By Techflow David

Translator: Naetitia

On July 29, the Hong Kong Monetary Authority (HKMA) published the following documents to support the implementation of the regulatory regime for stablecoin issuers, which will come into effect on August 1, 2025:

1. Consultation Conclusions on Draft Guideline on Supervision of Licensed Stablecoin Issuers and the finalised Guideline;

2. Consultation Conclusions on Proposed Anti-Money Laundering and Counter-Financing of Terrorism Requirements for Regulated Stablecoin Activities (For Licensed Stablecoin Issuers) and the finalised Guideline;

3. Explanatory Note on Licensing of Stablecoin Issuers on various aspects of the licensing regime and application process; and

4. Explanatory Note on Transitional Provisions for Pre-existing Stablecoin Issuers.

Earlier this year, on May 21, Hong Kong's Legislative Council officially passed the "Stablecoin Ordinance," establishing a licensing regime for fiat-backed stablecoin issuers.

From the ordinance's approval to the release of supporting guidelines and their subsequent implementation, Hong Kong has completed the "final mile" of its stablecoin regulatory framework in less than three months.

Relations Between Documents

It is clear that this complete regulatory framework consists of one ordinance (the Stablecoin Ordinance), two sets of guidelines (and their consultation summaries), and two explanatory documents. Together, they form a comprehensive chain from legal foundation to implementation details and operational guidance. Specifically, the entire document framework includes:

1. One foundational law: The "Stablecoin Ordinance" (published in May);

2. Two regulatory guidelines: "Guideline on Supervision of Licensed Stablecoin Issuers" and "Anti-Money Laundering and Counter-Financing of Terrorism Requirements";

3. Two consultation summaries: Documenting the public consultation process and HKMA responses regarding the above two guidelines;

4. Two explanatory documents: "Explanatory Note on Licensing of Stablecoin Issuers" and "Explanatory Note on Transitional Provisions for Pre-existing Stablecoin Issuers."

Among these, the Stablecoin Ordinance sits at the top of the pyramid as the foundational law, establishing the legal status and basic framework of the stablecoin licensing regime.

The two regulatory guidelines operate at the execution level, translating the principles outlined in the ordinance into specific operational standards and compliance requirements. These guidelines carry quasi-legal authority, and licensed entities must strictly adhere to them.

The consultation summaries, as procedural documents, do not hold direct legal authority but record the regulatory body's responses to market feedback, aiding market participants in understanding the regulatory intent and considerations behind the guidelines. The two explanatory documents serve at the interpretive and guidance level, offering institutional insights and application instructions to help potential applicants better understand regulatory requirements and application processes.

Simply put:

• The ordinance is responsible for "setting the rules"—defining what constitutes stablecoins, who can issue them, and addressing fundamental regulatory principles.

• The guidelines are responsible for "establishing standards"—covering technical requirements like capital adequacy ratios, risk management, and information disclosure standards.

• The explanatory documents are responsible for "providing pathways"—explaining how to apply for licenses, transitional arrangements, and how regulatory authorities will enforce the rules.

The Rigorous Yet Flexible Approach Behind the HK$25 Million Threshold

On July 29, the Hong Kong Monetary Authority (HKMA) released six documents related to stablecoin regulation. Among them, the "Guideline on Supervision of Licensed Stablecoin Issuers" stands out as the most critical execution document, detailing issuer compliance requirements that directly impact market participants and their operational pathways.

If the "Stablecoin Ordinance" serves as the foundation for stablecoin issuance in Hong Kong, then this 89-page guideline acts as the bricks and mortar filling the regulatory framework.

From the HK$25 million minimum capital requirement to 12 specific provisions for private key management, the HKMA has outlined a regulatory framework that is both stringent and pragmatic.

Entry Threshold: Not for Everyone

The HK$25 million (approximately US$3.2 million) minimum capital requirement is relatively high compared to global stablecoin regulations. For instance, the EU's MiCA regulation mandates a minimum capital of €350,000 for electronic money token issuers, while Japan requires only ¥10 million (approximately US$75,000). Hong Kong's threshold is carefully calibrated to ensure issuers have sufficient financial strength without completely shutting out innovators.

However, capital is just the first hurdle. The "fit and proper" requirements deserve even greater attention.

The guideline dedicates an entire chapter to listing seven key considerations, ranging from criminal records to business experience, financial status, time commitment, and even external roles held by directors. Particularly noteworthy is the requirement for independent non-executive directors to make up at least one-third of the board, aligning with corporate governance standards for listed companies.

This means that issuing stablecoins in Hong Kong requires not only money but also the "right people." Web3 startups composed of tech enthusiasts might need to significantly adjust their governance structures and recruit professionals with traditional financial backgrounds to meet regulatory standards.

Business activity restrictions are even more stringent. Licensed issuers must obtain written approval from the HKMA before engaging in any "other business activities." This essentially positions stablecoin issuers as "specialized institutions," akin to traditional payment service providers or electronic money issuers. For projects aiming to build an ecosystem combining "DeFi and stablecoins," this signals a need to reevaluate their business models.

Reserve Management: 100% Is Just the Starting Point

In terms of reserve asset management, Hong Kong adopts a "100% + over-collateralization" dual safety mechanism.

The guideline explicitly states that the market value of reserve assets must always equal or exceed the face value of stablecoins in circulation, while also requiring issuers to "consider the risk profile of reserve assets and ensure appropriate over-collateralization."

But what constitutes "appropriate"?

While the guideline does not specify a numerical figure, requirements such as setting internal limits for market risk indicators and conducting regular stress tests suggest that regulators expect issuers to dynamically adjust over-collateralization ratios based on their risk profiles.

This principle-based approach provides issuers with flexibility but also imposes higher compliance costs, requiring a robust risk assessment framework to justify the "appropriateness" of their reserves.

Regarding the definition of qualified reserve assets, Hong Kong demonstrates a prudent yet forward-looking attitude.

In addition to traditional options like cash and short-term bank deposits, the guideline explicitly accepts "tokenized forms of eligible assets." This leaves room for future innovation—tokenized U.S. Treasury bonds or tokenized bank deposits could theoretically qualify as reserve assets.

One standout feature is the trust segregation arrangement.

For example, licensed issuers must establish "effective trust arrangements" to legally separate reserve assets from proprietary assets, backed by independent legal opinions verifying the arrangement's validity. This goes beyond simple accounting separation, ensuring that stablecoin holders' rights are protected even in the event of issuer bankruptcy.

Transparency requirements are equally stringent. Hong Kong mandates a combination of "high-frequency disclosure and regular audits." Issuers must disclose the market value and composition of reserve assets weekly, and undergo quarterly verification by independent auditors. In comparison, even highly compliant stablecoins like USDC currently only publish monthly reserve reports. Hong Kong's requirements significantly raise the bar for transparency.

Technical Requirements: Professional Private Key Management

The guideline demonstrates remarkable expertise in addressing private key management, a risk unique to Web3.

From key generation to destruction, from physical security to breach response, the 12 specific provisions cover every stage of the private key lifecycle.

For instance:

• "Critical private keys must be used in an isolated environment"—keys for minting or burning stablecoins cannot be exposed to the internet and must operate in a completely offline setting.

• "Key usage requires multi-party authorization"—no single individual can independently access critical private keys.

• "Key storage media must be located in Hong Kong or other HKMA-approved locations"—this effectively rules out storing private keys overseas.

These requirements show that the HKMA is not merely applying traditional financial regulations but genuinely understanding blockchain technology's characteristics and risks. To some extent, this guideline could be considered a regulatory version of "best practices for enterprise-level private key management."

Smart contract audit requirements are equally stringent. Issuers must engage "qualified third-party entities" to audit smart contracts during deployment, redeployment, or upgrades, ensuring contracts "execute correctly," "align with expected functionalities," and are "highly assured to be free of vulnerabilities or security flaws." Given that the smart contract auditing industry is still in its infancy, defining "qualified" could pose practical challenges.

Operation Standards: The "Bankification" of Stablecoins

"T+1 redemption," "pre-registered accounts," "three lines of defense"—these requirements indicate Hong Kong's intention for stablecoin issuers to align their operational standards with traditional financial institutions, maximizing risk controls.

Take redemption timelines, for example.

"Valid redemption requests must be processed within one business day"—this T+1 requirement is stricter than many existing stablecoins. Tether's terms of service reserve the right to delay or deny redemptions, whereas Hong Kong's regulation elevates timely redemption to a legal obligation.

However, this "bankification" is not a straightforward copy-paste. The guideline allows flexibility for "exceptional circumstances"—issuers can delay redemptions with prior written consent from the HKMA. This mechanism resembles the "suspension of withdrawals" clause in banking, providing a buffer for system stability under extreme market conditions.

The three lines of defense risk management framework directly borrows from mature banking practices:

1. The first line of defense is the business unit.

2. The second line is independent risk management and compliance functions.

3. The third line is internal auditing.

For many Web3-native teams, this signifies a fundamental shift in organizational structure—they must evolve from flat technical teams to hierarchical organizations with clearly defined roles and responsibilities.

Special attention is given to managing third-party risks.

Whether for reserve asset custody, outsourced technical services, or stablecoin distribution, all third-party arrangements must undergo rigorous due diligence and continuous monitoring. The guideline even stipulates that if third-party service providers are located outside Hong Kong, issuers must assess local regulators' data access rights and notify the HKMA promptly when required.

KYC Dilemma: Must Stablecoin Holders Undergo Identity Verification?

Currently, the most debated topic on social media regarding Hong Kong's stablecoin regulation is the issue of KYC.

Earlier analyses suggested that the regulatory documents strictly require all stablecoin holders to undergo identity verification, implying mandatory real-name registration.

Let’s examine the original text of the guideline:

Although the regulatory guideline distinguishes between "customers" and "holders" in its wording, a closer analysis reveals that this distinction is more of a theoretical construct. While you may freely acquire and hold stablecoins, exercising their core value—redeeming fiat currency at any time—is almost impossible without completing KYC.

The guideline uses seemingly lenient language in several places:

• "Licensed issuers should only issue designated stablecoins to their customers."

• "Terms and conditions should apply to all designated stablecoin holders (whether or not they are customers of the licensed issuer)."

This distinction suggests the existence of two groups: KYC-required "customers" and KYC-exempt "holders." However, upon delving into the specifics of service provision, this distinction appears largely theoretical.

The crux lies in the redemption service requirements:

• "Unless relevant customer due diligence is completed, issuance or redemption services must not be provided to designated stablecoin holders and/or potential designated stablecoin holders."

This means that anyone wishing to exercise their redemption rights must first complete KYC, transitioning from being a "holder" to a "customer."

The guideline repeatedly emphasizes that stablecoin holders have the right to "redeem at face value," which is considered the cornerstone of stablecoin stability. However, in practice, exercising this right is conditional—you must be willing and able to complete KYC.

For those unable to complete KYC due to privacy concerns, geographical restrictions, or other reasons, this "right" is effectively inaccessible.

Apart from identity verification, geographical restrictions may pose an even greater challenge.

The guideline mandates issuers to "ensure that designated stablecoins are not issued or offered in jurisdictions where trading of designated stablecoins is prohibited," and requires issuers to "take reasonable measures to identify and prevent the use of virtual private networks (VPNs)."

For global cryptocurrency users, this geographical fencing could be more restrictive than KYC itself.

From Hong Kong's perspective, this may be an acceptable trade-off: moderate restrictions in exchange for regulatory clarity and financial stability. However, whether this model will become mainstream in the global cryptocurrency ecosystem remains to be seen.

Exit Mechanism: A "Safety Valve" for Worst-Case Scenarios

Among all regulatory requirements, the "business exit plan" may be the most overlooked but also one of the most critical aspects.

The guideline requires every issuer to prepare a detailed exit plan, including how reserve assets will be sold, how redemption requests will be handled, and how third-party services will be transitioned.

Underlying this requirement is the regulator's deep concern about systemic risks.

Unlike other crypto assets, stablecoins' promise of "stability" makes them more likely to be widely adopted. However, this also means that any issues with stablecoins could have far-reaching consequences. By requiring issuers to plan exit strategies in advance, regulators aim to ensure that even in the worst-case scenario, the market can absorb the shock in an orderly manner.

The exit plan must cover asset disposal strategies under "normal and stressed conditions." This means issuers need to consider:

• How to liquidate reserve assets without triggering a market stampede if liquidity dries up?

• How to maintain redemption channels if banking partners terminate their services?

The answers to these questions will directly determine a stablecoin project's survivability during a crisis.

The Deep Logic Behind Hong Kong's Regulatory Path

Examining this regulatory guideline, it is evident that Hong Kong has forged a unique path in stablecoin regulation. It neither adopts the U.S.-style "enforcement-driven" approach (forcing compliance through enforcement actions) nor the European-style "rule-driven" approach (meticulously detailed written regulations). Instead, Hong Kong employs a hybrid model of "principle + rule."

For critical risk points like reserve management and private key security, the guideline provides detailed rules; for specific implementations such as over-collateralization ratios and risk indicator settings, it leaves room for principled flexibility.

This design reflects the pragmatic attitude of Hong Kong regulators, acknowledging that the stablecoin industry is still evolving rapidly and that overly rigid rules could quickly become outdated.

The HK$25 million licensing threshold is not low, but compared to the HK$5 million capital requirement for Hong Kong's virtual asset trading platforms, it is relatively reasonable. The technical requirements are detailed but explicitly accept innovations like "tokenized assets." The operational standards are strict but also include emergency mechanisms to account for market fluctuations.

Most importantly, this regulatory framework demonstrates Hong Kong's understanding of the essence of stablecoins: they are not merely "cryptocurrencies" but critical infrastructure connecting traditional finance and the digital economy. Therefore, regulatory standards must be high enough to maintain financial stability but also flexible enough to accommodate technological innovation.

For market participants, the message from this guideline is clear:

Hong Kong welcomes responsible innovators but urges them to prepare for stringent regulatory oversight.

Institutions aiming to issue stablecoins in Hong Kong need to seriously evaluate whether they possess the necessary financial strength, technical capabilities, and compliance resources.

For the broader industry, Hong Kong's practice offers a valuable reference: stablecoin regulation is not about stifling innovation but about providing fertile ground for sustainable development.

When regulatory rules are clear and enforcement standards are well-defined, compliance costs become predictable, and the boundaries of innovation become explorable.

This, perhaps, is the key to Hong Kong's continued competitiveness as an international financial center in the era of digital assets.