This article will introduce the core content of the stablecoin issuer licensing system and regulatory requirements in the Stablecoin Regulations, and focus on the key points that issuers should pay attention to when considering applying for a license.
Article author: Qiao Zheyuan, Zhou Jingbo, etc., Junhe Law Review
Table of contents
- introduction
- What is the definition and scope of stablecoins regulated by the Stablecoin Regulations?
- Under what circumstances is it necessary to apply for a license under the Stablecoin Regulations?
- What is the definition of “active promotion”?
- What are the restrictions on the sale of specified stablecoins in Hong Kong under the Stablecoin Ordinance?
- What are the minimum standards for stablecoin licensees?
- After becoming a licensed person, are there any special restrictions on business disposal and capital restructuring?
- Are there any application time points and transition arrangements that license applicants need to pay attention to?
- Conclusion
Introduction
On December 6, 2024, the Hong Kong government published the Stablecoin Bill (hereinafter referred to as the " Stablecoin Bill" ) in the Gazette and submitted it to the Hong Kong Legislative Council for first reading on December 18. The Stablecoin Bill must undergo three readings before being signed into law. It is expected to become one of the most watched new regulations in 2025. This also marks the further improvement of Hong Kong's regulatory framework in the field of virtual assets and is in line with the development and regulatory trends of global virtual assets.
The Hong Kong Monetary Authority (“ HKMA ”) and the Financial Services and the Treasury Bureau (“ FSTB ”) jointly issued the “Consultation Conclusions on the Legislative Proposals for Implementing the Regulatory Regime for Stablecoin Issuers in Hong Kong” ( “Consultation Conclusions ”) in July 2024 and the “Consultation Paper on the Legislative Proposals for Implementing the Regulatory Regime for Stablecoin Issuers in Hong Kong” (“ Consultation Paper” ) in February 2024, which have conducted public consultation and summarized the proposed stablecoin licensing system and regulatory requirements. The Stablecoin Ordinance launched now can be regarded as a key step in the development of the stablecoin market in Hong Kong. For the specific content of the “Consultation Paper” and “Consultation Conclusions”, please refer to our previous releases “ Stablecoin Issuers Can Start Applying to Join the Hong Kong Monetary Authority Sandbox Arrangement ” and “ Understanding the Hong Kong Stablecoin Issuer Licensing Regime in One Article ”.
This article will introduce the core content of the stablecoin issuer licensing system and regulatory requirements in the Stablecoin Regulations, and focus on the key points that issuers should pay attention to when considering applying for a license.
What is the definition and scope of stablecoins regulated by the Stablecoin Regulations?
“Stablecoin” means a cryptographically protected digital form of value that meets the following characteristics:
(a) expressed in terms of units of account or stores of economic value;
(b) is or is intended to be used as a medium of exchange accepted by the public for the purpose of payment for goods or services, settlement of debts or investment;
(c) can be transferred, stored or traded by electronic means;
(d) operates on a distributed ledger or similar information repository; and
(e) aims to maintain a stable value with reference to a single asset or a group or basket of assets.
A distributed ledger is an information repository that uses a technology that records transactions:
(a) held in a ledger;
(b) sharing on a network;
(c) verified using a consensus mechanism among network participants; and
(d) Synchronization among network nodes.
It is worth noting that in item (d) of the definition of stablecoin, in addition to specifying a distributed ledger, it also includes similar information repositories , which means that the future development of blockchain-related technologies is also taken into account, allowing the regulatory framework to be adjusted and improved as technology develops.
The Stablecoin Regulations also further define “specified stablecoins” , thereby defining the scope of supervision.
Specified stablecoins are stablecoins that maintain a stable value by reference to one or more official currencies, or units of account or forms of storage of economic value specified by the HKMA. When considering whether to apply for a license in Hong Kong, issuers need to first clarify whether the stablecoins they issue meet the definition of "specified stablecoins" to confirm whether they fall within the regulatory scope of the HKMA. Combined with the definition in the Stablecoin Ordinance, we understand that algorithmic stablecoins fall within the scope of regulated "specified stablecoins", but it may be difficult for issuers of algorithmic stablecoins to meet the minimum standards for stablecoin licensees, especially those related to reserve assets.
We also note that the definition of specified stablecoins includes a certain digital value or a certain type of digital value specified by the HKMA , which means that the HKMA has the power to expand the definition of specified stablecoins as technology develops, thereby expanding the scope of supervision.
Under what circumstances is it necessary to apply for a license under the Stablecoin Regulations?
Issuers that conduct or hold themselves out as conducting “regulated stablecoin activities” (i.e. issuing specified stablecoins in Hong Kong , or issuing specified stablecoins outside Hong Kong that purport to be referenced to the Hong Kong dollar , in the course of their business ) need to apply for a licence.
In addition, any person who actively promotes to the public, whether in Hong Kong or elsewhere, that he or she is conducting or appears to be conducting any activities that would constitute regulated stablecoin activities if conducted in Hong Kong, whether or not such activities are conducted, will be deemed to be presenting himself or herself as conducting regulated stablecoin activities and will need to apply for a licence.
At the same time, the HKMA also has the power to designate an activity as a “regulated stablecoin activity”, taking into account factors including but not limited to (a) whether the activity is or is likely to be important to Hong Kong’s monetary stability, financial stability, or Hong Kong’s function as an international financial centre, and (b) whether it involves matters of major public interest.
It can be seen from this that the Stablecoin Ordinance reserves a certain degree of regulatory freedom for the HKMA to assess whether stablecoin-related activities should be regulated from the perspective of market stability and public interest.
What is the definition of “active promotion”?
Although the Stablecoin Regulations do not explicitly define “active promotion”, we note that in the Consultation Conclusions, the HKMA further clarified the definition of “active promotion” and stated that when determining whether someone is “actively promoting” a fiat-pegged stablecoin, it will consider a number of factors, including:
(a) the language used in promotional information;
(b) whether the message is targeted at people residing in Hong Kong; and
(c) whether its website uses a Hong Kong domain name.
We tend to believe that the above factors also apply to the Stablecoin Ordinance. We also note that the above considerations overlap to a certain extent with the factors considered by the Securities and Futures Commission of Hong Kong (the " SFC ") when considering whether a person is "actively promoting" the business of operating a virtual asset trading platform to the Hong Kong public under Section 115 of the Securities and Futures Ordinance (the " Securities Ordinance" ) and Section 53ZRB of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (the "Anti-Money Laundering Ordinance"). Specifically, the factors considered by the SFC include:
(a) whether there is a detailed promotion plan for the relevant service;
(b) whether the services concerned are widely publicised through marketing channels;
(c) whether the relevant promotion is carried out in a planned manner and in accordance with the plan or procedures; and
(d) whether the service packaging is targeted at the Hong Kong public, e.g. written in Chinese and denominated in Hong Kong dollars.
Therefore, we believe that the above factors also have a certain reference value for the HKMA when considering whether a certain behavior constitutes active promotion of regulated stablecoin activities to the public in Hong Kong. At the same time, considering the HKMA's consistent regulatory principles, we understand that it will not be limited to the factors listed in the Consultation Conclusions, but will be dynamically adjusted as the industry develops. We suggest that you keep paying attention to this.
What are the restrictions on the sale of specified stablecoins in Hong Kong under the Stablecoin Ordinance?
Seller:
The Stablecoin Ordinance only allows the following types of permitted offerors to sell specified stablecoins:
(a) a licensee under the Stablecoin Regulations;
(b) Licensed corporations that provide virtual asset services (i.e. Virtual Asset Trading Platforms (VATPs)). Currently, seven of them have obtained such licenses;
(c) a corporation holding a licence to carry on Type 1 regulated activity under the Securities Ordinance; and
(d) Banks.
Buyer:
Specified stablecoins issued by licensees under the Stablecoin Ordinance have no audience restrictions and can be sold to retail investors .
Specified stablecoins issued by other unlicensed issuers (legal-pegged stablecoins issued outside Hong Kong, such as USDT and USDC, which have large circulation in the market) can only be sold to a certain category of persons - we expect them to be limited to professional investors as defined under the Securities Ordinance .
Regarding other specified stablecoins, although retail investors are currently excluded from participation, the "specified audience" mechanism also provides regulators with a certain degree of freedom and can be expanded to other audiences. The HKMA once stated in the "Consultation Conclusion" that considering the cross-border nature of fiat-pegged stablecoins and their potential value in various application scenarios, the HKMA may establish a formal regulatory cooperation mechanism for fiat-pegged stablecoins issued overseas in the future, such as mutual recognition or "passporting" arrangements. We note that the Stablecoin Ordinance also gives the HKMA the right to modify or exempt the minimum standards for stablecoin licensees in certain circumstances (including when the issuer is regulated by a regulator with similar functions to the HKMA outside Hong Kong), which also lays the groundwork for the HKMA to recognize fiat-pegged stablecoins issued by overseas issuers through regulatory cooperation.
What are the minimum standards for stablecoin licensees?
The Stablecoin Regulations sets out detailed requirements for the minimum standards for stablecoin license applications in its Schedule 2. Below we will introduce the core content and key issues that stablecoin issuers need to pay attention to.
1. Asset management and operation mechanism
Corporate status
The licensee must be a company established in Hong Kong or a bank established outside Hong Kong.
Financial resources
The licensee must have sufficient financial resources and liquid assets. The basic requirement is that the paid-up capital is not less than HK$25,000,000.
We note that the original requirement in the Consultation Conclusions was HK$25,000,000 or 1% of the nominal value of the stablecoin in circulation , whichever is higher. The financial resource requirement in the Stablecoin Ordinance is more relaxed than that proposed during the consultation.
In addition, we note that the financial resource requirement of HK$25,000,000 does not apply to bank applicants.
Management of Reserve Assets
For each type of specified stablecoin issued by a licensee :
- The licensee must maintain a portfolio of reserve assets (the “specified reserve asset portfolio”) and ensure that it is segregated from other reserve asset portfolios.
- The market value of the specified reserve asset portfolio must at all times be at least equal to the par value of the stablecoins that have not been redeemed and are still in circulation .
- Each portfolio of specified reserve assets must be held in the same reference assets to which the specified stablecoin is referenced .
Disclosure requirements: Licensees must establish and implement sound and appropriate risk management policies and procedures and control systems, and make adequate and timely disclosures to the public on their reserve asset management policies, risk assessments, risk management assessments, composition and market value, and the results of regular independent certification and audits.
According to our experience, in addition to the adequacy of reserve assets, the HKMA also has certain requirements for the composition, custody and management of reserve assets. Before applying for a license, issuers should pay special attention to whether the custody and management arrangements of their reserve assets can ensure the safety and liquidity of reserve assets.
Redemption Mechanism
The licensee must provide each holder with the right to redeem the specified stablecoin and shall not impose any overly stringent conditions restricting redemption or charge unreasonable fees related to redemption (reasonable related fees are permitted).
Disclosure requirements: The licensee must make adequate and timely disclosures to the public about the redemption rights, including the following, and ensure that the following are clearly and prominently stated on the licensee's website or otherwise made available to the public:
(a) fees associated with the redemption of such specified stablecoins;
(b) the conditions for exercising the right of redemption;
(c) the mechanism and procedures for redemption; and
(d) the period within which valid redemption requests in respect of stablecoins may be processed.
We note that the original requirement in the Consultation Conclusions was that licensed issuers must redeem stablecoins within one business day after receiving the redemption request, unless the HKMA has obtained prior approval. Although the Stablecoin Regulations do not make clear requirements on the redemption time limit, we believe that in practice the HKMA also expects licensed issuers to process holders' redemption applications within a reasonable time (such as a few business days) after receiving eligible redemption applications. In addition, if a license applicant hires a third party (such as a distributor) to assist in processing redemption applications, the license applicant also needs to consider how to ensure that the third party will also process the redemption applications in a timely and full manner.
2. Requirements for shareholders and senior executives of licensees
The Consultation Document and Consultation Conclusions state that the HKMA will consider overall whether the senior management of the license applicant meets the suitability requirements, including their qualifications, asset levels and educational background.
In the Stablecoin Regulations, there are more detailed classifications and requirements for senior managers of license applicants, which shows that regulators attach great importance to the suitability and relevant experience of managers of licensees. We have sorted out the personnel requirements of the Stablecoin Regulations below to help issuers and license applicants understand and evaluate whether the current personnel structure meets the requirements.
Controller
- Controlling Persons refer to the following types of persons:
- Majority shareholder controller : more than 50% of the voting rights
- Minority shareholder controller : not less than 10% but not more than 50% of the voting rights
- Indirect controller : A group of directors or a majority of directors acting in accordance with their instructions
- The licensee must have control systems in place to ensure that the HKMA is informed of the identity of each controlling person.
- Relevant shareholders of a licensed person need to submit a written application and obtain the prior consent of the HKMA before they can become controlling persons.
Chief Executive and alternate chief executive
- The licensee must appoint one person as the chief executive officer and at least one person as the alternate chief executive officer.
- If the Chief Executive Officer is unable to perform the functions of the Chief Executive Officer due to illness, absence from Hong Kong or any other reason, the Alternate Chief Executive Officer shall act as the Chief Executive Officer.
- The candidate must ordinarily reside in Hong Kong and be a fit and proper person to serve as the Chief Executive Officer or Alternate Chief Executive Officer.
- The appointment of the Chief Executive and the Alternate Chief Executive requires the prior consent of the HKMA, which may impose such conditions as it considers appropriate when granting its consent.
Director
- The appointment of directors requires the prior consent of the HKMA.
- If a director has obtained the HKMA’s consent to act as chief executive, he or she may directly become a director of the licensee and act in that capacity without the need for further consent.
Manager
- “Manager” is defined as a person who is the principal person in charge of handling one or more specified matters in relation to the licensee’s licensed stablecoin activities .
- The Stablecoin Ordinance lists “specified matters” in its Schedule 1, including:
- 1. Maintaining accounts or accounting systems;
- 2. Maintaining a system of controls to manage risks and prevent licensees from being involved in money laundering or terrorist financing;
- 3. Develop, operate and maintain computer systems;
- 4. Conduct internal audits or reviews of the affairs or business of the licensee;
- 5. Ensure that licensees comply with applicable rules, regulations and guidelines; and
- 6. Develop, operate and maintain any business activities other than licensed stablecoin activities that the licensee has obtained consent from the HKMA to carry out.
employee
An employee shall not become an employee of any licensee or shall cease to act as an employee unless the HKMA has given its prior consent if, at the time of appointment or during the term of office, he:
(a) bankruptcy;
(b) enter into a composition, scheme of arrangement or voluntary arrangement as defined in the Bankruptcy Ordinance with its creditors; or
(c) has been convicted in any place of an offence involving fraud or dishonesty.
Stablecoin Manager
- Licensees are required to appoint a stablecoin manager.
- The relevant person must ordinarily reside in Hong Kong and be a fit and proper person to serve as a stablecoin manager.
- Appointment requires the prior consent of the HKMA and the HKMA may impose such conditions as it considers appropriate when giving its consent.
Personnel Change Notification Requirements
- When a licensee becomes aware that a person has become or ceases to be a controller, chief executive officer, alternate chief executive officer, director, or stablecoin manager of the licensee, the licensee must give written notice to the HKMA within 14 days.
- When a person is appointed or ceases to be a manager of a licensee, or when an appointed manager is appointed in respect of any new specified matters, the licensee is required to give detailed written notice to the HKMA and the manager within 14 days.
Note: The above positions, except for managers and stablecoin managers , are not applicable to banks.
Other personnel-related requirements
- Every person who holds the position of chief executive officer, director, stablecoin manager or controller of a licensee must be a fit and proper person to hold the relevant position .
- Each senior officer responsible for the day-to-day management and operation of licensed stablecoin activities must have appropriate knowledge and experience to perform his or her duties effectively.
- A licensee must have in place and implement sound and appropriate control systems to ensure that (a) each person acting as a manager is a fit and proper person for the position, and (b) each senior officer responsible for the day-to-day management and operation of its licensed stablecoin activities has appropriate knowledge and experience.
Although the Stablecoin Ordinance does not explicitly define fit and proper, we note that the HKMA mentioned in the Consultation Conclusions that when considering the suitability of senior management personnel, the HKMA will comprehensively review the application and take into account a series of factors, including the applicant's experience, experience in supervising other financial activities in a similar capacity, qualifications, asset level and educational background. We expect that the aforementioned factors will also apply to the Stablecoin Ordinance.
We also note that section 129(1) of the Securities Ordinance sets out the following matters that the SFC or the HKMA must consider when considering whether a person is a fit and proper person for the purposes of any provision of Part V (Licensing and Registration) of the Ordinance, in addition to any matters that the regulator considers relevant:
(a) financial condition and solvency;
(b) academic or other qualifications or experience, having regard to the nature of the functions to be performed by the person;
(c) the person's ability to carry on the relevant regulated activity competently, honestly and impartially; and
(d) reputation, character, reliability and financial soundness.
We believe that the above factors will also serve as a reference for the HKMA when considering appropriate candidates for the Stablecoin Regulations.
3. Management system and measures
Risk Management and Anti-Money Laundering Regulations
- Licensees must have risk management policies in place to manage the risks arising from conducting licensed stablecoin activities, which must be commensurate with the scale and complexity of the activities.
- Licensees must have a control system in place to prevent money laundering or terrorist financing related to their licensed stablecoin activities and must comply with relevant Hong Kong regulations.
As with other types of business entities regulated by the HKMA, we expect the HKMA to issue further detailed guidance on the specific responsibilities of licensed issuers in anti-money laundering or counter-terrorist financing.
Purpose and robustness of issuing specified stablecoins
- The issuance of specified stablecoins must be thorough and sound, taking into account the licensee’s purpose, business model and operational arrangements.
Unlike other relatively "rigid" minimum standards, this requirement starts from the sustainability of the stablecoin business of the license applicant, requiring that the business model of the license applicant must be feasible and promising. According to our experience, the HKMA attaches great importance to the application scenarios, development prospects, competitiveness and sustainability of the stablecoin business model. Therefore, it is recommended that license applicants start preparing business plans as early as possible, and highlight in the business plans the advantages of the stablecoins they plan to issue (compared with other stablecoins), as well as what characteristics make them more attractive to investors.
Business Activities
- Licensees must have dedicated and sufficient resources to carry out their licensed stablecoin activities.
- Licensees must obtain the consent of the HKMA before engaging in any business activities other than licensed stablecoin activities and must have a control system in place to ensure that these business activities do not pose significant risks to licensed stablecoin activities and that any potential or actual conflicts of interest arising therefrom can be properly managed.
Note: Requirements related to business activities do not apply to banks.
Disclosure requirements
- Licensees are required to publish a white paper and provide information on the complaint handling and compensation mechanism to licensees.
- Licensees are required to have risk management policies and procedures in place to identify, prevent, manage and disclose conflicts of interest between licensees and holders.
Complaints Handling
- The licensee must have a control system in place to ensure that a complaints handling and redress mechanism is provided to the licensee and that such mechanism is sound, accessible, affordable, independent, fair, accountable, timely and efficient.
- Licensees must also ensure that the complaints handling and redress mechanism does not impose unreasonable costs or burdens on the licensees concerned, or cause unreasonable delays.
Interest
- A licensee must not pay interest on specified stablecoins it issues.
Recovery plan and orderly downsizing
The licensee must have a control system in place to ensure that:
- timely restoration and continued support for key functions of its licensed stablecoin activities in the event of a significant disruption to its operational activities;
- Its licensed stablecoin activities can be wound down in an orderly manner; and
- The redemption of the designated stablecoins it issues can be fulfilled in an orderly manner.
As for the relevant supervision of the custody of specified stablecoins, the HKMA stated in the Consultation Paper that the Treasury, the HKMA and the SFC will work closely together to evaluate the appropriate regulatory model. We expect that with the development of the market and the continued cooperation of regulators, the market will usher in more specific regulatory guidelines on the custody of stablecoins.
After becoming a licensed person, are there any special restrictions on business disposal and capital restructuring?
Unless the HKMA has given its prior written approval or the licensee is a bank, it may not sell or dispose of the whole or any part of its business, nor may it enter into any agreement or arrangement to do so.
If a licensee restructures its capital (such as reducing total share capital, consolidating shares, splitting shares, etc.), it must notify the HKMA in writing of the restructuring as soon as possible.
Are there any application time points and transition arrangements that license applicants need to pay attention to?
The transitional arrangements in the Stablecoin Ordinance apply to issuers that have carried out regulated stablecoin activities in Hong Kong before the effective date of the Ordinance (the “Effective Date”) .
These issuers may continue to carry out regulated stablecoin activities in Hong Kong within three months from the effective date.
Submit your application within 3 months
An issuer may continue to carry out regulated stablecoin activities within the first six months of the effective date if it meets the following conditions within the first three months of the effective date:
(a) applying for a licence to carry out regulated stablecoin activities;
(b) the HKMA confirms, by written notification, that it has accepted the application; and
(c) The issuer has provided the HKMA with the following documents:
- a written statement that it has carried on regulated stablecoin activities in Hong Kong before the effective date; and
- a written undertaking that it will ensure compliance with the regulatory requirements applicable to the issuer (as would be the case if the licensee were granted a licence) at the time the provisional licence is granted.
A temporary license is granted within 6 months
Once the issuer meets the above requirements, the HKMA may grant a provisional licence authorising the issuer to carry out regulated stablecoin activities within the first 6 months from the effective date, provided that (a) the issuer has already carried out regulated stablecoin activities in Hong Kong before the effective date; and (b) the issuer has a reasonable opportunity to successfully demonstrate to the HKMA its ability to comply with the regulatory requirements applicable to licensees.
Once a provisional license is granted, it is deemed to be approved, authorizing the issuer to conduct regulated stablecoin activities until the license is granted or the license application is withdrawn or rejected, resulting in the provisional license no longer being valid.
1 month closing period
Issuers that do not apply for a licence within the first three months from the effective date will enter a one-month winding-up period after the first three months from the effective date.
Issuers whose licence applications are rejected or withdrawn within three months from the first effective date will enter a one-month closure period starting from the date of rejection or withdrawal. These issuers may apply to the HKMA for an extension of the closure period.
In view of the above transitional arrangements, we recommend that issuers that are issuing stablecoins in Hong Kong analyze as soon as possible whether they need to apply for a license in Hong Kong based on the contents of the Stablecoin Ordinance so that issuers can better manage their time and submit their applications within the first three months of the effective date.
As for issuers that have not yet issued stablecoins in Hong Kong, they can use the Stablecoin Ordinance to understand Hong Kong’s regulatory framework for stablecoin activities and prepare for entering the Hong Kong market.
Conclusion
The HKMA has stated that the key objective of introducing the Stablecoin Ordinance is to promote the development of the virtual asset sector and its underlying technologies, while striving to address the risks of fiat-pegged stablecoins to monetary and financial stability through a regulatory framework, ensure that stablecoin holders are adequately protected, and prevent the abuse of fiat-pegged stablecoins for illegal activities, aiming to strike a balance between encouraging technological innovation and maintaining financial stability.
For companies that want to expand their stablecoin business in Hong Kong, understanding and adapting to these new regulations as soon as possible is the key to seize market opportunities. In the future, with the formal implementation of this regulation, we expect to see further development and innovation in the Hong Kong stablecoin market. At the same time, it is also recommended that all parties in the market keep paying attention to ensure that they always operate in compliance in a dynamic policy environment.
We look forward to participating in the first step of the Stablecoin Ordinance in the regulation of crypto-assets and stablecoins in Hong Kong under the supervision of the HKMA, responding to the challenges brought about by the development and innovation of the virtual asset market, demonstrating the market vitality under the continuous innovation and improvement of Hong Kong's financial regulatory system, and enhancing Hong Kong's competitiveness in the international financial market.
Our team has extensive experience in HKMA application-related matters and has provided services to many clients in the field of stablecoins, including providing legal advice to clients who are applying for sandbox arrangements and clients who have entered the Hong Kong Stablecoin Issuer Sandbox Arrangement. If you have any questions or needs regarding stablecoins or HKMA licensing, please feel free to contact us.
