Hong Kong's New Stablecoin Ordinance Sets 25 Million HKD Entry Threshold

On August 1, 2024, the first comprehensive regulatory framework for fiat-backed stablecoins, the Hong Kong Stablecoin Ordinance, officially came into effect, allowing relevant institutions to begin applying for licenses. This framework is more stringent than the recent U.S. cryptocurrency laws signed by Trump, which include a 25 million Hong Kong dollar entry threshold, 100% asset collateralization, and a one-day redemption guarantee.

Stablecoins, which have been in existence since 2014, have gained significant traction in recent years. By June 2024, the total market value of cryptocurrencies exceeded 3 trillion dollars, surpassing France's GDP for the previous year. Stablecoins, in particular, have seen their market size grow to approximately 260 billion dollars, a more than 40-fold increase from 2020. This growth is driven by the increasing restrictions on the exchange between fiat currencies and cryptocurrencies, making stablecoins a crucial medium for transactions within the cryptocurrency market.

Stablecoins, like Bitcoin and other cryptocurrencies, are blockchain-based digital assets that offer privacy and decentralization. However, stablecoins are pegged to specific assets, primarily the U.S. dollar and dollar-denominated assets, which makes them more stable in value compared to Bitcoin. This stability offers two key advantages: the ability to conduct cross-border transactions without the need for a bank account or regulatory oversight, and a stable value that makes them suitable for various financial transactions.

Several financial institutions have already integrated stablecoins into their operations. For instance, JPMorgan launched the JPM Coin in February 2019 for interbank payments, while major credit card companies like Visa and Mastercard have developed stablecoin payment solutions. The technological foundation for stablecoins is public blockchain technology, with Ethereum being the largest platform, accounting for 50% of the market, followed by Tron at 32%, and other platforms like Solana, Binance Smart Chain, and Base.

The Hong Kong Stablecoin Ordinance sets out strict requirements for issuing stablecoins in the region. Institutions must obtain a license from the Hong Kong Monetary Authority, with a minimum registered capital of 25 million Hong Kong dollars. Stablecoins must be pegged 1:1 to fiat currencies, with reserves held in high-quality, liquid assets such as central bank deposits and government bonds. These reserves must be audited regularly, and daily audit reports must be made public. Additionally, stablecoin holders have the right to redeem their coins at face value within one business day, a measure aimed at preventing runs similar to the 2023 USDC crisis caused by the collapse of Silicon Valley Bank.

The ordinance also includes provisions to prevent fraud, allowing only advertisements for licensed fiat-backed stablecoins to be published at any time, including during a six-month non-compliance period. The Hong Kong Monetary Authority expects the first licenses to be issued by early 2026. However, some industry experts believe that the regulatory framework and oversight mechanisms are not yet fully in place, which could lead to high compliance costs and a cautious approach to stablecoin adoption in the region.

The development of stablecoins is seen as a way to address the high levels of U.S. debt and maintain the dollar's global dominance. By pegging stablecoins to the U.S. dollar, the U.S. can convert global cryptocurrency markets into a "peripheral market" for the dollar, addressing liquidity issues with U.S. debt. Additionally, the use of stablecoins in the cryptocurrency space is seen as a way for the U.S. to gain an advantage in the emerging "metaverse" economy, where stablecoins could become the universal currency, extending the dollar's dominance into the digital world.

However, the rise of stablecoins could also disrupt the existing international currency settlement system, Swift. As stablecoins gain traction, the network effects that have traditionally supported the dollar's dominance in cross-border payments could weaken, potentially eroding the U.S.'s digital currency hegemony. Some experts predict that within the next five years, point-to-point payment systems based on compliant stablecoins could replace Swift, leading to significant changes in the global financial system.