On May 22, Eastern Time, the price of Bitcoin reached a new historical high.

At the same time, two recent events occurred: first, the Legislative Council of Hong Kong passed the (Stablecoin Regulation Bill), which is expected to take effect within the year; second, on the other side of the globe in the United States, the GENIUS Act aimed at regulating stablecoins is also advancing rapidly.

It is reported that stablecoins are virtual assets designed to maintain a relatively stable value relative to certain assets (usually currencies). The value of stablecoins is pegged to various fiat currencies, such as the US dollar, euro, etc. Common stablecoins include USDT (Tether) and USDC. Previously, the Hong Kong Monetary Authority had publicly released the first batch of stablecoin issuer sandbox lists, including JD Group’s JD Coin Chain Technology (Hong Kong), Yuan Coin Innovation Technology, while Standard Chartered Bank (Hong Kong), Animoca Brands Limited, and HKT chose to apply jointly.

The regulatory framework for stablecoins is gradually becoming clear

According to news from the Hong Kong SAR government, on May 21, the Hong Kong Legislative Council passed the (Stablecoin Regulation Bill), aimed at establishing a licensing system for fiat stablecoin issuers in Hong Kong.

After the implementation of the regulation, anyone who issues fiat stablecoins in Hong Kong during business operations or issues fiat stablecoins claiming to be pegged to the value of the Hong Kong dollar outside of Hong Kong must apply for a license from the Financial Management Commissioner. The regulation only allows designated licensed institutions to sell fiat stablecoins in Hong Kong, and only fiat stablecoins issued by licensed issuers can be sold to retail investors. The news stated that the (Stablecoin Regulation) is expected to take effect within this year, and the licensing system has a transitional period arrangement to allow the industry to apply for licenses and make appropriate business arrangements according to the regulation's requirements.

Qiao Zheyan, a partner at JunHe Law Firm's Hong Kong office, told (Daily Economic News) reporters that if the regulation comes into effect, providers of internationally popular stablecoins like USDT may need to apply for relevant local licenses in Hong Kong to sell stablecoins to ordinary investors.

According to reporters, stablecoins ensure their relative stability in value by being linked to fiat currencies. For a considerable period, stablecoins have been outside the government's regulatory framework. As the application of stablecoins continues to expand, potential risks such as redemption runs have gradually drawn attention, and the urgency of stablecoin regulation is increasing.

Many regions are moving towards improving the legislative regulation of stablecoins

In fact, to date, in addition to Hong Kong, several countries or regions including the United States, the European Union, Singapore, and Dubai have begun or completed legislative improvements regarding the stablecoin framework.

Taking the EU as an example, the MiCA (Regulation on Markets in Crypto-Assets) will be fully implemented by December 30, 2024, providing a comprehensive regulatory framework for all crypto assets, including stablecoins. To prevent systemic financial risks, the bill requires issuers to hold sufficient asset reserves to support the stability of stablecoin prices.

In the United States, according to ABC News on May 21, the U.S. Senate passed the GENIUS Act with a vote of 66 to 22 on Monday. Supporters praised the bill as a means to protect consumers and establish industry standards, which could make such cryptocurrencies mainstream tools for digital payments and other financial instruments.

We are seeing a clear global trend: stablecoins are moving from a 'gray area' to a more defined and systematic regulatory framework.

Bai Zhen, head of the Hong Kong office of Mankun Law Firm, told reporters that regulatory measures in various countries or regions indicate that major markets are incorporating stablecoins into the logic of traditional financial regulation, with the focus gradually shifting from 'whether to regulate' to 'how to regulate', especially in terms of anti-money laundering, transparency of fund sources, and on-chain traceability.

The activity level of stablecoin applications has increased, attracting the attention of regulatory bodies in various regions. Several interviewees told (Daily Economic News) reporters that government regulators are seeking a balance between market development needs and risk prevention.

Taking the (Stablecoin Regulation Bill) launched in Hong Kong as an example, lawyer Bai Zhen admitted: 'On one hand, there has been uncertainty in the market for stablecoins over the past few years due to a lack of regulatory framework. By establishing a clear licensing system, the government hopes to provide a clear rule foundation for the industry, thus reducing market trial and error costs and encouraging compliant innovation. On the other hand, the cross-border nature of stablecoins also brings challenges in financial security, capital flow, and anti-money laundering. Through legislation, Hong Kong hopes to manage these risks more effectively.'

Xiao Sa, a senior partner at Beijing Dacheng Law Firm, also stated to reporters that the most direct reason for Hong Kong to promote the implementation of the regulation is to improve the regulatory framework for virtual assets in order to further find a balance between innovation and risk in the field of virtual assets.

Xiao Sa summarized for reporters that looking at the regulatory frameworks for stablecoins in some countries and regions, three major trends are emerging:

First is the popularization of licensing entry and localization requirements, with major economies generally requiring stablecoin issuers to operate with licenses and establish local entities. For example, Hong Kong requires licensed issuers to register and establish management in Hong Kong, while the U.S. plans to limit stablecoin issuance rights to banks or trust companies. Such measures aim to strengthen local regulatory capabilities and prevent cross-border regulatory arbitrage.

Secondly, reserve management is approaching traditional financial standards, with countries emphasizing the liquidity of reserve assets (such as cash and government bonds) and independent custody, while introducing regular audits. Hong Kong requires that the value of reserve assets not be less than the nominal value of circulating stablecoins, and the EU's MiCA rules even require algorithmic stablecoins to hold 300% excess reserves, reflecting a strict control of credit risk, with regulation approaching traditional financial standards.

Finally, the functional positioning is concentrating on payment tools, with regulators tending to define stablecoins as 'payment tools' rather than investment products, limiting their financial intermediary functions. For example, Hong Kong prohibits licensed issuers from engaging in lending activities to avoid credit creation risks, aligning with the logic of payment institution regulation.



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Author of the article: Bai Zhen Jen