Author: Bai Zhen, Head of Shanghai ManQun Law Firm's Hong Kong Office;
Huang Wenjing, Legal Assistant at ManQun (Shenzhen) Law Firm
Introduction
On May 21, 2025, the passage of the Hong Kong Stablecoin Ordinance by the Legislative Council marked a pivotal turning point in regulation. The ordinance was gazetted on May 30, 2025, and is scheduled to take effect on August 1, 2025. Activities involving fiat-referenced stablecoins (FRS)—whether conducted within Hong Kong, issued from outside Hong Kong, or linked to the Hong Kong dollar—are no longer operating in the gray zone of crypto finance but are now formally regulated under an institutional legal framework. This legislation reflects a deliberate recalibration: positioning Hong Kong as a compliant and forward-looking virtual asset hub capable of supporting next-generation programmable finance within a rule-of-law environment. This article analyzes the ordinance’s key provisions, strategic positioning, practical implications, and clarifies its distinction from related technologies such as real-world asset tokenization (RWA).
Legal Infrastructure
The legislation establishes a sophisticated semantic system for digital value. Stablecoins are not merely defined as functional tools but are delineated across technical, economic, and legal dimensions: they must be cryptographically secured, serve as a store of value or medium of exchange, and operate on distributed ledger technology (DLT). A “specified stablecoin” further narrows the scope to tokens pegged to official currencies or other units approved by the Hong Kong Monetary Authority (“HKMA”).
The scope of regulated activities is broad, covering not only issuance and redemption but also marketing, operational participation, and even indirect inducement targeting Hong Kong residents. This expansive definition ensures comprehensive regulatory coverage while minimizing opportunities for regulatory arbitrage based on geography or activity type.
Fiat backing is central to the regime. The ordinance explicitly requires that any “specified stablecoin” must be fully redeemable at par in its reference fiat currency, particularly the Hong Kong dollar. This is not merely a mechanical requirement but a fundamental safeguard mechanism. Fiat backing ensures stablecoins function as credible monetary instruments rather than speculative crypto assets. The HKMA mandates that reserve assets be high-quality, liquid assets (such as cash or short-term government bonds) denominated in the same fiat currency as the stablecoin. This eliminates currency mismatch risk—the potential devaluation arising when reserve and stablecoin currencies differ—and insulates users from contagion risks caused by panic selling triggered by sharp declines in non-pegged crypto assets.
The ordinance explicitly prohibits using highly volatile or illiquid assets—such as real estate tokens, commodity baskets, or hybrid asset indices—as backing. Tokens that cannot be clearly redeemed into fiat and lack transparent fiat support do not qualify as stablecoins and receive no legal protection. This effectively prevents regulatory arbitrage and stops financial engineering from blurring the boundary between asset-backed securities and monetary instruments, reflecting Hong Kong’s prioritization of financial stability over speculative or synthetic innovation.
Licensing Framework
The ordinance introduces a comprehensive prudential licensing regime emphasizing the systemic importance of stablecoin issuers. Key requirements include:
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Capital Requirement: Minimum paid-up capital of HKD 25 million.
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Reserve Structure: Issuers must maintain high-quality, liquid reserve assets (e.g., cash, short-term government bonds) matching outstanding stablecoins on a 1:1 basis.
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Segregation and Legal Protection: Reserve assets must be held in trust or similar ring-fenced arrangements, protected from claims by general creditors in insolvency.
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Redemption Mechanism: A mechanism must exist to fulfill redemption requests instantly at face value; delays or fees constitute statutory violations.
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Governance Oversight: Appointments of controllers, directors, and stablecoin managers require prior HKMA approval and ongoing compliance with “fit and proper” criteria and disclosure obligations.
Licensed entities must also meet continuing obligations, including annual fees, reporting of material changes, and submission of annual compliance reports.
Additionally, on June 6, the Financial Secretary announced that unlicensed issuers may offer non-regulated stablecoins to professional investors as defined under the Securities and Futures Ordinance, preserving limited operational flexibility without crossing core regulatory boundaries.
Regulatory Powers and Enforcement Tools
The HKMA is equipped with robust enforcement capabilities:
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Investigative Authority: Authorized investigators may demand documents, conduct on-site inspections, and require sworn statements.
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Sanctions Regime: The ordinance grants the HKMA multi-tiered sanctioning powers, including fines, license revocation or cancellation, public warnings, confiscation orders, and appointment of statutory managers. The HKMA has also launched public consultations on detailed regulatory requirements, focusing on anti-money laundering (AML) and counter-terrorist financing (CFT) compliance, laying down operational guidelines for future enforcement.
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Management Intervention: The HKMA may appoint a statutory manager to take over troubled licensees—a tool previously reserved for systemic banks.
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Judicial Review Mechanism: An independent “Stablecoin Tribunal” will handle judicial reviews of sanction decisions, licensing outcomes, and investigation actions.
Prohibited Acts and Criminal Liability: Defining Legal Boundaries
The ordinance clearly enumerates activities prohibited in the virtual asset market, enhancing legal certainty and reinforcing market discipline. Key prohibitions include:
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Unlicensed Operation (Section 9): Engaging in regulated stablecoin activities—including issuance, redemption, or management—or representing oneself as doing so constitutes a criminal offense, regardless of physical location, if the activity targets the Hong Kong market.
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Illegal Issuance of Specified Stablecoins (Section 9): Offering specified stablecoins to the public without proper authorization is a standalone criminal offense.
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Advertising Restrictions (Section 10): Publishing or preparing to publish advertisements indicating participation in stablecoin activities or issuance, without being licensed or exempted, is a criminal act.
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Fraud and Misrepresentation (Section 11): Any act of fraud, misrepresentation, or false promotion relating to stablecoin transactions is criminal, including false claims about reserve backing, redemption rights, or affiliation with licensed entities.
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Inducement Offenses (Section 12): Inducing others through false statements or reckless disregard to purchase, dispose of, subscribe to, or underwrite specified stablecoins is a criminal offense.
Transitional Provisions
The ordinance takes effect on August 1, 2025, with a limited transitional arrangement: stablecoin issuers already operating substantially in Hong Kong before the effective date may continue operations for six months if they submit a license application within the first three months. However, this is neither indefinite nor unconditional—unlicensed operators must either exit the market or complete the authorization process in accordance with the law.
International Comparison and Hong Kong’s Differentiated Positioning
Compared to the EU’s Markets in Crypto-Assets Regulation (MiCA), Singapore’s Payment Services Act 2019, and U.S. state-level money transmission licensing regimes, Hong Kong’s approach reveals distinct regulatory choices:
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Mandatory Par Redemption: Most jurisdictions—including MiCA and U.S. MTL systems—allow delayed or discretionary redemptions (e.g., MiCA permits redemption within five business days), whereas Hong Kong mandates immediate redemption at par.
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Statutory Management Mechanism: The explicit introduction of pre-insolvency intervention power—an instrument rare in crypto legislation and previously exclusive to banking—is codified in Hong Kong’s framework.
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Convergence with Banking Regulation: Regulatory standards such as capital requirements, reserve segregation, and “fit and proper” tests mirror those applied to traditional deposit-taking institutions, blurring the line between token issuers and conventional financial intermediaries.
This strategic divergence underscores Hong Kong’s prioritization of stability and fiat anchoring over mere market expansion or issuer flexibility.
Real-World Asset Tokenization: Critical Distinction
A common misconception is that stablecoin regulation implies indirect recognition of RWA. This is not the case. The ordinance does not provide direct pathways or legal recognition for RWA projects.
Stablecoins operate within a fiat-based framework, whereas RWA involves tokenizing onshore assets such as real estate, equities, or bonds. The ordinance highlights that RWA remains largely unregulated, facing major challenges including:
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Cross-border Asset Transfer: Tokenizing assets located in mainland China involves foreign exchange controls, securities regulations, and capital account oversight.
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QFII Restrictions: Onshore assets cannot be cross-border tokenized unless done through traditional channels like QFII/RQFII programs.
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Stablecoin License ≠ RWA Legality: Holding an FRS license does not confer legality to conduct RWA business, especially concerning illiquid, unverified, or “firewalled” assets.
RWA initiatives must confront their own independent legal hurdles. While stablecoins can serve as payment or collateral tools within RWA ecosystems, they do not resolve the core legal issues surrounding cross-border asset mobility.
Practical Impacts and Industry Adjustments
The new rules will fundamentally reshape how virtual asset firms operate in Hong Kong. Both issuers and investors must reassess strategies, partnerships, and legal risks:
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Issuers: The era of launching products quickly is over. Stablecoin issuance now demands sound financial governance, genuine fiat backing, and clear legal accountability. With a minimum capital threshold of HKD 25 million, plus audit costs, reserve audits, and real-time redemption systems, entry barriers have significantly increased. Unlicensed issuance is no longer just a "risk"—it is a criminal offense.
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Banks and Trust Companies: These institutions are natural candidates to become reserve custodians, compliance verifiers, and risk managers. They may develop new services such as stablecoin treasury management and KYC support, though they must upgrade systems to handle tokenized transactions and assess associated legal liabilities.
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Investors: Enhanced protections come with temporarily fewer choices. Mandatory redemption rights and segregated reserves boost investor confidence. Although the number of available stablecoins may initially shrink, over time it will become easier to identify truly compliant, fiat-backed options.
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Global Platforms: Cannot casually extend stablecoin offerings to Hong Kong. Under the new regime, dedicated compliance strategies are required. Unlike MiCA’s passporting system, Hong Kong does not recognize foreign licenses. Marketing or offering basket-backed tokens to Hong Kong users likely violates advertising laws.
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Developers and DeFi Builders: Technology cannot override legal constraints. Any protocol interacting with fiat-referenced stablecoins must prioritize compliance from inception, embedding systems to verify issuer licensing status.
Conclusion
Hong Kong’s stablecoin ordinance represents a deliberate strategic choice: integrating crypto finance into a system of institutional accountability. By consolidating licensing, supervision, and enforcement within a unified framework, Hong Kong sends a clear signal to global markets: digital finance must operate under the rule of law. Market participants should prepare for rigorous audits, reserve verification, and continuous regulatory engagement. Those who adapt will not only survive but help shape the future of compliant digital finance in Asia.
Yet deeper questions remain: Can programmable money thrive within a rule-of-law economy? Can decentralized technologies coexist with centralized regulation? Can crypto innovation earn public trust without enforceable redemption rights and institutional accountability? These challenges are amplified by unresolved tensions: balancing AML/CFT oversight with privacy-preserving features, and navigating how mainland China’s capital controls interact with cross-border circulation of HKD-pegged stablecoins or tokenization of mainland assets.
These tensions reinforce Hong Kong’s central proposition: the key to financial evolution lies not in speed, but in sovereignty, stability, and systemic integrity. Only regulation can build trust where technology alone cannot self-validate it. Without trust, innovation ultimately fails.
