Hong Kong Mandates 100% Reserve Backing for Stablecoins to Boost Financial Stability

Hong Kong has introduced stringent stablecoin licensing regulations to bolster financial stability and foster innovation in the digital asset sector. The new framework, announced by the Financial Secretary, Paul Chan, mandates that stablecoin issuers maintain 100% reserve backing in cash or government bonds, ensuring redemption at any time. This regulation is part of a broader strategy to prevent speculative activities and promote genuine financial innovation.

The licensing system, overseen by the Hong Kong Monetary Authority, requires issuers to meet strict requirements and aligns with global trends. Institutions such as Standard Chartered are expected to participate actively, emphasizing the need for stability and asset backing. The government seeks input from market participants on integrating these licensed stablecoins into public systems, with industry reactions suggesting anticipation of greater institutional adoption.

Paul Chan highlighted that stablecoins should be tools for financial development and innovation, rather than speculative opportunities. The new regulations aim to ensure market integrity and provide a foundation for responsible growth in the digital asset sector. The licensing regime is set to commence on August 1, as part of the updated digital asset agenda, “Policy Statement 2.0.” This policy builds on a framework established in October 2022 and introduces the “LEAP” framework, focusing on legal streamlining, expanding tokenized products, advancing use cases, and people and partnership development.

Under the new stablecoin ordinance, any entity issuing fiat-referenced stablecoins in Hong Kong will be required to obtain a license from the Hong Kong Monetary Authority. A critical aspect of this regulation is the mandate for stablecoins to be fully backed by high-quality, liquid assets, designed to safeguard investors and ensure financial stability. The push for a regulated stablecoin market is complemented by a significant focus on tokenizing real-world assets. The government plans to regularize the issuance of tokenized government bonds and promote the tokenization of other assets, such as precious metals, to enhance liquidity and market access.

To support this, the Financial Services and the Treasury Bureau, and the Hong Kong Monetary Authority are conducting a legal review to streamline regulatory processes for tokenized instruments. Authorities have also clarified the stamp duty treatment for tokenized ETFs to encourage secondary market trading and are drafting regulations for tax incentives on profits from certain blockchain activities. Major tech firms, including Ant Group, have already expressed their intent to apply for a stablecoin issuance license once the new regime is active. This move is expected to further develop the market and reinforce trust and market stability, encouraging safe and practical applications of stablecoins in the broader financial system.