The Hong Kong Stablecoins Bill and Its Impact on the Crypto Landscape

Stablecoins, generally recognized as digital currencies pegged to other conventional assets like fiat money or commodities, have seen widespread adoption in areas ranging from cross-border payments and remittances to decentralized finance. Often perceived as the bridge between traditional finance and cryptocurrencies, stablecoins have the potential to facilitate faster, cheaper transactions while reducing price volatility and associated risks.

However, stablecoins are not without their challenges – issues such as inadequate asset backing, insufficient transparency, and potential systemic risks persist. These challenges are best exemplified by the collapse of TerraUSD in 2022, the commercial and legal effects of which are still being felt today. The case of TerraUSD revealed vulnerabilities in stablecoin ecosystems, prompting intense scrutiny and calls for regulatory oversight.

Against this context, on 6 December 2024, Hong Kong gazetted its Stablecoins Bill ("Bill"). Following from a Discussion Paper and a Consultation Paper, issued by the Hong Kong Monetary Authority ("HKMA") on 12 January 2022 and 27 December 2023 respectively, the Bill represents another step forward in Hong Kong's proactive regulation of these virtual assets. In this Legal Update, we highlight key features of the Bill while considering its impact on the broader crypto industry.

Highlights of the Stablecoins Bill

The Stablecoins Bill establishes a comprehensive framework seeking to regulate the issuance of stablecoins, and the conduct of stablecoin-related activities, in Hong Kong.

As a starting point, the scope of application of the Bill is determined with reference to the following definitions:

• "stablecoin", defined as "a cryptographically secured digital representation of value that –

(a) is expressed as a unit of account or store of economic value;
(b) is used, or intended to be used, as a medium of exchange accepted by the public for any one or more of the following purposes – (i) payment for goods or services; (ii) discharge of a debt; (iii) investment;
(c) can be transferred, stored or traded electronically;
(d) is operated on a distributed ledger or similar information repository; and
(e) purports to maintain a stable value with reference to – (i) a single asset; or (ii) a pool or basket of assets",

but which excludes a digital representation of value that is issued by a central bank (or an entity performing the functions of, or authorised by, a central bank) or a government (or an entity authorised by a government to issue currency) or otherwise falls within the scope of other regulation; namely, the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (which applies to limited purpose digital tokens); the Securities and Futures Ordinance (which applies to securities or futures contracts); the Payment Systems and Stored Value Facilities Ordinance (which applies to floats or SVF deposits); and the Banking Ordinance (which applies to deposits).

• "specified stablecoin", defined as: (a) a stablecoin that purports to maintain a stable value with reference wholly to one or more official currencies (and/or units of accounts or stores of economic value specified by HKMA); or (b) a digital representation of value (or value of a class) specified by the HKMA.
• "regulated stablecoin activity", where a person is deemed to carry on a regulated stablecoin activity if: (a) he issues a specified stablecoin in Hong Kong in the course of business; (b) he issues a specified stablecoin in the course of business which purports to maintain a stable with reference (whether wholly or partly) to Hong Kong dollars; or (c) he carries on an activity specified by HKMA by notice published in the Gazette.

Businesses engaged in regulated stablecoin activity are subject to regulation under the Bill. As such, they should be familiar with its key features:

• Licensing and Registration Requirements: The Bill establishes a licensing regime for certain activities involving stablecoins. In particular, unless a person applies to the HKMA and obtains a license, it would be an offence to:
  • Carry on, or holding oneself out as carrying on, regulated stablecoin activity;
  • Offer, or hold oneself out as offering, a specified stablecoin; and
  • Publish, or have in one's possession for the purposes of publication, advertisements that holds him out as carrying on a regulated stablecoin activity.

  Once licensed, the licensee will be listed on a register maintained by the HKMA. It will then be subject to duties such as the duty to pay the license fee; the duty to display its license number on its advertising material and consumer-facing interfaces of its software; the duty to ensure that it fulfils the minimum criteria established; and the duty to report to the HKMA matters including an inability to meet its obligations, a change of address, material changes of circumstances.

  Most pertinently, the Bill proceeds to set out the minimum criteria that a licensee must fulfil:

  • Corporate status: The licensee must be a company or an authorised institution incorporated outside Hong Kong.
  • Financial resources: The licensee is obliged to have "adequate financial resources and liquid assets to meet its obligations … as they will or may fall due". Further, the licensee must have paid-up share capital of not less than HKD 25M (or equivalent in other currency) or other financial resources as approved by the HKMA equivalent to or exceeding HKD 25M (or equivalent in other currency).
  • Reserve assets management: The licensee must maintain a pool of reserve assets, separate from any other pool of assets or funds held by the licensee, which "must be of high quality and high liquidity with minimal investment risks", must be "adequately protected against claims by other creditors", and the market value of which must at all times be at least equal to the part value of the outstanding specified stablecoins of the type in circulation.
  • Redemption: The licensee must provide the stablecoin holders with redemption rights that are not subject to any unduly burdensome conditions or unreasonable fees. Further, in the event of the licensee's insolvency, stablecoin holders have the right to direct the disposal of the specified reserve assets pool for the purposes of redemption on a pro rata basis and to claim against the licensee for any shortfall if proceeds from disposal of the specified reserve assets pool are insufficient to cover redemption in full.
  • Risk management and systems of control: The licensee must implement adequate and appropriate risk management policies and/or systems of control in relation to matters including the management of reserve assets, appointment of key personnel and officers, preventing anti-money laundering and counter-terrorist financing, the conduct of stablecoin activities, conflicts of interest, complaints handling and redress mechanisms, and business continuity and contingency planning.
  • Disclosure and reporting obligations: The licensee is obliged to publish "a white paper to provide comprehensive and transparent information" about each type of specified stablecoin it issues and must make adequate and timely disclosures in relation to matters including the management of reserve assets and redemption rights. The licensee is also required to seek the HKMA's consent to appointment of key personnel and notify the HKMA of changes to such personnel.
• Prohibited Stablecoin Activities: The Bill outright criminalises certain harmful activities involving stablecoins. Broadly, these activities are: engaging in fraud and deception in relation to a specified stablecoin; and making a fraudulent misrepresentation or reckless misrepresentation for the purpose of inducing another person to enter into a transaction in respect of a specified stablecoin.
• Enforcement: The Bill grants broad enforcement powers to the HKMA as the primary regulatory authority. Aside from issuing, suspending, and revoking licenses, the Bill confers upon the HKMA the power to require the licensee to take remedial action, the power to appoint a statutory manager to manage the licensee's affairs, broad powers of investigation (including search and seizure under a warrant), and the power to impose sanctions for contravention of statutory provisions (including in relation to former licensees and officers of a licensee).
• Administration and Judicial Review. The Bill establishes the Stablecoin Review Tribunal ("Tribunal"), with jurisdiction to review decisions made under the purview of the Bill on application by aggrieved persons. Further, decisions made by the Tribunal may be appealed to the Hong Kong Court of Appeal.

Implications for Hong Kong and the Broader Crypto Industry

As set out in the Consultation Paper, the key policy objectives sought to be achieved under the Bill are:

• To put in place appropriate safeguards to address potential monetary and financial stability risks posed by fiat-referenced stablecoin;
• To provide adequate protection to such stablecoin users;
• To maintain Hong Kong’s status as an international financial centre by putting in place an appropriate regulatory regime for FRS issuers that is in line with international regulatory recommendations; and
• To foster sustainable and responsible development of the virtual asset ecosystem in Hong Kong by providing legal and regulatory clarity.

To meet these key objectives, the Bill imposes strict licensing, asset backing, and consumer protection measures. While critics may argue that these features could lead to higher compliance costs and the stifling of innovation (especially for smaller or emerging stablecoin issuers), the Bill may still be viewed as a necessary step towards safeguarding digital finance. By providing clear regulatory standards, the Bill has the potential to enhance investor and consumer confidence in stablecoins, thereby encouraging greater market participation and innovation in digital payment systems and decentralised finance. Without such rigorous standards, stakeholders may find it difficult to foster long-term market stability and consumer trust in a rapidly evolving digital asset ecosystem.

At present, the Bill represents one of the most advanced legislative efforts in the Asia-Pacific region in  the cryptocurrency space. Jurisdictions such as Singapore and Australia have thus far relied on soft law instruments, combined with existing legislation, to mitigate risks (Singapore, see e.g.: the Response to Public Consultation on Proposed Regulatory Approach for Stablecoin-related Activities (proposing that single-currency stablecoins be regulated under a new framework while other stablecoins remain subject to the existing regulatory regime under the Payment Services Act 2019); Australia, see e.g. Consultation Paper 381 (proposing that the existing information sheet on the applicability of the Corporations Act 2001 and Australian Securities and Investment Commission Act 2001 to crypto-assets be updated to include further guidance relating to stablecoins).

Against this context, Hong Kong’s initiative may serve as a benchmark for regional regulatory standards and inform compliance strategies for businesses moving forward.

The Bill was presented to the Hong Kong Legislative Council for First Reading and commencement of the Second Reading debate on 18 December 2024, and is now presently undergoing a clause-by-clause examination by the Bills Committee. Stakeholders can expect to be notified of timelines for resumption of the Second Reading debate, committee stage, and Third Reading in the coming months.