Hong Kong stablecoin regulation upgrade, legal currency-linked licenses may be distributed this year.

Recently, as enthusiasm in the stablecoin market continues to rise, several regulatory departments in the Hong Kong Special Administrative Region have frequently stated that the issuance and application of stablecoins are still in the exploratory stage, with high entry barriers and involving multiple levels of institutional construction that need to be advanced cautiously. Hong Kong hopes to fully align the issuance and regulation of stablecoins with the "TradFi-level" Compliance framework.

Stablecoins are digital assets designed to maintain a relatively stable value against certain assets (usually currencies), and are considered an interface or connecting mechanism linking TradFi and digital assets. Globally, there are expectations for stablecoins to be used more widely, and how to properly manage the associated risks is gradually becoming an international regulatory focus.

Several relevant institutions in Hong Kong have been actively involved in the work of international regulatory organizations, including the "Global Crypto Asset Activity Regulatory Framework" released by the Financial Stability Board in 2023. The relevant regulatory system in Hong Kong is largely based on this framework. As one of the regions globally poised to be the first to release a legal stablecoin, the preparation and timing of the relevant system in Hong Kong are considered to have certain reference significance.

First of all, in terms of the entry threshold, legal stablecoins did not flourish in the early stage of their legal landing in the Hong Kong SAR. In May of this year, the Hong Kong Legislative Council passed the "Stablecoin Ordinance," introducing a licensing system for stablecoin issuers pegged to legal tender in Hong Kong. This ordinance will take effect on August 1, and at that time, the Hong Kong Monetary Authority will begin accepting license applications.

The Chief Executive of the Hong Kong Monetary Authority, Eddie Yue, emphasized that stablecoins are not investment or speculative tools, but rather one of the payment tools utilizing blockchain technology, with no appreciation potential. Considering the risks associated with stablecoins, user protection, as well as the market's carrying capacity and long-term development, the licensing has a relatively high threshold, and it is expected that only a few licenses will be granted in the initial stage.

Secondly, regarding the timeline, the issuance of stablecoin licenses by the Hong Kong Special Administrative Region government is expected to be realized within this year. The Secretary for Financial Services and the Treasury, Christopher Hui, stated that the relevant government sectors are looking forward to receiving applications after the "Regulations" come into effect and aim to issue licenses within this year.

Factors affecting the issuance timeliness still include multiple aspects, such as the financial management authority is consulting market stakeholders on how to implement the "Regulations", and will subsequently publish guiding policies involving anti-money laundering and a series of other related requirements. Streamlining the anti-money laundering regulatory system related to stablecoins is a key aspect, including KYC (Know Your Customer) and KYT (Know Your Transaction).

Thirdly, in terms of application scenarios, after relevant institutions are issued licenses, the specific focus of their use cases and whether they can be linked to other fiat currencies are currently relatively uncertain. Cross-border payment is a potential application scenario, but stablecoins are not the only option; other new payment tools also include CBDC networks established in cooperation with certain central banks, tokenized deposits planned for issuance by some international banks, and cross-border connections of fast payment systems, among others.

Some industry insiders believe that the Hong Kong SAR government's statement conveys an attitude of cooling down the market. The regulators hope the industry will be more rational and focus on practical needs such as payment, clearing, and cross-border circulation related to the real economy. This is the "original intention" of Hong Kong's push for stablecoins.

Currently, some applicants have expressed a desire to issue stablecoins pegged to the Renminbi. Some experts believe that there may not be legal obstacles to issuing stablecoins anchored to offshore Renminbi in Hong Kong, and from the perspective of Renminbi internationalization strategy, it also has positive significance. However, in reality, some entrepreneurial teams have encountered legal and Compliance issues during their attempts, indicating that current policies have not been fully clarified, and there is still a gap between market enthusiasm and regulatory coordination.