Hong Kong passes the "Stablecoin Issuer Ordinance Draft" to provide the first complete regulatory framework for stablecoins.

On May 21, 2024, the Hong Kong Legislative Council officially passed the "Stablecoin Issuers Ordinance Bill" in its third reading, providing the first complete framework for stablecoin regulation. The ordinance is expected to take effect within this year and stipulates three categories of stablecoin-related activities that require licensing: issuance of fiat stablecoins in Hong Kong, issuance of Hong Kong dollar stablecoins in Hong Kong or outside Hong Kong, and actively promoting the issuance of fiat stablecoins to the public in Hong Kong.

According to the regulations, individuals or entities intending to issue or operate "designated stablecoins" in Hong Kong must apply for a license from the Hong Kong Monetary Authority. Applicants must meet minimum standards, including capital strength, risk management, corporate governance structure, and internal control systems, among others. For example, the licensed entity's capital must be at least 25 million HKD.

Licenses do not have a fixed validity period unless revoked or the licensee loses eligibility. However, if the licensee fails to meet minimum standards or encounters significant issues, the financial management commissioner may revoke or suspend the license and may appoint a statutory manager to take over the business if necessary. In addition, a "Licensee Registration List" will be established for public inquiry.

The regulations stipulate that only designated licensed institutions can sell fiat stablecoins in Hong Kong, and only fiat stablecoins issued by licensed issuers can be sold to retail investors. These designated licensed institutions include stablecoin issuers licensed by the Financial Management Commissioner, banks, institutions with Type 1 licenses issued by the Securities and Futures Commission, and virtual asset trading platforms licensed in Hong Kong.

The draft also clarifies the penalties for engaging in regulated stablecoin activities without a license or for selling designated stablecoins without authorization. The maximum penalty can be a fine of HKD 5 million and imprisonment for 7 years, while a summary conviction can result in a fine of HKD 500,000 and imprisonment for 2 years. Continuous violations may incur an additional daily penalty of up to HKD 100,000.

Other key points of the regulations include:

1. 100% Reserve and Segregated Custody: Licensed issuers must maintain a robust stablecoin mechanism to ensure that reserve assets consist of high-quality, highly liquid assets and are equal to the circulating fiat currency stablecoin denominations. These reserve assets must be properly segregated and held apart from the issuer's own assets.

2. Unconditional redemption mechanism: Stablecoin holders have the right to redeem stablecoins at face value from the issuer without any fees, and it must be processed within a reasonable time.

3. Strict Compliance Framework: Licensed issuers must meet a series of regulatory requirements, including anti-money laundering, risk management, information disclosure, and qualified audits, to ensure operational transparency and soundness.

In addition to legislation, the Hong Kong Monetary Authority also launched a stablecoin issuance sandbox in 2024. Currently, there are three groups of participants in the sandbox, consisting of Standard Chartered Hong Kong, a consortium formed by Anqi Group and Hong Kong Telecommunications, JD Coin Chain Technology (Hong Kong), and Yuan Coin Innovation Technology.

Industry insiders have expressed support for this bill, believing that it sets a unified standard for industry development and helps enhance transparency and long-term stability. At the same time, some experts suggest that in the future, it may be worth considering including assets such as offshore renminbi within the scope of underlying assets, and exploring the possibility of directly delivering the interest earned from investments to stablecoin holders.

With the passage of the regulations, Hong Kong is actively building its Web3 infrastructure. Some enterprises have announced comprehensive support for Hong Kong's stablecoin and its reserve assets, accelerating the construction of on-chain infrastructure for stablecoin issuance, circulation, and management. This initiative will have a profound impact on the development of the digital asset market and inject new momentum into Hong Kong's fintech sector.