Daily Economic News Interview with Bai Zhen | From "Sandbox" to "License", Hong Kong's Regulatory Moves on Stablecoins

On May 22, Eastern Time, the price of Bitcoin reached a new all-time high. At the same time, two things have happened recently: first, the Legislative Council of Hong Kong has passed the "Stablecoin Regulation Draft", which is expected to take effect within the year; second, on the other side of the world in the United States, the GENIUS Act aimed at regulating stablecoins is also being advanced intensively. It is reported that stablecoins are virtual assets designed to maintain a relatively stable value against certain assets (usually currencies). The value of stablecoins is pegged to various fiat currencies such as the US dollar, euro, etc. Common stablecoins include USDT (Tether) and USDC. Previously, the Hong Kong Monetary Authority publicly announced the first batch of stablecoin issuer sandbox list, which includes JD Group's JD Coin Chain Technology ( Hong Kong ), Yuan Coin Innovation Technology, while Standard Chartered Bank (Hong Kong), Animoca Brands Limited, and Hong Kong Telecommunications (HKT) chose to apply jointly. The regulatory framework for stablecoins is gradually becoming clear. According to the Hong Kong SAR government, on May 21, the Hong Kong Legislative Council passed the "Stablecoin Bill", which aims to establish a licensing system for fiat stablecoin issuers in Hong Kong. After the commencement of the Ordinance, any person who issues fiat currency stablecoins in Hong Kong in the course of business, or fiat currency stablecoins outside Hong Kong that claim to be pegged to the value of the Hong Kong dollar, must apply for a licence from the Monetary Authority. The Ordinance only allows designated licensed institutions to sell fiat stablecoins in Hong Kong, and only fiat stablecoins issued by licensed issuers can be sold to retail investors. According to the source, the Stablecoin Ordinance is expected to come into effect within this year, and there is a transitional period arrangement for the licensing regime to facilitate the industry to apply for licenses and make appropriate business arrangements in accordance with the requirements of the Ordinance. Qiao Zheyuan, a partner at JunHe Law Offices' Hong Kong office, stated in an interview with a reporter from the Daily Economic News that if the regulation takes effect, providers of internationally popular stablecoins such as USDT may need to apply for relevant local licenses in Hong Kong to sell stablecoins to ordinary investors. According to reporters, stablecoins ensure their relative stability in value by being pegged to fiat currencies. For a considerable period, stablecoins have operated outside the government's regulatory framework. As the applications of stablecoins continue to expand, potential risks such as redemption runs are gradually attracting attention, and the urgency for stablecoin regulation is increasing. Many regions are moving towards完善 stablecoin legislation and regulation. In fact, as of today, apart from Hong Kong, several countries or regions including the United States, the European Union, Singapore, and Dubai have started or completed the legislative improvement work around the stablecoin framework. Taking the European Union as an example, MiCA (Regulation on Markets in Crypto-Assets) will be fully implemented on December 30, 2024, providing a comprehensive regulatory framework for all crypto assets, including stablecoins. It is reported that to mitigate systemic financial risks, the bill requires issuers to hold sufficient asset reserves to support the stability of stablecoin prices. In the United States, according to an ABC News report on May 21, the U.S. Senate passed the GENIUS Act on Monday with a vote of 66 to 22. Supporters praised the bill as a means to protect consumers and establish industry standards, which could make such cryptocurrencies a mainstream tool for digital payments and other financial instruments. "We are witnessing a clear global trend: stablecoins are moving from the 'grey area' towards a more defined and systematic regulatory framework." Bai Zhen, the head of the Hong Kong office of the Mankun Law Firm, told reporters that the regulatory measures in various countries or regions indicate that major markets are incorporating stablecoins into the logic of traditional financial regulation. The focus is gradually shifting from "whether to regulate" to "how to regulate," especially in terms of anti-money laundering, transparency of fund sources, and on-chain traceability. Industry: Three major regulatory trends are emerging. The increasing activity of stablecoin applications has attracted the attention of regulatory authorities in various regions. Several interviewees told the Daily Economic News reporter that government regulators are seeking a balance between market development needs and risk prevention. Taking Hong Kong's Stablecoin Bill as an example, Bai Qin admitted: "On the one hand, there has always been uncertainty in the market in the past few years in the absence of a regulatory framework for stablecoins. By establishing a clear licensing system, the government hopes to provide a clear rule basis for the industry, thereby reducing the cost of trial and error in the market and encouraging compliance innovation. On the other hand, stablecoins have cross-border attributes and other characteristics, which also bring challenges in terms of financial security, capital flows, and anti-money laundering. Through legislation, Hong Kong is expected to manage these risks more effectively. Xiao Sa, a senior partner at Beijing Dacheng Law Firm, also stated to reporters that the most direct reason for Hong Kong to promote the implementation of the regulations is to improve the regulatory framework for virtual assets, in order to further find a balance between innovation and risk in the field of virtual assets. According to Xiao Za, there are three major trends emerging from the regulatory frameworks for stablecoins in some countries and regions. First, there is the popularization of licensing access and localization requirements. Major economies generally require stablecoin issuers to operate with a license and establish physical institutions locally. For example, Hong Kong requires licensed issuers to register and establish management in the region, while the United States plans to limit stablecoin issuance rights to banks or trust companies. Such measures aim to strengthen local regulatory capabilities and prevent cross-border regulatory arbitrage. Second, reserve management is approaching traditional financial standards, with countries emphasizing the liquidity of reserve assets (such as cash and government bonds) and independent custody, as well as introducing regular audits. Hong Kong requires the value of reserve assets to be no less than the face value of circulating stablecoins, while the EU's MiCA regulation even requires algorithmic stablecoins to hold 300% excess reserves, reflecting strict control over credit risk, with its regulation approaching traditional financial standards. Finally, the functional positioning is focused on payment tools, and regulatory authorities tend to define stablecoins as "payment tools" rather than investment products, limiting their financial intermediation functions. For example, Hong Kong prohibits licensed issuers from engaging in lending activities to avoid credit creation risks, aligning with the regulatory logic for payment institutions.

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Author of this article: Bai Zhen Jen