Author: SK Lee

Translation: Baihua Blockchain

Introduction: A New Era for Digital Assets in Hong Kong

When the "Stablecoin Regulation" comes into effect on August 1, 2025, Hong Kong will officially enter a new phase in the evolution of its digital asset ecosystem. At the heart of this transformation is a set of landmark anti-money laundering (AML) guidelines issued by the Hong Kong Monetary Authority (HKMA). These guidelines are not merely a checklist of procedures—they represent a deliberately designed, meticulously constructed framework aimed at shaping a new generation of licensed, transparent, and globally trusted stablecoins.

While these guidelines reaffirm familiar regulatory pillars such as Customer Due Diligence (CDD) and Suspicious Transaction Reporting (STR), they introduce a decisive and globally significant requirement: the identity of every stablecoin holder must be continuously verifiable. This is not a one-time onboarding check; it is about maintaining an ecosystem where all participants in a value chain are known and identifiable.

This rule appears simple yet has transformative implications: licensed stablecoins can only be transferred to wallet addresses that have been confirmed to belong to verified individuals or entities. Verification can be conducted by the issuer itself, regulated financial institutions, or trusted third-party providers. In short, the HKMA envisions a stablecoin environment devoid of anonymous corners, replacing opacity with accountability.

Why It Matters: The Global Regulatory Landscape

For blockchain traditionalists and DeFi purists, this restriction may seem to close off the open architecture of permissionless systems, replacing the borderless spirit of public ledgers with a licensed "closed-loop" model. However, this decision is not arbitrary—it is a sharp response to the international community's increasing scrutiny of anonymous transactions.

The Financial Action Task Force (FATF), a global leader in anti-money laundering standard-setting, has long warned of the systemic risks posed by "unhosted" or self-custodied wallets conducting peer-to-peer transactions. Because these transactions bypass regulated Virtual Asset Service Providers (VASPs), they evade traditional KYC controls and the travel rule obligations that require identifying information about senders and receivers to accompany each relevant transaction. The HKMA's new requirements are essentially a preemptive strike against this loophole—embedding compliance rules directly into the very nature of the assets.

The Bank for International Settlements (BIS) adds another layer to this argument. Through multiple reports, it has highlighted the "decentralized illusion" present in many DeFi systems. While the infrastructure may be distributed, real decision-making and control often reside with identifiable developers, operators, or governance bodies. In this context, allowing transactions to be completely anonymous undermines the ability to apply AML/CFT rules and could jeopardize financial stability. The BIS believes that to ensure the smooth and secure integration of DeFi projects with traditional finance, structural gaps in compliance must be closed. Therefore, the HKMA's stance is both a response to current global standards and a safeguard for the future of Hong Kong's ecosystem.

How to Achieve It: Embedding Compliance into Code

Of course, the challenge lies in practical implementation: how to enforce such rules on public blockchains without compromising the availability and liquidity of the assets?

The answer is to build compliance into the DNA of the token—making transfers possible only when certain rules are met. Technically, this is achieved through a "permissioned token" architecture that checks wallet eligibility on-chain before settling transactions. Such designs revolve around whitelisting: transfers will only succeed if both the sender's and receiver's wallet addresses have been pre-approved.

A mature and highly relevant framework is ERC-3643, a formal Ethereum token standard optimized for regulated digital assets such as stablecoins and tokenized securities.

The Application of ERC-3643 in Practice

ERC-3643 is not just a technical specification; it is a comprehensive compliance framework woven directly into the structure of digital assets. It achieves this by clearly separating the "rules of the game" of law and regulation from the core transactional logic of the token while binding them closely together for seamless operation. At the core of this architecture is the token contract, a piece of on-chain code representing the stablecoin itself. Unlike traditional tokens, it is programmed to verify whether certain conditions are met before a transfer occurs. The token contract does not immediately transfer funds from one wallet to another; instead, it pauses to consult a second-layer infrastructure—the compliance contract.

The compliance contract acts as an automated gatekeeper, a programmable instruction set used to determine whether a transaction is allowed. To make such judgments, it relies on a third key component: the identity registry. This registry is an on-chain directory that links each wallet address to a series of verifiable attributes of its owner, commonly referred to as "claims." These claims may confirm that the holder has passed KYC checks, indicate their jurisdiction of residence, or record whether their address has been flagged for sanctions.

When someone attempts to send stablecoins, the token contract queries the compliance contract, which in turn cross-references the claims of the sender and receiver stored in the identity registry. Only when all required conditions—such as KYC approval or sanctions clearance—are fully met will the transfer proceed. This entire process occurs in real-time, requiring no manual intervention, embedding compliance directly into the speed and certainty of blockchain transactions. It is instantaneous, fair, and transparent, providing regulators with a living, auditable record of rule application.

Through the interaction of tokens, registries, and compliance logic, ERC-3643 transforms regulatory guidelines into self-executing on-chain controls. It makes anonymous transfers nearly impossible, allowing problematic addresses to be frozen or restricted in an instant, facilitating compliance with travel rule obligations, and providing regulators with a clear window into how compliance is applied throughout the ecosystem. Essentially, it shifts enforcement from paper policies to native actions on the blockchain.

Conclusion: Building Bridges, Not Closing Doors

Hong Kong's stablecoin regulation is not just a signal of compliance—it signals the city's intention to become a global hub for regulated digital assets. By requiring verifiable identities for participants, the HKMA is creating conditions for stablecoins to become trusted, mass-market financial tools rather than niche or speculative instruments.

For issuers, the message is clear: adopting technologies like ERC-3643 is rapidly shifting from "forward-looking" to operational necessity. It addresses policy requirements such as the FATF travel rule, provides transparent oversight for regulators, and reassures institutional players concerned about reputational risks.

Far from stifling innovation, embedding compliance into code expands the realm of legitimate use cases—from retail payments to cross-border settlements—and strengthens the bridge between Web3 innovation and traditional finance.

In this process, Hong Kong is not abandoning decentralized finance; it is laying the groundwork for a resilient, trustworthy, and globally connected stablecoin ecosystem—one that the international community can trust and the market can confidently embrace.

Looking ahead, an urgent question arises: if identity verification and wallet address registration become standard practices in FATF member jurisdictions and major financial centers, can this process evolve to be both safer and more user-friendly? The answer may lie in the maturation of blockchain-based decentralized identity (DID) solutions, which promise to give individuals greater control over their personal data while meeting the stringent demands of regulators. Whether such technologies will emerge as the preferred bridge between regulatory compliance and the convenience expectations of digital asset users remains to be seen.

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