Hong Kong's 'Basel-fication' of stablecoins sparks regulatory vs. innovation clash

Hong Kong’s regulatory framework for stablecoins has drawn significant attention from financial institutions and market participants, with DBS Hong Kong CEO Sebastian Paredes cautioning that the rules will severely limit their use in onchain derivatives trading. Effective August 1, 2025, Hong Kong’s stablecoin regulations impose stringent requirements, including 100% collateralization with high-quality reserves, ring-fenced liquidity, and T+0 redemption at par value, effectively aligning stablecoin issuers with bank-like capital and liquidity standardsHong Kong’s new stablecoins law: what issuers and distributors need to know^[1]. Paredes emphasized that these measures, while aimed at mitigating systemic risks, will curtail the utility of stablecoins in decentralized finance (DeFi) ecosystems, particularly for derivative contracts.

The regulatory regime, outlined in the Stablecoins Ordinance and accompanying guidelines from the Hong Kong Monetary Authority (HKMA), mandates that stablecoin issuers maintain reserves equivalent to 100% of their issued tokens, with strict liquidity coverage ratios to withstand five-day stress scenarios. Additionally, anti-money laundering (AML) and know-your-customer (KYC) obligations have been extended to stablecoin activities, requiring real-time monitoring of wallet addresses and transaction patterns. These requirements, while enhancing transparency, increase operational costs for issuers, particularly smaller players, who may struggle to meet the capital buffers and compliance demands.

The impact of these rules is already evident. Following the implementation, stablecoin-related activities in Hong Kong saw a sharp decline, with some firms reporting double-digit losses as they adjusted to the new compliance landscape. Ant International, a major player in the space, has signaled its intent to apply for a license, betting on first-mover advantage despite thin profit margins. Meanwhile, smaller issuers are reportedly exiting the market or seeking partnerships with licensed banks to navigate the regulatory hurdles.

Market analysts attribute the stringent rules to lessons learned from past crises, including the collapse of TerraUSD in 2022 and the USDC de-pegging in 2023. Hong Kong’s regulators aim to prevent scenarios where stablecoins lose their peg due to inadequate reserves or liquidity management. However, critics argue that the framework may stifle innovation, as the capital-intensive requirements favor large institutions and discourage experimentation in DeFi and cross-border payments.

The regulatory environment in Hong Kong is also being compared to emerging frameworks in the U.S. and Singapore. While the U.S. Senate advanced the bipartisan GENIUS Act, which shares similar reserve requirements, Hong Kong’s rules include more prescriptive liquidity and leverage limits. Singapore’s approach, in contrast, is expected to adopt a more flexible model that integrates stablecoins with tokenized deposits, potentially offering a broader perimeter for innovation.

Despite the challenges, some industry players remain optimistic. The HKMA has indicated that it will issue secondary legislation, including disclosure templates and AML guidelines, by late 2025, providing further clarity for market participants. Additionally, interoperability pilots with international partners, such as the Bank of Thailand’s Project Inthanon and the UAE’s mBridge corridor, are expected to test cross-border applications of licensed stablecoins by late 2026.

The DBS CEO’s remarks highlight a broader tension between regulatory caution and market dynamism. While Paredes acknowledged the bank’s commitment to building stablecoin capabilities in Hong Kong, he stressed that the current rules prioritize stability over innovation, redirecting focus to broader digital asset initiatives. This aligns with DBS’s recent expansion into tokenized structured notes and blockchain-powered government grant disbursements, underscoring the bank’s strategic pivot toward regulated, institutional-grade offerings.

As the stablecoin landscape evolves, stakeholders will closely monitor how Hong Kong’s regulatory approach balances risk mitigation with fostering a competitive digital asset ecosystem. The coming months will likely reveal whether the city’s “Basel-fication” of stablecoins attracts institutional capital or drives activity to more permissive jurisdictions.