How to Obtain a License to Operate a Stablecoin Business in Hong Kong? Understanding the Hong Kong Government's Stablecoin Regulatory Framework

1. The Regulatory Background of Stablecoins

1.1 Definition of Stablecoins

Stablecoins are a unique asset within the cryptocurrency market, characterized by their value being pegged to fiat currencies or other assets, maintaining a relatively stable value. The Bank for International Settlements (BIS) defines stablecoins as “cryptocurrencies whose value is pegged to fiat currencies or other assets.” Unlike traditional cryptocurrencies such as Bitcoin, stablecoins aim to avoid severe price fluctuations by anchoring their value to fiat currencies or other assets. The introduction of stablecoins has provided a relatively stable store of value for the cryptocurrency market, especially in decentralized finance (DeFi), where they are widely used in on-chain transactions, lending, and other scenarios, bringing both liquidity and stability.

Stablecoins can generally be classified into three types based on their pegging mechanism:

• Fiat-collateralized stablecoins: Such as USDT and USDC, these stablecoins are backed by fiat currencies like the US dollar, maintaining a 1:1 exchange rate with the dollar.

• Crypto-collateralized stablecoins: Such as DAI, these rely on over-collateralization with cryptocurrencies to ensure stability.

• Algorithmic stablecoins: Such as Ampleforth, these adjust the supply automatically to stabilize prices.

The rapid global development of stablecoins demonstrates their immense potential in payments, cross-border transactions, and as financial instruments. As of 2024, the total market capitalization of stablecoins has surpassed $300 billion, with daily transaction volumes reaching several billion dollars. USDT (Tether), the most popular stablecoin globally, accounts for nearly 70% of the total stablecoin market, making it the dominant player in the sector.

1.2 International Stablecoin Regulatory Landscape

Internationally, stablecoin regulations have become increasingly stringent. In 2021, the U.S. Treasury publicly called for strict regulation of stablecoins, highlighting their systemic risks within payment systems. Similarly, Europe and the UK are gradually advancing regulatory frameworks to ensure compliance and financial security. Many countries are also exploring the development of central bank digital currencies (CBDCs), which, in some cases, compete with stablecoins but serve different roles and use cases. In emerging markets such as Southeast Asia and the Middle East, stablecoins present new opportunities for cross-border payments and financial inclusion, enabling many unbanked individuals to participate in global financial markets, enhancing economic liquidity in these regions.

1.3 Stablecoin Regulation in China

China’s government has taken a cautious stance on stablecoins. Since 2017, the People’s Bank of China has emphasized strict regulation of virtual currencies, and in 2021, it further strengthened its crackdown on cryptocurrency trading and mining activities. Although China is actively promoting the adoption of its digital currency (e-CNY), it remains stringent regarding foreign stablecoins, viewing them as potential threats to monetary sovereignty and financial security. Thus, for cross-border payments, China prefers to promote government-backed digital currencies like the digital yuan.

Hong Kong, a Special Administrative Region of China, has adopted a different regulatory approach, favoring an environment that allows for innovation in virtual assets. Its relatively relaxed regulation has attracted numerous crypto companies and innovative projects. This year, a subsidiary of JD.com also joined Hong Kong's regulatory sandbox, demonstrating mainland companies' interest in and trust in Hong Kong's virtual asset policies. In fact, as early as 2018, Hong Kong began rolling out regulatory policies for virtual assets. In 2019, the Hong Kong Securities and Futures Commission (SFC) issued regulations for virtual asset trading platforms and fund management, clarifying compliance requirements for virtual assets, marking the beginning of a new era in Hong Kong's virtual asset regulation. In 2023, Hong Kong officially introduced a Virtual Asset Service Provider (VASP) licensing regime, further clarifying the regulatory framework for virtual asset trading platforms and service providers. This regime requires VASPs to obtain licenses to operate legally in Hong Kong and sets strict Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance requirements.

This article will focus on stablecoins in Hong Kong, providing an overview and analysis of its regulatory framework and policies.

2. Evolution of Stablecoin Regulation in Hong Kong

Since 2022, Hong Kong has gradually advanced its regulatory framework for the issuance of stablecoins, with a primary focus on ensuring transparency, security, and fostering the healthy development of the virtual asset market. Below is a timeline of the regulatory evolution of stablecoins in Hong Kong:

2.1 2022: Initial Discussions and Public Consultation

In January 2022, the Hong Kong Monetary Authority (HKMA) released a Discussion Paper on Crypto-assets and Stablecoins. The paper highlighted that the rapid growth of crypto assets and stablecoins had outgrown the scope of the existing regulatory framework for payment systems and stored-value payment tools (e.g., e-wallets). Consequently, the HKMA emphasized the need to prioritize regulation of fiat-backed payment stablecoins (such as USDT and USDC), while excluding algorithmic stablecoins and other non-asset-backed types from immediate regulatory focus. The HKMA invited the industry to provide feedback on the discussion paper by the end of March 2022, using this input as a key basis for designing the future regulatory framework.

2.2 2023: Clarifying the Regulatory Framework

In 2023, the HKMA accelerated the development of a concrete regulatory system for stablecoins. In December, the HKMA and the Financial Services and the Treasury Bureau (FSTB) jointly issued legislative proposals on the regulation of stablecoin issuers, outlining a draft regulatory framework. This framework not only comprehensively regulated the issuance and management of stablecoins but also provided detailed requirements regarding reserve asset management, corporate governance, risk control, information disclosure, and anti-money laundering (AML) and counter-terrorism financing (CTF) obligations.

A key aspect of the framework was the regulation of reserve assets, mandating that all stablecoin issuers ensure that their circulating stablecoins are backed by 100% reserve assets, which must be managed in independent accounts. Additionally, issuers are required to regularly disclose the status of their reserves to the public.

2.3 2024: Legislative Advancements and Public Consultation

In 2024, Hong Kong took further steps to advance the legislative process for stablecoin regulation. In January 2024, the HKMA published a consultation paper that proposed more detailed regulatory measures. For the first time, the paper provided a clear definition of Fiat-Referenced Stablecoins (FRS), which are stablecoins whose value is pegged to fiat currencies, commodities, or other financial assets. Issuers of such stablecoins are required to be registered in Hong Kong and obtain regulatory approval.

The consultation paper also outlined specific licensing requirements for stablecoin issuers, including a minimum paid-up capital requirement (e.g., HKD 25 million) and the stipulation that issuers must establish a physical presence in Hong Kong to ensure that local governance structures meet regulatory standards. Additionally, non-Hong Kong-registered issuers intending to market their stablecoins to the Hong Kong public must comply with the local regulatory requirements. The implementation of this framework positions Hong Kong as a leading global hub for virtual assets and stablecoin issuance activities.

To support emerging stablecoin projects and businesses in transitioning to the new regulatory framework, the HKMA introduced a regulatory sandbox for stablecoin issuers. This sandbox allows businesses to engage with the HKMA before launching stablecoins, receiving preliminary guidance and supervision to ensure compliance. This measure not only encourages innovation but also provides flexibility for the compliant development of stablecoins.

3. Detailed Overview of Hong Kong’s FRS Regulatory Framework

Hong Kong’s regulatory framework for Fiat-Referenced Stablecoins (FRS) is an essential policy to ensure stability, transparency, and compliance within the virtual asset market. This framework not only defines what constitutes an FRS but also outlines specific conditions, applicable entities, and a series of regulatory requirements for their issuance.

3.1 Applicable Entities and Concept Explanation

In Hong Kong, all entities issuing fiat-pegged stablecoins (such as those pegged to the Hong Kong dollar or U.S. dollar) are required to obtain an issuance license from the Hong Kong Monetary Authority (HKMA). Even international issuers, if their stablecoin is pegged to the Hong Kong dollar or marketed to the Hong Kong public, must comply with Hong Kong’s regulatory requirements.

According to Hong Kong’s proposals, an FRS is defined by the following core elements:

• Cryptographically protected digital value: FRS represents digital value protected by distributed ledger technology or similar methods.

• Stable value: The FRS must be pegged to a fiat currency (or a basket of assets) and maintain a relatively stable value. Algorithmic stablecoins that rely on supply and demand mechanisms to maintain value may not meet this criterion.

• Purpose: The FRS must be used as a payment tool, an investment instrument, or a means for debt settlement.

All types of stablecoins, regardless of whether their stability is maintained through fiat reserves or other mechanisms, are subject to this regulatory framework as long as they claim to offer stable value.

3.2 Conditions and Regulatory Requirements

Issuing stablecoins in Hong Kong requires meeting stringent regulatory conditions, mainly in the following areas:

• Financial Resource Requirements: FRS issuers must have sufficient capital, with a minimum paid-up capital requirement of HKD 25 million. This ensures that issuers can withstand market volatility and maintain enough capital buffers. Additionally, issuers must ensure that the stablecoins in circulation are fully backed by reserve assets of corresponding value, which must be highly liquid and low-risk. These reserve assets must be held in independent accounts at regulated financial institutions.

• Governance and Risk Management: Issuers must have sound corporate governance structures to ensure effective internal controls and risk management mechanisms. Issuers are required to conduct annual risk assessments, covering technical risks, security controls, and anti-fraud measures. FRS issuers must also comply with the Anti-Money Laundering and Counter-Terrorism Financing Ordinance to monitor transactions and prevent financial crime.

• Reserve Asset Management: Issuers must ensure that all issued stablecoins are fully backed by reserve assets. These assets must correspond to the fiat currency the stablecoin is pegged to and must be regularly disclosed to the public. Disclosure includes details such as the total amount of stablecoins in circulation and the market value and composition of reserve assets. This measure is intended to ensure transparency and market trust.

• Prohibition of Interest Payments: The FRS regulatory framework in Hong Kong prohibits issuers from paying interest to stablecoin holders. This provision prevents stablecoins from becoming similar to deposit products and avoids disrupting the traditional banking system.

• Localization Requirements: All FRS issuers must be registered companies in Hong Kong, with their executives and management teams based locally to ensure effective oversight and control of their issued stablecoins.

3.3 FRS Issuance Process and Challenges

Issuing stablecoins in Hong Kong involves a rigorous process, beginning with the submission of a licensing application to the HKMA, where issuers must meet stringent standards. These include financial resource adequacy, robust corporate governance structures, and professional reserve management mechanisms. Issuers are required to submit a comprehensive business plan, detailing the issuance plan, target market, issuance scale, and expected use cases. A specific reserve management plan must also be included, explaining how each unit of stablecoin will be backed by corresponding reserve assets, alongside a complete risk management framework to ensure the stability of the stablecoin’s value and the security of the system under various market conditions.

Issuers must ensure that their reserve management and disclosure systems meet HKMA’s high standards. This means that the systems must be secure, transparent, and capable of timely and accurate public disclosures of critical information, such as issuance volume and reserve asset status. After obtaining a license, issuers are required to adhere to continuous compliance obligations, including regular submission of detailed operational reports to the HKMA. These reports must cover all aspects of business operations, such as financial performance, the effectiveness of risk management measures, and customer protection strategies, while ensuring all activities comply with legal and regulatory requirements to maintain market fairness and protect investors.

Issuing stablecoins in Hong Kong presents several challenges. The capital requirements set a high bar for many startups. Issuers must not only hold sufficient funds to support the initial issuance but also ensure that reserve assets always match the face value of the issued stablecoins, potentially requiring large amounts of liquid capital. Additionally, compliance costs are significant. FRS issuers must follow strict rules related to anti-money laundering, information disclosure, and risk management, often necessitating additional investment in dedicated compliance teams and systems to ensure the legality and transparency of operations. For international issuers, localization presents another challenge, as companies must establish a physical presence in Hong Kong, ensuring that management and key functional teams operate effectively, which increases operational costs and may pose cultural and managerial challenges.

3.4 Sandbox Program

On March 12, 2024, the HKMA introduced an innovative measure called the “Sandbox Program,” aimed at providing a trial environment for entities wishing to issue stablecoins in Hong Kong before the formal legislation takes effect. The sandbox program allows participants to test their products and services in a controlled risk environment while providing regulators the opportunity to observe and evaluate these new financial instruments. This initiative promotes dialogue between regulators and the industry, laying a solid foundation for the future stablecoin issuance regulatory framework.

To ensure the sandbox program's effectiveness and fairness, the HKMA did not limit the number of participants but imposed strict criteria for applicants. Applicants must demonstrate genuine intent and reasonable plans to issue fiat-pegged stablecoins in Hong Kong and have developed a specific strategy for participating in the sandbox program. They must also prove they can meet the regulatory requirements outlined in the consultation paper, including a comprehensive business plan, a professional team based in Hong Kong, and sufficient startup capital to cover initial operational costs.

The application process for the sandbox program is relatively straightforward. Applicants can submit the necessary documentation to the HKMA via a designated email address, and additional information may be requested to support the evaluation. During the review process, regulators will consider multiple factors, such as the uniqueness of the proposed stablecoin use cases, the effectiveness of the price stability mechanism, the management of reserve assets, and user protection measures. Even if an entity successfully joins the sandbox program, this does not guarantee formal recognition or regulation by the HKMA or other financial regulatory bodies. Once the licensing regime for stablecoin issuers is formally implemented, all sandbox participants must reapply for a license to operate officially.

The sandbox program itself comes with certain limitations, such as restrictions on the user base and stablecoin issuance limits to ensure that risks remain within acceptable levels. The HKMA also reserves the right to adjust sandbox rules based on specific circumstances to adapt to the changing market and technological environment. Before releasing any public information regarding their sandbox status, all participants must obtain prior approval from the HKMA to prevent misleading marketing and protect potential investors from unnecessary risks.

On July 18 of this year, the HKMA announced the list of stablecoin issuers participating in the sandbox, including JINGDONG Coinlink Technology Hong Kong Limited, RD InnoTech Limited, Standard Chartered Bank (Hong Kong) Limited, Animoca Brands Limited, and Hong Kong Telecommunications (HKT) Limited.

In conclusion, Hong Kong’s FRS regulatory framework is forward-looking on a global scale. Its strict reserve requirements and transparency measures ensure market stability and trust. However, for issuers looking to enter the Hong Kong market, high capital and compliance costs present significant challenges. Through the sandbox program, companies can receive the necessary support and guidance to ensure their operations comply with regulatory requirements.

4. Impact of Hong Kong’s Stablecoin Regulatory Framework

As a key international financial center, Hong Kong’s stablecoin regulatory framework provides a robust legal structure for the global cryptocurrency market. By introducing strict compliance requirements, Hong Kong has attracted many global stablecoin issuers and fintech companies. The framework places a strong emphasis on reserve asset management and transparency, ensuring that all issued stablecoins are fully backed by 100% reserve assets, which must be held in regulated financial institutions. For international companies, this means meeting high regulatory standards to issue stablecoins in Hong Kong. Any issuer from outside Hong Kong that wants to market or issue stablecoins pegged to the Hong Kong dollar must obtain approval from the Hong Kong Monetary Authority (HKMA). This positions Hong Kong as a vital hub for virtual asset regulation globally, drawing substantial international investment and businesses. Algorithmic stablecoins or other non-asset-backed stablecoins may struggle to meet these regulatory standards, making them ineligible for issuance in Hong Kong.

Moreover, Hong Kong’s regulatory sandbox offers a controlled environment for global companies to test their business models and ensure compliance before entering the market, reducing initial operational risks. It also allows Hong Kong regulators to work more closely with companies, continuously refining the regulatory framework. This balance of flexibility and control has made Hong Kong a focal point for international stablecoin projects.

As a Special Administrative Region of China, Hong Kong’s approach to stablecoin regulation contrasts sharply with mainland China’s conservative stance on cryptocurrencies. While mainland China has maintained strict controls over cryptocurrency activities, Hong Kong’s status as an international financial hub with a flexible regulatory regime has made it a gateway for mainland enterprises to experiment with virtual asset business models. For example, JD.com’s subsidiary has already joined Hong Kong’s regulatory sandbox, exploring stablecoin applications and other virtual asset innovations. This trend indicates that mainland companies are increasingly interested in leveraging Hong Kong to access global markets. It also suggests that China may consider adjusting its approach to cryptocurrencies in the future, particularly in areas like cross-border payments and fintech. Hong Kong’s regulatory framework could serve as a model for future virtual asset policies in mainland China, especially regarding transparency, reserve management, and risk control requirements.

For global cryptocurrency companies and investors, Hong Kong’s stablecoin regulatory framework creates a relatively stable and transparent market environment. Issuers must meet high standards for reserve management and compliance, which provides investors with greater confidence. Additionally, Hong Kong’s stringent Anti-Money Laundering (AML) and Counter-Terrorism Financing (CFT) regulations ensure that the stablecoin market is more secure and reliable, reducing the risks of money laundering and illicit transactions. This contributes to the overall reputation of the cryptocurrency market. Hong Kong also offers flexible market entry routes and its sandbox system allows companies to test business models within a limited scope, receiving regulatory guidance to lower compliance risks. This setup is particularly advantageous for startups and small to medium-sized enterprises, enhancing their competitiveness in the market.

5. Conclusion

In conclusion, Hong Kong’s stablecoin regulatory framework not only promotes innovation but also ensures market safety. The implementation of this framework will contribute to the long-term, healthy development of the stablecoin market and enhance Hong Kong’s position as a global leader in the virtual asset space. Hong Kong’s regulatory system has had a significant impact not only in Asia but also on the global cryptocurrency market. Its regulations set an important example for other countries, adhering to international standards and furthering the normalization of the global cryptocurrency market. Collaboration with the Basel Accords and international banking regulatory standards ensures that Hong Kong’s framework integrates seamlessly with the global financial system, reducing the complexity of cross-border transactions and market participation. This will contribute to the sustainable and healthy development of the stablecoin market in the long term.

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