Why is Hong Kong regulating and licensing stablecoins

Background: What are Stablecoins?

• Definition: Cryptocurrencies pegged to a stable asset (fiat currency, commodity, or algorithmic logic) to reduce volatility.
• Types:
  • Fiat-backed: e.g., USDT (pegged to USD), issued by Tether.
  • Crypto-backed: e.g., DAI, backed by Ethereum-based collateral.
  • Algorithmic: e.g., UST (now defunct), regulated by code rather than reserves.
• Use Cases:
  • Trading pair within crypto exchanges.
  • Protection against local currency depreciation (e.g., Turkey, Argentina).
  • Cross-border remittances (low cost, fast settlement).
  • Daily transaction utility in cash-scarce economies.

Relevance : GS 3( Economy )

Hong Kong’s Stablecoin Ordinance (Effective August 1, 2025)

Prohibitions:

• Illegal to offer or market unlicensed fiat-referenced stablecoins (FRS) to retail investors in Hong Kong.

Mandatory Licensing Requirements:

1. Licence from HKMA (Hong Kong Monetary Authority).
2. Reserve Management:
   1. Backed by fiat or other approved assets.
   2. Reserve transparency and redemption mechanisms mandatory.
3. Compliance Protocols:
   1. Anti-money laundering (AML) and counter-terror financing (CFT) safeguards.
   2. Independent audits and asset disclosures.
4. Limited Licenses:
   1. Initial phase: only a “handful” of licences will be granted to maintain systemic trust.

Why Regulation is Necessary: Data & Global Trends

• Systemic Risk: Rapid issuer expansion can undermine trust if reserves are unverified.
• Historical Collapse: Terra-LUNA (May 2022) – stablecoin UST lost peg → wiped billions of dollars in market cap → global contagion.

International Regulatory Landscape

USA – GENIUS Act (2025):

• 100% Reserve Mandate: Stablecoins must be fully backed by USD or short-term Treasuries.
• Monthly Disclosures: Issuers must publish reserve composition.
• Marketing Rules: Protect consumers from deceptive promotion.

Japan:

• Regulates stablecoins under Payment Services Act.
• Limits issuance to licensed banks and money transfer agents.

Singapore:

• Licensing under Payment Services Act (PSA).
• MAS (Monetary Authority of Singapore) mandates capital and operational risk requirements.

Volatility Despite Stability?

• Causes: Redemption pressures, loss of confidence, poor reserve transparency.
• Impact: Loss of investor wealth, liquidation crises on exchanges, regulatory crackdowns.

India’s Relevance: What Can Be Learnt?

Policy Lessons for India:

• India lacks a dedicated stablecoin law; oversight falls under broader crypto restrictions via RBI.
• Recommendations:
  • Designate stablecoins as a separate class from volatile cryptocurrencies.
  • Mandate reserve disclosure norms with regular audits.
  • Implement licensing and KYC norms like Hong Kong to manage cross-border risk and illicit flows.

Fintech & Digital Rupee Nexus:

• India’s CBDC (e₹) under RBI offers state-backed stability.
• But privately issued stablecoins could foster:
  • Faster remittances (₹84 billion/month in inward remittances).
  • Trade settlement in rupee-linked tokens.
• Regulatory sandbox may explore pilot cases, akin to Singapore’s innovation-driven model.

Way Forward – Global Coordination Needed

• G20 FSB (Financial Stability Board) guidance needed to avoid:
  • Regulatory arbitrage
  • Cross-border misuse of unregulated stablecoins
• BIS Recommendations (2023): Stablecoins should be:
  • Subject to banking-like regulation
  • Held to “same risk, same regulation” principles

Conclusion

• Hong Kong’s Stablecoins Ordinance marks a shift from crypto-libertarianism to centralised accountability.
• It balances innovation with risk mitigation, offering a regulatory template for jurisdictions like India.
• In the long run, global crypto financial systems may hinge on interoperable, transparent, and auditable stablecoin ecosystems.