Hong Kong's Stablecoin Rules: A Regulatory Clampdown Stifling DeFi?

Hong Kong’s new stablecoin regulatory framework, which took effect on August 1, 2025, has drawn significant industry scrutiny, particularly from DBS Hong Kong CEO Sebastian Paredes. Paredes warned that the rules’ stringent Know-Your-Customer (KYC) and Anti-Money Laundering (AML) requirements would largely block the use of stablecoins in onchain derivatives trading on blockchain networks. The regulations criminalize the promotion of unlicensed stablecoins and mandate a public registry of authorized issuers, creating barriers for decentralized trading platforms.

The Stablecoins Ordinance, passed by Hong Kong’s Legislative Council on May 21, 2025, establishes a formal licensing regime for fiat-referenced stablecoin (FRS) issuers. Regulated activities include issuing stablecoins pegged to fiat currencies, such as the Hong Kong dollar, and marketing such tokens to the public. The Hong Kong Monetary Authority (HKMA) is the primary regulator, with authority to require overseas entities issuing HKD-pegged stablecoins to apply for licenses, even if they operate outside Hong Kong.

The licensing process is rigorous, with applicants required to demonstrate viable use cases, prudent operations, and trust from market participants. The HKMA has indicated it will grant only a limited number of licenses initially, emphasizing high capital thresholds (HKD 25 million minimum paid-up share capital) and strict reserve requirements. Issuers must maintain 100% backing of stablecoins with high-quality liquid assets, segregated from corporate holdings.

Critics argue the rules disproportionately hinder innovation. When the framework was introduced, stablecoin companies in Hong Kong reported double-digit losses due to stricter-than-expected compliance costs. Paredes noted that DBS will focus on building broader stablecoin capabilities rather than derivatives trading, while other industry players have raised concerns about the regulatory burden stifling decentralized finance (DeFi) adoption.

Despite the restrictions, DBS remains active in blockchain and crypto initiatives. The bank recently launched tokenized structured notes on Ethereum and partnered with Franklin Templeton and Ripple to offer tokenized trading and lending services. Additionally, DBS manages the U.S. dollar reserve for the Global Dollar (USDG), underscoring its commitment to digital asset innovation within regulatory boundaries.

Hong Kong’s approach reflects a global trend toward stricter stablecoin oversight, aligning with frameworks in the EU’s MiCA and the U.S.’s proposed GENIUS Act. However, its extraterritorial reach—requiring offshore issuers of HKD-pegged tokens to comply—sets it apart. The HKMA’s emphasis on KYC and AML compliance, while enhancing financial stability, has sparked debates about privacy and decentralization, particularly among crypto advocates.

The regulatory environment is further complicated by mainland China’s influence. In early August 2025, Chinese authorities instructed local firms to cease publishing stablecoin-related research or seminars, signaling continued caution toward crypto activities. This has raised questions about Hong Kong’s ability to balance innovation with alignment to Beijing’s broader financial policies.

Source: [1] Hong Kong rules limit stablecoin derivative trading: DBS CEO (https://cointelegraph.com/news/hong-kong-s-regulation-limits-stablecoin-derivative-trading-dbs-hong-kong-ceo)

[2] Regulatory Regime for Stablecoin Issuers - Hong Kong Monetary … (https://www.hkma.gov.hk/eng/key-functions/international-financial-centre/stablecoin-issuers/)

[3] Hong Kong’s Stablecoins Ordinance and What Comes … (https://www.cooley.com/news/insight/2025/2025-08-15-hong-kongs-stablecoins-ordinance-and-what-comes-next)

[4] Hong Kong: Comprehensive Stablecoins Ordinance to Take Effect … (https://www.loc.gov/item/global-legal-monitor/2025-07-22/hong-kong-comprehensive-stablecoins-ordinance-to-take-effect-august-1/)

[5] Hong Kong’s new stablecoins law: what issuers and … (https://www.kwm.com/hk/en/insights/latest-thinking/hks-new-stablecoins-law-what-issuers-and-distributors-need-to-know.html)

[6] Stablecoin Regulation Around The World: 2025 … (https://onchainstandard.com/policy-regulation/stablecoin-regulation-around-the-world-2025-overview/)