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 licensee, are there specific restrictions on business disposal and capital restructuring?
What application timing points and transitional arrangements should license applicants pay attention to?
Conclusion
Introduction
On December 6, 2024, the Hong Kong government published the Stablecoin Ordinance Draft in the Gazette and submitted it for the first reading in the Legislative Council on December 18. The Stablecoin Ordinance must go through three readings before it is signed into law, and it is expected to be one of the most watched new regulations in 2025. This also marks further improvements in Hong Kong's regulatory framework in the virtual asset sector and aligns with global trends in the development and regulation of virtual assets.
The Hong Kong Monetary Authority ("Monetary Authority") and the Hong Kong Financial Services and the Treasury Bureau ("FSTB") jointly released the Consultation Summary on Legislative Proposals for Implementing the Regulatory Regime for Stablecoin Issuers in Hong Kong in July 2024 ("Consultation Summary") and the Consultation Paper released in February 2024 ("Consultation Paper"), which have publicly consulted and summarized the proposed stablecoin licensing system and regulatory requirements. The current Stablecoin Ordinance can be seen as a key step in the development process of the Hong Kong stablecoin market. For specifics regarding the Consultation Paper and Consultation Summary, please refer to our earlier releases on "Stablecoin issuers can start applying to join the Hong Kong Monetary Authority Sandbox" and "A comprehensive guide to the Hong Kong stablecoin issuer licensing system."
This article will introduce the core content of the license system and regulatory requirements for stablecoin issuers in the Stablecoin Ordinance, with a 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 under the Stablecoin Ordinance?
"Stablecoin" refers to a digital form of value that is cryptographically protected and meets the following characteristics:
(a) Expressed in storage form of calculation units or economic value;
(b) Used or intended to be used as a medium of exchange accepted by the public for payment for goods or services, for settling debts, or for investment purposes;
(c) Can be transferred, stored, or traded electronically;
(d) operate on a distributed ledger or similar information storage repository; and
(e) Aimed at maintaining a stable value by referring to a single asset or a group or basket of assets.
Distributed ledger refers to an information storage repository using certain technology, through which transaction records:
(a) Hold within the ledger;
(b) Shared within the network;
(c) Verification using consensus mechanisms among network participants; and
(d) Synchronize among network nodes.
It is worth noting that in item (d) of the definition of stablecoin, in addition to specifying distributed ledgers, it also includes similar information storage repositories, which means future developments in blockchain-related technologies are also taken into consideration, allowing the regulatory framework to adjust and improve as technology evolves.
The Stablecoin Ordinance further defines "specified stablecoin" to delineate the scope of regulation.
A specified stablecoin is a stablecoin that maintains a stable value by referencing one or more official currencies or a calculation unit or economic value specified by the Monetary Authority. When considering whether it needs to apply for a license in Hong Kong, the issuer must first clarify whether the stablecoin it issues fits the definition of "specified stablecoin" to confirm whether it falls within the regulatory scope of the Monetary Authority. Based on the definitions in the Stablecoin Ordinance, we understand that algorithmic stablecoins fall within the regulated scope of "specified stablecoins," but issuers of algorithmic stablecoins may find it challenging to meet the minimum criteria for stablecoin licensees, especially with respect to reserve asset requirements.
We also note that the definition of specified stablecoins includes a certain digital form of value or certain types of digital forms of value as specified by the Monetary Authority, indicating that the Monetary Authority has the authority to expand the definition of specified stablecoins as technology develops, thereby expanding the regulatory scope.
Under what circumstances is it necessary to apply for a license according to the Stablecoin Ordinance?
Issuers that conduct or demonstrate that they are conducting "regulated stablecoin activities" (i.e., issuing specified stablecoins in the course of business in Hong Kong or issuing those that appear to reference the Hong Kong dollar outside Hong Kong) are required to apply for a license.
Moreover, whether in Hong Kong or elsewhere, anyone who actively promotes their engagement in or appears to engage in any activities that would constitute regulated stablecoin activities if conducted in Hong Kong, regardless of whether such activities actually occur, will be considered as demonstrating themselves as engaging in regulated stablecoin activities and will need to apply for a license.
At the same time, the Monetary Authority also has the power to designate certain activities as "regulated stablecoin activities," considering factors including but not limited to (a) whether the activity is of significant importance to monetary stability, financial stability, or Hong Kong's role as an international financial center, and (b) whether it involves matters of significant public interest.
It can be seen that the Stablecoin Ordinance reserves a certain degree of regulatory discretion for the Monetary Authority 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 Ordinance does not explicitly define "active promotion," we note that the Monetary Authority further clarified the definition of "active promotion" in the Consultation Summary, stating that when determining whether someone is actively promoting fiat-backed stablecoins, it will consider various factors, including:
(a) The language used in promotional information;
(b) Whether the information is targeted at individuals residing in Hong Kong; and
(c) Whether its website uses a Hong Kong domain name.
We tend to believe that the aforementioned factors also apply to the Stablecoin Ordinance. We also note that the aforementioned considerations overlap with those considered by the Securities and Futures Commission ("SFC") when determining whether someone is actively promoting the operation of a virtual asset trading platform to the public under Section 115 of the Securities and Futures Ordinance ("Securities Ordinance") and Section 53ZRB of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance ("AML Ordinance"). Specifically, the factors considered by the SFC include:
(a) Whether there is a detailed promotional plan for the services;
(b) Whether the services are promoted through promotional channels for widespread publicity;
(c) Whether the relevant promotion is carried out in a planned manner and whether it is conducted according to plans or procedures; and
(d) Whether the services are packaged to target the Hong Kong public, for example, being written in Chinese and priced in Hong Kong dollars.
Therefore, we believe that the aforementioned factors also have reference significance for the Monetary Authority when considering whether a certain behavior constitutes actively promoting regulated stablecoin activities to the public in Hong Kong. Considering the Monetary Authority's consistent regulatory principles, we understand that it will not be limited to the factors listed in the Consultation Summary but will dynamically adjust them as the business landscape evolves. We recommend maintaining ongoing attention to this.
What restrictions are there on the sale of specified stablecoins in Hong Kong according to the Stablecoin Ordinance?
Seller:
The Stablecoin Ordinance only allows the following types of permitted offerors to sell specified stablecoins:
(a) Licensees under the Stablecoin Ordinance;
(b) Licensed corporations providing virtual asset services (i.e., virtual asset trading platforms (VATP)), seven of which have obtained that license so far;
(c) Corporations holding a license for regulated activity under the Securities Ordinance;
(d) Banks.
Buyer:
There are no audience restrictions on specified stablecoins issued by licensees under the Stablecoin Ordinance, and they can be sold to retail investors.
Other specified stablecoins issued by unlicensed issuers (such as fiat-backed stablecoins issued outside Hong Kong, like USDT and USDC which have significant circulation) can only be sold to specified categories of persons—we expect that this will be limited to professional investors as defined under the Securities Ordinance.
Regarding other specified stablecoins, while the participation of retail investors is currently excluded, the mechanism of "specified audience" also provides regulators with a certain degree of flexibility to extend this to other audiences. The Monetary Authority has indicated in the consultation summary that considering the cross-border nature of fiat-backed stablecoins and their potential value in various application scenarios, the Monetary Authority may establish formal regulatory cooperation mechanisms for fiat-backed stablecoins issued overseas in the future, such as mutual recognition or "passporting" arrangements. We note that the Stablecoin Ordinance also grants the Monetary Authority the right to vary or exempt the minimum standards for stablecoin licensees in certain circumstances (including situations where the issuer is regulated by a regulatory authority with similar functions outside Hong Kong), which also lays the groundwork for the Monetary Authority to recognize fiat-backed stablecoins issued by overseas issuers through regulatory cooperation.
What are the minimum criteria for stablecoin licensees?
The Stablecoin Ordinance lists detailed minimum standards for stablecoin license applications in its Schedule 2, and below we will introduce the core contents and key considerations that stablecoin issuers need to pay attention to.
1. Asset management and operational mechanisms
Corporate identity
Licensees must be companies established in Hong Kong or banks established outside Hong Kong.
Financial resources
Licensees must have sufficient financial resources and liquid assets, with a basic requirement of paid-up capital of no less than HK$25,000,000.
We note that the original requirement in the consultation summary was HK$25,000,000 or 1% of the face value of the stablecoin circulation, whichever is higher. The financial resource requirements in the Stablecoin Ordinance are more lenient compared to those proposed during the consultation period.
Additionally, we note that the financial resource requirement of HK$25,000,000 does not apply to bank applicants.
Management of reserve assets
For each category of specified stablecoin issued by the licensee:
The licensee must maintain a reserve asset portfolio ("specified reserve asset portfolio") and ensure that it is separated from other reserve asset portfolios.
The market value of the specified reserve asset portfolio must at all times be at least equal to the face value of the stablecoins that have not yet been redeemed and are still in circulation.
Each category of specified reserve asset portfolio must hold the same reference assets as those referred to by the specified stablecoin of that category.
Disclosure requirements: Licensees must establish and implement sound and appropriate risk management policies and procedures as well as control systems, and must make sufficient and timely disclosures to the public regarding their reserve asset management policies, risk assessments, risk management evaluations, composition and market value, as well as the results of regular independent verification and audits.
Based on our experience, apart from the sufficiency of reserve assets, the Monetary Authority has certain requirements regarding the composition, custody arrangements, and management of reserve assets. Issuers should pay particular attention to whether their custody and management arrangements for reserve assets can ensure the safety and liquidity of the reserve assets before applying for a license.
Redemption mechanism
Licensees must provide each holder with the right to redeem the specified stablecoin and may not attach any excessively stringent conditions limiting redemption or charge unreasonable fees related to redemption (reasonable related fees are allowed).
Disclosure requirements: Licensees must make sufficient and timely disclosures to the public regarding their redemption rights, including the following items, and ensure that the matters below are clearly and prominently displayed on the licensee's website or otherwise made available for public access:
(a) Fees related to redeeming the specified stablecoins;
(b) Conditions for exercising redemption rights;
(c) The mechanism and procedures for redemption; and
(d) Within what period can valid redemption requests regarding stablecoins be processed.
We note that the original requirement in the consultation summary stated that licensed issuers must redeem stablecoins within one working day after receiving a redemption request, unless prior approval from the Monetary Authority is obtained. Although the Stablecoin Ordinance does not specify a clear redemption timeframe, we believe that in practice, the Monetary Authority also expects licensed issuers to process holders' redemption requests within a reasonable time (such as a few working days) after receiving eligible redemption requests. Furthermore, if the license applicant employs a third party (such as a distributor) to assist in processing redemption requests, the license applicant also needs to consider how to ensure that the third party will also process redemption requests in a timely and sufficient manner.
2. Shareholder and executive requirements for licensees
The Consultation Paper and Consultation Summary mention that the Monetary Authority will consider whether the senior management of the license applicant meets the fit and proper requirements as a whole, taking into account their qualifications, asset levels, and educational background.
The Stablecoin Ordinance has a more detailed classification and requirements for the senior management of license applicants, indicating the regulatory authority's high regard for the suitability and relevant experience of licensee managers. We have summarized the personnel requirements of the Stablecoin Ordinance below for issuers and license applicants to understand and assess whether their current personnel structure meets the requirements.
Controller
Controller refers to the following types:
Majority shareholder controller: more than 50% voting rights
Minority shareholder controller: not less than 10% but not more than 50% voting rights
Indirect controller: a group of directors or a majority of directors acting on their instructions
Licensees must establish control systems to ensure that the Monetary Authority is informed of the identity of each controller.
The relevant shareholders of the licensee need to submit a written application and obtain prior consent from the Monetary Authority to become a controller.
Chief Executive and Alternate Chief Executive
Licensees must appoint one person as the Chief Executive and at least one person as the Alternate Chief Executive.
If the Chief Executive is unable to perform their duties due to illness, being outside Hong Kong, or any other reason, the Alternate Chief Executive must act as the Chief Executive.
The candidate must generally reside in Hong Kong and must be an appropriate (fit and proper) person to hold the position of Chief Executive or Alternate Chief Executive.
The appointment of the Chief Executive and Alternate Chief Executive requires prior approval from the Monetary Authority, which may attach conditions it deems appropriate when granting consent.
Director
The appointment of directors requires prior consent from the Monetary Authority.
If a director has already obtained the Monetary Authority's consent to serve as Chief Executive, they may directly become a director of the licensee and act in that capacity without needing additional consent.
Manager
The definition of "Manager" refers to the primary person responsible for handling one or more specified matters related 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 control systems to manage risks and prevent the licensee from getting involved in money laundering or terrorist financing;
3. Developing, operating, and maintaining computer systems;
4. Conducting internal audits or reviews regarding the licensee's affairs or business;
5. Ensuring that the licensee complies with applicable rules, regulations, and guidelines; and
6. Developing, operating, and maintaining any business activities other than licensed stablecoin activities that have been approved by the Monetary Authority.
Employees
If any employee has the following situations upon hiring or during their tenure, they may not become an employee of any licensee or must cease acting in that capacity unless prior consent from the Monetary Authority is obtained:
(a) Bankruptcy;
(b) enter into a debt restructuring agreement, debt repayment arrangement, or voluntary arrangement as defined in the Bankruptcy Ordinance with creditors; or
(c) Convicted of an offense involving fraud or dishonesty in any jurisdiction.
Stablecoin Manager
Licensees must appoint a Stablecoin Manager.
Relevant candidates must generally reside in Hong Kong and be fit and proper persons to serve as Stablecoin Managers.
Appointments require prior approval from the Monetary Authority, which may attach conditions it deems appropriate when granting consent.
Notification requirements for personnel changes
Licensees must notify the Monetary Authority in writing within 14 days upon becoming aware that someone has become or is no longer a controller, Chief Executive, Alternate Chief Executive, Director, or Stablecoin Manager of the licensee.
Whenever someone is appointed as or ceases to be a manager of a licensee, or when an already appointed manager is appointed to any new specified matter, the licensee must send detailed written notification to the Monetary Authority and the manager within 14 days.
Note: The contents related to the above positions do not apply to banks, except for the manager and stablecoin manager.
Other personnel-related requirements
Each person who holds the position of Chief Executive, Director, Stablecoin Manager, or Controller of the licensee must be a fit and proper person for the respective position.
Each senior person responsible for the daily management and operation of the licensed stablecoin activities must have the appropriate knowledge and experience to effectively perform their duties.
Licensees must establish and implement sound and appropriate control systems to ensure (a) that each person serving as a manager is a fit and proper person for the respective position, and (b) that each senior person responsible for the daily management and operation of their licensed stablecoin activities has the appropriate knowledge and experience.
Although the Stablecoin Ordinance does not explicitly define fit and proper, we note that the Monetary Authority mentioned in the consultation summary that it will conduct a comprehensive review of the applicant when considering the suitability of senior management, taking into account a range of factors, including the applicant's experience, experience supervising other financial activities in a similar capacity, qualifications, asset levels, and educational background. We expect these factors to similarly apply to the Stablecoin Ordinance.
We also note that Section 129(1) of the Securities Ordinance lists the matters that the Securities and Futures Commission or the Monetary Authority must consider, in addition to any matters deemed relevant by the regulatory authority, when determining whether someone is a fit and proper person concerning any provisions in Part V (Licensing and Registration) of that ordinance:
(a) Financial condition and solvency;
(b) Educational qualifications or other qualifications or experiences, and must take into account the nature of the functions that person will perform;
(c) Whether there is the ability to conduct the regulated activities in a competent, honest, and fair manner; and
(d) Reputation, character, reliability, and financial soundness.
We believe that the aforementioned factors also have reference significance for the Monetary Authority when considering fit and proper persons under the Stablecoin Ordinance.
3. Management systems and measures
Risk management and anti-money laundering regulations
Licensees must establish risk management policies to manage the risks arising from conducting licensed stablecoin activities and must align them with the scale and complexity of the activities.
Licensees must have control systems to prevent money laundering or terrorist financing related to their licensed stablecoin activities and must comply with Hong Kong's relevant regulations.
Like other types of business entities regulated by the Monetary Authority, we expect that the Monetary Authority will also issue further detailed guidelines on the specific responsibilities of licensed issuers concerning anti-money laundering or counter-terrorist financing.
The purpose and robustness of issuing specified stablecoins
Considering the purpose, business model, and operational arrangements of the licensee issuing specified stablecoins, the issuance must be comprehensive and prudent.
Unlike other relatively 'rigid' minimum criteria, this requirement is based on the sustainability of the license applicant's stablecoin business itself, requiring that the business model of the license applicant must be viable and have growth potential. Based on our experience, the Monetary Authority places significant importance on the application scenarios, development prospects, competitiveness, and sustainability of the stablecoin business model. Therefore, it is advisable for license applicants to begin preparing their business plans early and highlight in their business plans the advantages of the stablecoin they plan to issue (compared to other stablecoins) and what characteristics make it more attractive to investors.
Business activities
Licensees must have dedicated and sufficient resources to conduct their licensed stablecoin activities.
Before a licensee engages in any business activities other than licensed stablecoin activities, they must obtain the Monetary Authority's consent and establish a control system to ensure that these business activities do not pose significant risks to their licensed stablecoin activities and that any potential or actual conflicts of interest arising are properly managed.
Note: The requirements related to business activities do not apply to banks.
Disclosure requirements
Licensees must publish a white paper and provide holders with information about the complaint handling and compensation mechanism.
Licensees must have risk management policies and procedures to identify, prevent, manage, and disclose conflicts of interest between the licensee and the holders.
Complaint handling
Licensees must establish control systems to ensure that a complaint handling and compensation mechanism is provided to holders, which is sound, easy to initiate, affordable, independent, fair, accountable, timely, and efficient.
Licensees must also ensure that the complaint handling and compensation mechanism does not impose unreasonable costs or burdens on the relevant holders or cause unreasonable delays.
Interest
Licensees may not pay interest on the specified stablecoins they issue.
Recovery plans and orderly scaling down
Licensees must establish control systems to ensure:
In the event of significant disruption to operational activities, timely recovery and continued support for the critical functions of its licensed stablecoin activities;
Its licensed stablecoin activities can be scaled down in an orderly manner; and
The redemption of the specified stablecoins it issues can be executed in an orderly manner.
Regarding the relevant supervision of the custody of specified stablecoins, the Monetary Authority stated in the Consultation Paper that the FSTB, the Monetary Authority, and the SFC will closely cooperate to assess suitable regulatory models. We anticipate that as the market develops and regulatory authorities continue to cooperate, there will be more specific regulatory guidance regarding stablecoin custody.
After becoming a licensee, are there specific restrictions on business disposal and capital restructuring?
Unless the Monetary Authority grants prior written approval or is a bank, licensees may not sell or dispose of all or any part of their business, nor enter into any agreements or make arrangements regarding the same.
If a licensee restructures its capital (such as a reduction in share capital, share consolidation, share split, etc.), it must promptly notify the Monetary Authority in writing of such restructuring.
What application timing points and transitional arrangements should license applicants pay attention to?
The transitional arrangements in the Stablecoin Ordinance apply to issuers who have been conducting regulated stablecoin activities in Hong Kong before the effective date of the ordinance ("effective date").
These issuers can continue to conduct regulated stablecoin activities in Hong Kong within the first three months after the effective date.
Submit an application within 3 months
If the issuer meets the following conditions within the first three months after the effective date, they may continue to conduct regulated stablecoin activities within the first six months after the effective date:
(a) Submit a license application to conduct regulated stablecoin activities;
(b) Confirmation of acceptance of the application by the Monetary Authority through written notice; and
(c) The issuer has provided the following documents to the Monetary Authority:
A written declaration stating that it has been conducting regulated stablecoin activities in Hong Kong prior to the effective date; and
A written commitment stating that upon approval of the temporary license, it will ensure compliance with the regulatory requirements applicable to the issuer (as is the case for approved licensees).
Approval for a temporary license within 6 months
Once the issuer meets the above requirements, the Monetary Authority may approve a temporary license within the first six months after the effective date, authorizing the issuer to conduct regulated stablecoin activities, provided that (a) the issuer has been conducting regulated stablecoin activities in Hong Kong before the effective date; and (b) the issuer has a reasonable opportunity to successfully demonstrate to the Monetary Authority its ability to comply with the regulatory requirements applicable to licensees.
Once a temporary license is approved, it is deemed an approved license, authorizing the issuer to conduct regulated stablecoin activities until the approved license or license application is withdrawn or denied, resulting in the temporary license no longer being valid.
1-Month Closing Down Period
Issuers that do not apply for a license within the first three months after the effective date will enter a one-month closing down period after the first three months following the effective date.
Issuers that submit a license application within the first three months after the effective date and are denied or withdrawn will enter a one-month closing down period starting from the date of denial or withdrawal. These issuers may apply to the Monetary Authority for an extension of the closing down period.
In light of the aforementioned transitional arrangements, we recommend that issuers issuing stablecoins in Hong Kong analyze as soon as possible whether they need to apply for a license under the Stablecoin Ordinance, so that issuers can better grasp the timing and submit applications within the first three months after the effective date.
For issuers that have not yet issued stablecoins in Hong Kong, they can understand the regulatory framework for stablecoin activities in Hong Kong through the Stablecoin Ordinance to prepare for entering the Hong Kong market.
Conclusion
The Monetary Authority has stated that the key objective of launching the Stablecoin Ordinance is to promote the development of the virtual asset sector and its underlying technology while addressing the risks posed by fiat-backed stablecoins to monetary and financial stability through a regulatory framework, ensuring adequate protection for stablecoin holders, and preventing the abuse of fiat-backed stablecoins for illegal activities, aiming to strike a balance between encouraging technological innovation and maintaining financial stability.
For enterprises wishing to expand their stablecoin business in Hong Kong, it is crucial to understand and adapt to these new regulations as soon as possible to seize market opportunities. In the future, as this ordinance is officially implemented, we expect to see further development and innovation in the Hong Kong stablecoin market. It is also recommended that all market participants stay informed to ensure compliance in a dynamic policy environment.
We look forward to taking the first step under the supervision of the Monetary Authority in responding to the challenges brought about by the development and innovation of the virtual asset market in the regulation of stablecoins in Hong Kong, 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 regarding applications related to the Monetary Authority, having provided services to numerous clients in the stablecoin field, including legal advice for clients applying for sandbox arrangements and those already in the Hong Kong stablecoin issuer sandbox arrangements. If you have any questions or needs regarding stablecoins or applications to the Monetary Authority, please feel free to contact us.