Mankiw Research: Interpreting Hong Kong’s new stablecoin regulations, how will it reshuffle the industry landscape?

Without trust, innovation will fail!

Author: Jen Baiqin, Wenjing Huang, Mankiw Blockchain Legal Services

Cover: Photo by bady abbas on Unsplash

introduction

On May 21, 2025, the passage of the Hong Kong Stablecoin Ordinance in the Legislative Council of Hong Kong marked a critical turning point in regulation. The Ordinance was gazetted on May 30, 2025 and is scheduled to take effect on August 1, 2025. Fiat-pegged stablecoins (FRS) issued in Hong Kong, issued from outside Hong Kong, or involving Hong Kong dollars are no longer in the gray area of crypto finance, but are included in a formal and institutionally regulated legal framework. The Ordinance reflects an intentional recalibration: it aims to position Hong Kong as a compliant, forward-looking virtual asset hub capable of hosting the next generation of programmable finance under the rule of law. This article analyzes the key provisions, strategic positioning, and practical impact of the Ordinance, and clarifies its differences from related technologies such as real asset tokenization (RWA).

Legal infrastructure

The legislation constructs a complex semantic system about digital value. Stablecoins are defined not only as a functional tool, but also from technical, economic and legal dimensions: they must be cryptographically secured, used as a store of value or medium of exchange, and run on distributed ledger technology (DLT). “Specified stablecoins” are further limited to tokens that are anchored to official currencies or other units approved by the Hong Kong Monetary Authority (“HKMA”).

The scope of regulated activities is broad, covering not only issuance and redemption, but also marketing, operational participation, and even indirect inducement involving Hong Kong residents. This broad definition ensures regulatory coverage while minimizing regulatory arbitrage based on geography or activity type.

The principle of fiat currency backing is central. The Ordinance explicitly states that any “specified stablecoin” must be redeemable in full in the fiat currency to which it is pegged, in particular the Hong Kong dollar. This is not only a mechanical requirement, but also a fundamental safeguard. Fiat currency backing ensures that stablecoins can operate as credible monetary instruments rather than speculative crypto assets. The HKMA requires that reserve assets must be high-quality, liquid assets (such as cash, short-term government bonds) and denominated in the same fiat currency to which the stablecoin is pegged. This eliminates currency mismatch risk, i.e., the value of the reserve asset may depreciate if the currency of the stablecoin does not match the currency of the stablecoin. In addition, it also isolates users from the risk of volatility contagion - the impact of panic selling on the stablecoin market caused by the plunge in non-anchored crypto assets.

The Ordinance explicitly prohibits the use of highly volatile or illiquid assets as anchors, such as real estate tokens, commodity portfolios, or mixed asset indices. If the token is not clearly redeemable for fiat currency and is not clearly backed by fiat currency, it is not considered a stablecoin and does not enjoy legal protection. This approach effectively prevents regulatory arbitrage and prevents financial engineering from blurring the line between asset-backed securities and monetary instruments, thereby reflecting Hong Kong's position on prioritizing financial stability over speculative or synthetic innovation.

Licensing framework

The regulation introduces a comprehensive prudential licensing system that emphasizes the systemic importance of stablecoin issuers. The main requirements include:

• Capital minimum: The minimum paid-in capital is HK$25 million.
• Reserve structure: The issuer needs to maintain high-quality, liquid reserve assets (such as cash and short-term government bonds) corresponding to the circulating stablecoins at a 1:1 ratio.
• Isolation and legal protection: Reserve assets must be placed in a trust or similar closed mechanism and cannot be used by other creditors in the event of bankruptcy.
• Redemption Mechanism: A mechanism must be in place to ensure that redemption requests are fulfilled in real time and at par. Delays or additional fees will constitute statutory violations.
• Governance review: The appointment of controlling shareholders, directors, and stablecoin managers must be approved by the HKMA and must continue to meet the “fit and proper” standards and disclosure obligations.

License holders are also required to continue to fulfill relevant obligations, including paying annual fees, reporting major changes and annual compliance reports.

In addition, the Financial Secretary issued an announcement on June 6, allowing unlicensed issuers to provide non-regulated stablecoin offers to professional investors as defined under the Securities and Futures Ordinance, retaining a certain amount of practical space without violating regulatory red lines.

Regulatory authority and enforcement tools

The HKMA’s supervisory powers are equipped with powerful tools:

• Investigative Authority: Authorized investigators can request documents, conduct on-site inspections, and require sworn statements.
• Sanctions mechanism: The ordinance empowers the HKMA with multi-level sanctions powers, including fines, suspension or revocation of licences, public warnings, confiscation orders and appointment of statutory administrators. The HKMA has also conducted public consultation on the detailed regulatory requirements under the ordinance, focusing on core compliance provisions such as anti-money laundering and combating terrorist financing, laying the operational details for future law enforcement.
• Management intervention: The HKMA may appoint a statutory administrator to take over a licensee that is experiencing operational difficulties - this measure was originally reserved for systemic banks.
• Tribunal mechanism: An independent “stablecoin tribunal” is responsible for conducting judicial review of sanctions decisions, license approvals, and investigations.

Prohibited conduct and criminal liability: drawing the legal line

The regulations clearly list the activities that actors in the virtual asset market are not allowed to engage in, increasing legal certainty and strengthening market discipline. Key prohibitions include:

• Unlicensed operation (Article 9): engaging in regulated stablecoin activities (including issuance, redemption, management) or claiming to be engaged in related activities constitutes a criminal offence, regardless of whether it is established in Hong Kong or not, as long as its activities are oriented to the Hong Kong market;
• Illegal issuance of certain stablecoins (Section 9): Providing certain stablecoins to the public without obtaining the appropriate license is a separate criminal offence;
• Advertising restrictions (Section 10): If a person is not licensed or exempt, it is a crime to publish or prepare to publish an advertisement indicating that it is involved in stablecoin activities or issuing stablecoins;
• Fraud and misleading (Section 11): Any attempt to defraud, mislead, or mislead about a stablecoin transaction is a crime, including false claims about reserve backing, redemption rights, or relationships with licensed entities;
• Inducement offence (Section 12): It is a criminal offence to induce another person to purchase, dispose of, subscribe for or underwrite a specific stablecoin by making a false statement or recklessly disregarding the truth.

Transitional provisions

The Ordinance is scheduled to take effect on August 1, 2025, with a limited transitional period: Stablecoin issuers that have been operating in Hong Kong before the Ordinance is officially implemented can continue to operate for six months if they submit a license application within the first three months. However, this is not an indefinite or unconditional exemption, and those who do not obtain a license must exit the market or complete the authorization process in accordance with the law.

International comparison and Hong Kong’s differentiated positioning

Compared with the EU’s Markets in Crypto-Assets (MiCA), Singapore’s Payment Services Act 2019, and the US state-level remittance licensing regime, Hong Kong’s regulations present unique regulatory options:

• Mandatory par redemption obligation: Most jurisdictions (including MiCA and the US MTL regime) allow for delayed redemption or redemption at the issuer’s discretion. For example, MiCA allows redemption within five business days, while Hong Kong requires immediate redemption at par.
• Introducing a statutory management mechanism: The “pre-bankruptcy intervention power” that is rare in crypto asset legislation has been explicitly introduced in the Hong Kong Ordinance and was originally a bank-exclusive tool.
• Overlap with banking regulation: Regulatory requirements such as capital requirements, reserve segregation, and “proper person” standards are similar to those of traditional deposit institutions, blurring the line between token issuers and traditional financial intermediaries.

This strategic difference reflects Hong Kong’s priority on stability and fiat currency anchoring, rather than simply pursuing market growth or issuer flexibility.

Tokenizing physical assets: key distinctions

A common misunderstanding is that the compliance of stablecoins means that RWAs are also indirectly recognized. This is not the case. The regulation does not provide a direct path or legal recognition for RWA projects.

Stablecoins operate within the framework of fiat currencies, while RWA involves incorporating domestic assets (such as real estate, stocks, and bonds) into token form. The regulations emphasize that there are still gaps in the supervision of RWA, and the main challenges include:

• Cross-border asset transfer: If assets located in mainland China are tokenized, foreign exchange controls, securities regulations and capital account supervision will be involved.
• QFII restrictions: Domestic assets may not be used for tokenization across borders unless a QFII/RQFII license is obtained under traditional channels.
• Stablecoin license ≠ RWA legality: Obtaining an FRS license does not mean that you can legally engage in RWA business, especially for assets that are illiquid, unverified or in a "firewall" state.

The RWA project needs to deal with its independent legal challenges. Stablecoins can be used as payment or collateral tools in the RWA ecosystem, but they cannot solve the core legal issues of cross-border asset circulation.

Actual impact and industry adjustments

The new rules will fundamentally change the way virtual asset companies operate in Hong Kong. Both issuers and investors must re-examine their strategies, partners and legal risks:

• Issuers: It is no longer an era of quick product launches. Stablecoin issuance requires sound financial governance, real currency support and clear legal responsibilities. Capital requirements starting from HK$25 million, audit fees, reserve checks and real-time redemption systems have significantly raised the threshold. Unlicensed issuance is no longer a "risk" but a criminal offense.
• Banks and trust institutions: They can naturally become reserve custodians, compliance validators and risk managers. In the future, they may develop services such as stablecoin treasury management and KYC support, but they also need to upgrade their systems to support tokenized transactions and assess legal responsibilities.
• Investors: Enhanced protection, less choices. The mandatory redemption right and reserve isolation have increased investment confidence. Although the initial stablecoin selection may be reduced, in the long run, it will be easier to identify truly compliant, fiat-backed stablecoins.
• Global platforms: no longer "incidentally" provide stablecoins to Hong Kong. Under the new regulations, a dedicated compliance strategy must be established. Unlike the EU MiCA passport system, Hong Kong does not recognize external licenses. If you promote or provide asset basket anchor tokens to Hong Kong users, you are likely to violate advertising laws.
• Developers and DeFi builders: Technology cannot override the law. Any protocol development that interacts with fiat stablecoins must prioritize compliance from the beginning and embed a stablecoin issuer status verification system.

Conclusion

Hong Kong's stablecoin regulations are a deliberate strategic choice to bring crypto finance under an institutional accountability system. By integrating licensing, regulation and enforcement into a unified framework, Hong Kong sends a clear signal to the global market that digital finance must operate under the rule of law. Market participants should be prepared for rigorous audits, reserve inspections and ongoing regulatory dialogue. Those who adapt will not only survive, but also shape the future of compliant digital finance in Asia.

But the deeper questions remain: Can programmable money thrive in a rule-of-law economy? Can decentralized technology coexist with centralized regulation? Can crypto innovation win public trust without enforceable redemption rights and institutional accountability? These challenges are further amplified by the following unresolved rifts: how to balance AML/CFT regulation while retaining anonymity; and how mainland capital controls interact with cross-border circulation of Hong Kong dollar stablecoins or tokenization of mainland assets.

These tensions reinforce Hong Kong’s core proposition: the key to financial evolution is not speed, but sovereignty, stability and systemic integrity. Only regulation can build trust where technology cannot prove itself. Without trust, innovation will fail.

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