On May 21, 2025, the Hong Kong Legislative Council approved the (Stablecoin Regulation Bill), a move that has drawn widespread attention in the global virtual asset regulatory arena. With the iterative development of Web3 technology and the exponential growth of virtual asset trading scale, stablecoins have evolved from a marginal innovation to a core payment medium, acting as a key bridge between fiat currencies and the crypto world. However, frequent risk events such as algorithmic stablecoin de-pegging and the opacity of reserve assets have prompted major global economies to accelerate the establishment of regulatory frameworks. This legislation in Hong Kong is not only an institutional innovation in response to financial stability challenges but also signifies an important transformation in the regulatory paradigm of the digital economy era.

Legislative Background: The Dual Nature of Stablecoins and the Urgency of Regulation. Amidst the wave of financial innovation driven by blockchain technology, stablecoins, with their composite characteristics of 'fiat currency price anchoring + blockchain decentralization', are reshaping the underlying logic of the global payment system. Data shows that by 2024, the global market value of stablecoins will exceed 800 billion USD, with daily trading volume accounting for 35% of the total cryptocurrency market. Some leading stablecoins have begun to exhibit the circulation characteristics of 'digital fiat currency'. While this financial form enhances cross-border payment efficiency and reduces transaction costs, it also introduces significant systemic risks—an algorithmic stablecoin's price plummeted by 99% within 48 hours in 2022, resulting in over 40 billion USD in asset evaporation, exposing the potential threat stablecoins pose to financial stability in an unregulated environment. As a financial hub connecting Mainland China and international markets, Hong Kong has maintained an average annual growth rate of 70% in virtual asset trading in recent years, becoming an important digital asset trading center in the Asia-Pacific region. However, the regulatory void has led to a 'bad money drives out good' phenomenon: compliant institutions are hesitant to act due to the lack of clear rules, while unlicensed entities conduct business by cross-border issuing stablecoins pegged to the Hong Kong dollar, which not only raises compliance risks such as money laundering and terrorist financing but also poses potential challenges to the independence of Hong Kong's monetary policy. In this context, the introduction of the (Stablecoin Regulation Bill) is both an inevitable choice for preventing financial risks and a strategic deployment to promote industry compliance.

Institutional Design: A Risk-Based Regulatory Framework and an Innovation-Inclusive Rule System. The regulation constructs an institutional system centered around licensing management and a full lifecycle regulatory framework. At the issuance end, the regulation clearly defines the legal definition of 'fiat currency stablecoins' for the first time, bringing stablecoins that are 'issued in Hong Kong' or 'claim to be pegged to the Hong Kong dollar' into the regulatory scope, requiring issuers to apply for a specialized license from the Financial Commissioner. This provision breaks through the traditional 'territorial principle' limitations and implements penetrating regulation for cross-border issued stablecoins that substantively impact the Hong Kong market, reflecting the modern regulatory concept of 'jurisdiction at the place of risk occurrence'. The reserve asset management system constitutes the technical core of the regulation. The regulation mandates that licensed issuers establish a '100% fiat currency reserve + independent audit' mechanism, with customer assets strictly separated from the issuer's proprietary assets and stored in licensed banks in Hong Kong. In terms of stabilization mechanisms, in addition to the traditional 'over-collateralization' model, the regulation innovatively allows for a hybrid mechanism combining algorithmic adjustments and asset collateral, but requires issuers to submit detailed mathematical models and stress test reports to regulatory authorities. Redemption clauses reflect the emphasis on investor protection—licensed issuers must process redemption requests at face value within 7 working days, and the daily redemption limit cannot be less than 5% of the total issuance, effectively preventing the transmission of 'run risk'. Regarding market participants, the regulation demonstrates a balance between regulatory wisdom and market demand. In response to industry suggestions to 'expand the scope of recognized providers', the legislative body has included licensed prepaid payment tool holders in the compliance sales system, but set a 'commissioner approval' prerequisite, requiring such institutions to undergo special assessments for anti-money laundering, customer suitability management, and more. For stablecoins issued by unlicensed entities, the regulation adopts a management model of 'qualified investors + risk disclosure', limiting trading to professional investors only, and requiring product prospectuses to prominently state in bold red font the warning that states 'unlicensed issuance, risk borne by oneself' to strengthen the risk defense from the perspective of investor suitability.

Multidimensional Impact: Institutional Innovation Reshaping the Financial Landscape. For the Hong Kong financial market, the implementation of this regulation will push the construction of a 'digital financial center' into a new stage. The principle of 'same activities, same risks, same regulation' ensures regulatory consistency between traditional finance and virtual assets, avoiding regulatory arbitrage opportunities. A recent report from the International Monetary Fund (IMF) states that Hong Kong's regulatory framework achieves a global leading level in 'risk identification accuracy' and 'innovation inclusivity', which will attract more compliant stablecoin projects to settle in Hong Kong, with stablecoin trading volume in Hong Kong expected to increase to 15% of the global total by 2026. The more profound impact is that this regulation reserves institutional interfaces for the coordinated development of central bank digital currencies (CBDCs) and private stablecoins, laying the foundation for future construction of a 'legal digital currency + compliant stablecoin' dual-layer digital payment system. In terms of industry development, the introduction of the regulation will trigger structural changes in the stablecoin market. On one hand, requirements for reserve asset transparency and redemption mechanism standardization will eliminate about 60% of 'low-quality projects', driving market resources towards leading compliant institutions; on the other hand, clear regulatory rules will provide a safe boundary for innovation, and it is expected that in the next two years, Hong Kong will see the emergence of blockchain-based supply chain finance stablecoins, green finance stablecoins, and other innovative forms. A report from an international investment bank indicates that after the regulation is implemented, the financing costs of compliant stablecoins will drop by about 300 basis points, significantly enhancing the industry's sustainable development capabilities.

Global Regulatory Perspective: Hong Kong's Legislative Practice as a Pioneering Demonstration. While major economies are still at the policy discussion stage, Hong Kong has legislatively clarified the cross-border regulatory rules for stablecoins, and its institutional design of 'license classification management + international regulatory mutual recognition' provides important reference for the (Global Stablecoin Regulatory Guidelines) being promoted by G20 countries. The head of the European Banking Authority (EBA) publicly stated that the provisions in the Hong Kong regulation regarding 'reserve asset custody' and 'cross-border issuance reporting' will become important references for subsequent EU legislation. This 'first mover' institutional advantage allows Hong Kong to gain a voice in rule-making within the global digital economy governance system.

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