoins," license holders must comply with the laws and regulatory requirements of the relevant jurisdictions. This provision emphasizes that not only must issuance be compliant, but a comprehensive institutional guarantee mechanism covering cross-border operations, identifying restricted areas, and proactively blocking must also be established.

Specifically, this includes the following three obligations:

1. Prohibition on Providing Services to Specific Regions

License holders must ensure that they do not engage in issuance or offering activities in jurisdictions where trading stablecoins is prohibited. Regulatory recommendations suggest achieving this through multiple means, including: verifying user identity documents (such as ID cards or passports) to identify nationality or residence; using IP address or GPS location technology to determine the user's true geographical location; and technically blocking access from restricted areas to prevent downloading, registration, or purchasing activities. This requirement essentially mandates that license holders act as a "geographical risk firewall," cutting off potential access paths to restricted areas from the point of issuance to prevent violations of foreign laws or cross-border regulatory disputes.

3.5.3 also clearly states that license holders need to detect whether users are using virtual private networks to determine compliance, meaning that if stablecoins are not allowed in a user's location, using a virtual private network would still be considered a violation. This significantly raises the user threshold, requiring each user to submit identification, making the process cumbersome and erasing the "open wallet and use" experience. It may also make it difficult for global users to access; non-local Hong Kong users who are not explicitly included in the policy scope may find it practically impossible to use stablecoins issued in Hong Kong. Transfers are also strictly limited; stablecoin license holders will be regarded as financial institutions and must comply with FATF's rules on fund transfers, ensuring that both the recipient and sender have completed KYC and provided relevant information before transfers, or the platform or contract may block the transaction from being executed.

This requirement from Hong Kong regulators essentially transforms "stablecoins" into a form of controlled circulating electronic currency or bank token, characterized not as universally applicable decentralized assets on-chain, but as: a digital tool with real-name binding, geographical restrictions, and regulatory attributes.

2. Comprehensive Compliance for Overseas Marketing and Operations

In addition to the obligation to block prohibited trading jurisdictions, the regulations also require license holders to ensure that all business operations and marketing activities (such as advertising, partnership channels, application deployment, etc.) comply with the applicable regulations of the target market. This means:

· No marketing content may be pushed to unlicensed regions;

· Overseas partners must be assessed for compliance qualifications;

· Care must be taken with website language versions, service terms, etc., to avoid constituting "actual provision of services" as a legal fact.

3. Continuous Monitoring and Dynamic Adjustment Mechanism

Regulators further require license holders to establish a continuous monitoring mechanism to closely monitor policy changes in various countries/regions and promptly adjust their business strategies and technical measures. For example: if a country introduces a new stablecoin ban, the issuer must immediately terminate related services; if regulatory standards are raised (such as requiring additional licenses or real-name requirements), the KYC process and compliance review system must be updated accordingly.

In this regard, Dr. Xiao Feng, Chairman and CEO of HashKey Group, previously stated that in traditional finance, anti-money laundering mechanisms heavily rely on identity-based information retrieval and account information connectivity, but in practice, this system faces serious bottlenecks in multi-bank, multi-region, and cross-jurisdictional scenarios. In contrast, the on-chain tracking and address labeling mechanisms developed in the crypto industry in recent years provide an alternative approach to anti-money laundering. In blockchain systems, every transaction is transparent, and the historical flow of funds for any address can be traced throughout. From the minting of tokens, the first circulation, cross-chain transfers to final ownership, on-chain information possesses characteristics of immutability, global readability, and real-time synchronization, enhancing the efficiency and accuracy of money laundering path identification.

Industry Impact Analysis: Reactions from Project Teams, Users, and Market Chains

According to on-site investigations by Techub News reporters, on the first day the Hong Kong "Stablecoin Regulation" officially took effect on August 1, some cryptocurrency OTC offline stores, including One Satoshi, temporarily closed due to concerns about violating regulatory red lines. Meanwhile, several OTC stores chose to continue normal operations, reflecting a divergence in the industry's understanding of the new regulations' applicability. After the regulation was introduced, reactions from Hong Kong's Web3 industry varied. Some said, "Finally, there is regulation," while others candidly stated, "This is not the kind of regulation we want." The real-name system, licensing system, and high barriers to entry have kept many native projects out. Particularly, the inability of stablecoins to directly connect with DeFi, along with the exclusion of anonymous wallets and open contracts from compliance, essentially makes it clear: Hong Kong stablecoins will not support free circulation on-chain.

For some teams that originally hoped to establish Hong Kong as a Web3 base, this is clearly a setback. If you want to issue tokens, you must apply for a license; if you want to create a wallet, you must ensure that every address is real-name verified—this deviates from the traditional notion of "Web3," resembling more of "Web2.5" or "permissioned chain finance." The more practical issue is that this regulation excludes some small and medium-sized entrepreneurs; although the Hong Kong Monetary Authority claims to welcome innovation, it appears to favor banks and giants, with only invited institutions or platforms qualifying to apply for licenses. The entire system design seems more aimed at allowing "orthodox forces" to dominate the development of stablecoins, leaving individuals and small projects either observing or exiting. If the previous Hong Kong Web3 ecosystem was characterized by wild growth, it is now a complete "order restructuring." However, in the pursuit of compliance and financial stability, Hong Kong may also be losing the very freedom that initially attracted developers.

Comparison with Regulatory Frameworks in Other Regions

In contrast to the recently introduced Project Crypto initiative across the ocean, which proposes "innovation exemptions," Hong Kong's new stablecoin regulations are characterized by clear regulation, strong KYC real-name systems, and robust anti-money laundering measures.

It is evident that Hong Kong's current strategy leans towards constructing a "quasi-sovereign settlement tool," emphasizing regulatory dominance and financial security, while shielding core capabilities of Web3, such as permissionless structures, contract invocation, and decentralized wallets, from the regulatory framework. This, to some extent, presupposes that stablecoins "can only serve regulated financial institutions," rather than being used as neutral infrastructure within the on-chain ecosystem.

In contrast, the EU's MiCA also emphasizes KYC but allows for some flexibility—such as exemptions for low-value transactions or permitting anonymous wallets; while Singapore's DTSP is closer to a "layered sandbox" approach, welcoming DeFi projects with risk control capabilities to gradually test the waters. In the U.S., although regulation has long lagged, there have been strong signals of a shift towards modernizing on-chain systems while balancing financial innovation following the signing of the "GENIUS Act," the release of the "PWG Report," and the launch of the "Project Crypto" initiative. The current SEC chairman has emphasized in public speeches: "We introduce regulation for the sake of regulation, avoiding the act of cutting corners."

This comparison reveals a core difference: Hong Kong bets on the compliance infrastructure for stablecoins, the U.S. shifts towards on-chain system modernization, the EU seeks universal standards, and Singapore maintains openness in financial experimentation. Hong Kong's current approach is more suited for "permissioned chain finance" aimed at serving offshore settlements, while its compatibility and attractiveness are relatively limited for the Web3 path that emphasizes open ecosystems and anonymous circulation.

Conclusion: Can Compliance and Openness Be Balanced? Hong Kong is Still Testing the Boundaries

Regulation must move forward, but it should also leave room for flexibility. As a financial center in Asia, Hong Kong is not only a testing ground for technology and systems but also bears the responsibility of setting paradigms for the region and even the world. However, while promoting KYC real-name systems, anti-money laundering, and traceability mechanisms, how to avoid completely erasing the space for on-chain privacy, and how to retain a certain degree of openness and scalability while ensuring financial security, is the true long-term challenge of this legislation. As Dr. Xiao Feng stated, the reason blockchain can develop is that permissionless access is its most fundamental characteristic. Anyone can freely join or exit the network, while the real-name system and approval mechanisms emphasized by the current Hong Kong stablecoin regulation, in a sense, deviate from this logic of openness without permission.

Stablecoins are essentially a tool for institutional innovation, linking on-chain and off-chain, bridging the traditional and the future. If overly "paternalistic" regulation is imposed, it will not only struggle to integrate into the current DeFi ecosystem but may also lose Hong Kong's key position in the global reshaping of digital financial order. In the next phase of implementation and interpretation, how Hong Kong finds a balance between regulatory rigidity and technological flexibility is worthy of ongoing attention from all sectors.

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