In a significant move to solidify its position as a leading cryptocurrency hub, the Hong Kong government recently gazetted the Proposed Stablecoin Ordinance. This legislative initiative underwent its first reading on December 18, 2024, and is expected to be enacted into law in the coming months.
The proposed framework aims to bring the issuance and regulation of stablecoins under the oversight of the Hong Kong Monetary Authority (HKMA), the body responsible for supervising all banking activities in the region.
Understanding the Regulatory Objectives
The government's explanatory notes acknowledge the potential for stablecoins to become widely adopted as a payment method and to play a major role within mainstream financial systems. However, it also recognizes that without a proper regulatory framework, their operation could pose significant risks to the stability of local markets and the broader financial ecosystem.
The introduction of this ordinance represents Hong Kong's chosen path: establishing a clear regulatory regime rather than imposing an outright ban on stablecoin activities.
Key Provisions of the Draft Legislation
Licensing Requirements and Criminal Offenses
The proposed law makes it a criminal offense to issue stablecoins or engage in specific stablecoin-related activities without obtaining a license from the HKMA or qualifying for a special exemption. Notably, these provisions extend to activities conducted outside Hong Kong that specifically target the Hong Kong public.
Regulatory Alignment With Existing Frameworks
The licensing regime follows similar requirements found in other existing regulatory frameworks, such as those governing intermediaries under the Securities and Futures Ordinance. These requirements include:
- Background checks on all directors to ensure their suitability
- Pre-approval procedures for major shareholders
- Requirements to maintain adequate financial resources
- Comprehensive anti-money laundering and counter-terrorist financing provisions for license holders
Governance and Management Requirements
While board members of applicant companies are not required to be Hong Kong residents, each applicant must have at least three key managers residing in Hong Kong. These managers must also meet the fit-and-proper person requirements established by the regulatory framework.
Eligibility and License Validity
Stablecoin licenses will only be granted to Hong Kong companies or overseas recognized institutions already licensed by the HKMA to conduct banking activities in Hong Kong. Although the stablecoin license itself does not have an expiration date, the HKMA retains the authority to revoke it under certain circumstances.
Implications for the Digital Asset Ecosystem
The Proposed Stablecoin Ordinance represents a comprehensive regulatory framework operated by a respected regional regulatory authority. This development marks an exciting step forward for Hong Kong's aspirations to become a significant player in the cryptocurrency market while balancing the need to protect investors and safeguard the financial system from illicit activities.
The establishment of clear guidelines provides much-needed certainty for businesses operating in the digital asset space and demonstrates Hong Kong's commitment to fostering innovation while maintaining financial stability.
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Frequently Asked Questions
What is the purpose of Hong Kong's Proposed Stablecoin Ordinance?
The ordinance aims to regulate stablecoin issuance and related activities through a licensing framework supervised by the HKMA. It seeks to harness the potential benefits of stablecoins while mitigating risks to financial stability and protecting investors.
Who needs to apply for a stablecoin license in Hong Kong?
Any entity issuing stablecoins or engaging in specific stablecoin-related activities that target the Hong Kong public must obtain a license, even if their operations are based outside Hong Kong. The license is available to Hong Kong companies and overseas institutions already licensed for banking activities in Hong Kong.
What are the key requirements for obtaining a stablecoin license?
Applicants must pass background checks for all directors, obtain pre-approval for major shareholders, demonstrate adequate financial resources, and implement robust anti-money laundering and counter-terrorist financing measures. Additionally, they must have three key managers residing in Hong Kong who meet fit-and-proper requirements.
How does this regulatory framework benefit the cryptocurrency industry?
The clear regulatory guidelines provide legal certainty for businesses, enhance consumer protection, and promote financial stability. This structured approach helps legitimate operators comply with standards while preventing illicit activities, ultimately fostering greater adoption of digital assets.
What happens if someone operates without a stablecoin license?
Conducting stablecoin activities without a license or exemption from the HKMA constitutes a criminal offense under the proposed legislation. The HKMA will have enforcement authority to address violations.
When is the stablecoin legislation expected to come into effect?
The draft ordinance underwent its first reading in December 2024 and is expected to be passed into law in the coming months, though the exact timeline for implementation remains subject to legislative proceedings.