Rapid growth of stablecoins and international recognition reflect regulatory needs

In recent years, stablecoins have become a key settlement asset in blockchain transactions due to their price stability and wide-ranging applications, experiencing remarkable growth. Moreover, as the US advances stablecoin legislation, major banks project that the stablecoin market could soar to USD2 trillion within three years. For Hong Kong to lead in global Web3 finance, it must promptly review regulations and products to boost competitiveness.

What are stablecoins? Essentially, stablecoins are virtual assets that maintain stable value by referencing certain assets, typically fiat currencies. Unlike central bank digital currencies, stablecoins can be issued by financial institutions or corporations. As fiat-referenced stablecoins are backed by equivalent reserves of national fiat currencies, they have the potential to become widely accepted payment instruments, making integration into mainstream financial systems likely. However, this poses more immediate risks to monetary and financial stability. The Legislative Council’s passage of the Stablecoins Bill establishes a regulatory framework for fiat-referenced stablecoin issuers. As a Financial Stability Board member, Hong Kong is obliged to implement stablecoin regulation.

Risk-based approach: balancing public protection and stablecoin development

The Stablecoins Ordinance requires anyone issuing fiat-referenced stablecoins in Hong Kong, claiming to issue HKD-pegged fiat-referenced stablecoins inside or outside Hong Kong, or actively promoting stablecoin issuance to the Hong Kong public to obtain a license. Regulating stablecoins focuses on minimizing risks like insufficient reserves, value de-pegging, and centralization to limit spillover risks to traditional finance and protect the public effectively. The Ordinance mandates licensees to maintain a robust reserve stabilization mechanism, ensuring reserve assets are high-quality and highly liquid. It sets minimum standards, requiring the total value of reserve assets to at least equal the face value of circulating fiat-referenced stablecoins at all times, with proper segregation and custody. Additionally, holders of fiat-referenced stablecoins have the right to redeem their stablecoins at face value from the issuer, with redemption requests processed within a reasonable timeframe and without unreasonable fees. The Ordinance also includes provisions for anti-money laundering, risk management, disclosure, audits and fit-and-proper person requirements.

Additionally, the Stablecoins Ordinance establishes a review mechanism. Anyone aggrieved by a specified decision can refer it to a tribunal for review. The tribunal’s decision is final, except for appeals on points of law. This balances the needs of license applicants, ensuring the legislation’s overall fairness and impartiality.

Expanding use cases to position Hong Kong as a digital asset hub

Progressive legislation and robust regulatory frameworks are prerequisites for stablecoin development. Expanding stablecoin use cases and public education are key future priorities. Compared to traditional payment and settlement methods, stablecoins offer higher efficiency and transparency in blockchain transactions, with tamper-proof data enhancing payment certainty. This presents new opportunities for Hong Kong’s SMEs to reduce transaction costs, improve cash flow efficiency, and expand into international markets. As “programmable money,” stablecoins can execute complex transactions, potentially leading to innovative applications.

Last July, the Hong Kong Monetary Authority announced three stablecoin issuers as “sandbox” participants. This year, the Chief Executive’s delegation to the Middle East noted Qatar’s keen interest in Hong Kong’s stablecoin development. Authorities should enhance promotion efforts and attract more stablecoin issuers to Hong Kong, establishing the city as a digital asset hub and facilitating cross-border settlement channels.