Stablecoin Regulation in Hong Kong: HKMA Licensing Framework and Compliance Guide

Introduction

Stablecoins – digital assets designed to maintain a stable value by referencing a fiat currency, commodity, or basket of assets – have become a critical infrastructure layer for the digital assets ecosystem. Their use in payments, DeFi protocols, cross-border transfers, and as collateral in virtual asset trading has grown dramatically, attracting significant regulatory attention globally.

Hong Kong has moved decisively to regulate fiat-referenced stablecoins (FRS) through a dedicated licensing regime administered by the Hong Kong Monetary Authority (HKMA). This guide explains the proposed and enacted regulatory framework, the obligations it imposes on stablecoin issuers, and the compliance steps required to operate legally in Hong Kong.

Why Regulate Stablecoins?

Regulators globally have identified stablecoins – particularly those pegged to fiat currencies and achieving significant scale – as posing risks to monetary stability, payment system integrity, and investor protection. Concerns include:

• Reserve adequacy – whether issuers hold sufficient high-quality assets to redeem stablecoins at par value;
• Run risk – the potential for mass redemptions triggered by loss of confidence, as demonstrated by the collapse of TerraUSD in 2022;
• Money laundering and sanctions evasion – the use of stablecoins to move value across borders with limited traceability;
• Systemic risk – where a widely used stablecoin becomes critical financial infrastructure.

Hong Kong’s Regulatory Approach

Phase 1: Sandbox and Consultation

The HKMA published its discussion paper on crypto-assets and stablecoins in January 2022, followed by a consultation paper in January 2023, proposing a licensing regime for FRS issuers in Hong Kong. The HKMA launched a stablecoin issuer sandbox in March 2024, allowing prospective applicants (including JD.com, Standard Chartered/Animoca/HKT, and HSBC/Hang Seng) to test their business models and compliance frameworks before the formal regime commenced.

Phase 2: Legislation

The Stablecoins Ordinance was enacted in May 2025 and came into force in phases through 2025–2026. The Ordinance establishes a mandatory licensing regime for persons who issue FRS in Hong Kong or issue FRS denominated in Hong Kong dollars (HKD) outside Hong Kong.

Scope: What Is Regulated?

Fiat-Referenced Stablecoins (FRS)

The regime applies to fiat-referenced stablecoins – virtual assets that are designed to maintain a stable value with reference to one or more fiat currencies. This covers HKD-pegged, USD-pegged, EUR-pegged, and multi-currency basket stablecoins. The regime does not cover:

• Algorithmic stablecoins (though these may be addressed under separate crypto-asset regulation);
• Central bank digital currencies (CBDCs);
• E-money issued by licensed banks under existing banking legislation (where the e-money is fully backed by deposits and has no blockchain component).

Who Needs a Licence?

The following activities require a stablecoin issuer licence from the HKMA:

• Issuing FRS in Hong Kong – regardless of the currency of the peg;
• Issuing HKD-pegged FRS from outside Hong Kong – targeting Hong Kong users.

Operating without a licence is a criminal offence with significant penalties.

Licensing Requirements

Eligible Applicants

Only the following entities are eligible to apply for an FRS issuer licence:

• A company incorporated in Hong Kong;
• An authorised institution (bank or deposit-taking company) under the Banking Ordinance; or
• A subsidiary of an authorised institution incorporated in Hong Kong.

This effectively requires stablecoin issuers to establish a Hong Kong legal entity and localise their operations.

Fit and Proper Requirements

Applicants and their responsible officers and key controllers must satisfy fit and proper requirements, including:

• Financial soundness and adequate capital;
• Integrity, competence, and relevant experience in financial services or technology;
• Absence of criminal convictions or regulatory sanctions for dishonesty or financial misconduct.

Minimum Capital

FRS issuers must maintain a minimum paid-up capital of HKD 25 million (or equivalent), separate from reserve assets. This capital serves as a buffer against operational losses and is not part of the reserve assets backing stablecoin holders’ redemption rights.

Reserve Asset Requirements

Reserve adequacy is the cornerstone of the FRS licensing regime. Issuers must at all times hold reserve assets equal to or exceeding the outstanding value of FRS in circulation.

Eligible Reserve Assets

Reserve assets must be high-quality, liquid assets in the same currency as the pegged fiat currency. Eligible assets include:

• Cash and cash equivalents (bank deposits);
• Government bonds of the pegged currency jurisdiction (e.g., U.S. Treasury bills for a USD-pegged stablecoin);
• Central bank bills;
• High-quality short-duration debt securities meeting prescribed credit rating and maturity criteria.

Speculative assets (equities, crypto-assets, corporate bonds below investment grade) are not eligible reserve assets.

Segregation and Custody

Reserve assets must be:

• Segregated from the issuer’s proprietary assets and kept in a separate account;
• Held with custodians approved by the HKMA (typically authorised institutions or regulated custodians);
• Subject to regular independent audit to verify composition and sufficiency.

Redemption Rights

FRS holders must be able to redeem their stablecoins at par value (1:1 with the pegged fiat currency) on demand or within a short settlement period. Issuers must not impose unreasonable restrictions on redemption, and redemption terms must be clearly disclosed.

Prudential and Operational Requirements

Governance

FRS issuers must maintain robust governance structures, including:

• A board of directors with clear responsibility for risk management and compliance;
• An independent risk management function;
• A compliance officer responsible for the issuer’s obligations under the Stablecoins Ordinance;
• Written policies on reserve management, redemption procedures, and AML/CFT.

AML/CFT Obligations

FRS issuers are subject to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) as “designated non-financial businesses and professions” (or equivalent). Obligations include:

• Customer due diligence (CDD) on all users, including identity verification;
• Ongoing transaction monitoring and suspicious activity reporting;
• Sanctions screening against OFAC, UN, and HKMA sanctions lists;
• Travel Rule compliance: transmitting required originator/beneficiary information for transfers above the threshold (typically USD 1,000 equivalent).

Technology and Cybersecurity

Issuers must maintain:

• A secure, resilient smart contract infrastructure with regular independent audits;
• Business continuity and disaster recovery plans;
• Cybersecurity incident response protocols aligned with HKMA’s Cybersecurity Fortification Initiative (CFI).

Disclosure and Transparency

Issuers must publish:

• A white paper or equivalent disclosure document describing the stablecoin, its mechanics, reserve composition, and redemption terms;
• Regular (at least monthly) reserve attestations by an independent auditor;
• Annual audited financial statements.

Restrictions on Stablecoin Issuers

FRS issuers are subject to the following restrictions:

• No yield on stablecoins – issuers may not pay interest or yield directly to stablecoin holders (to prevent stablecoins from being characterised as deposits);
• No proprietary trading – issuers may not use reserve assets for proprietary trading or investment;
• Restricted use of reserve income – income generated by reserve assets (e.g., T-bill interest) accrues to the issuer and must be managed within the governance framework.

Interaction with VASP Licensing

FRS issuers that also operate virtual asset trading platforms (VATPs) – for example, by enabling peer-to-peer trading of their stablecoin – may require a separate VATP licence from the SFC under the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance 2023. Legal advice should be obtained where FRS issuance is combined with exchange, custody, or other virtual asset services.

Implications for Market Participants

• Existing stablecoin issuers operating in Hong Kong should review whether they fall within the FRS licensing scope and apply for a licence during the transitional period;
• Overseas FRS issuers targeting Hong Kong users with HKD-pegged stablecoins must either obtain a licence or cease offering their product to Hong Kong users;
• Virtual asset exchanges and DeFi protocols listing FRS should conduct due diligence on whether listed stablecoins are licensed under the Stablecoins Ordinance;
• Banks and financial institutions considering stablecoin issuance should engage early with the HKMA through pre-application dialogue and the sandbox process.

How Alan Wong LLP Can Assist

Alan Wong LLP’s Digital Assets & Virtual Assets team provides specialist legal advice to stablecoin issuers, virtual asset service providers, and financial institutions navigating Hong Kong’s evolving regulatory landscape. Our services include:

• HKMA stablecoin issuer licence application preparation and regulatory strategy;
• Reserve asset structuring and custodian arrangements;
• AML/CFT programme design and Travel Rule implementation;
• White paper and disclosure document drafting;
• Regulatory analysis for overseas FRS issuers considering Hong Kong market entry.

Contact us to discuss how we can support your stablecoin regulatory strategy.