Decode the Hong Kong Monetary Authority Document: The

Author: David, Shenchao TechFlow

Hong Kong is accelerating the advancement of stablecoin legislation.

On July 29, the Hong Kong Monetary Authority (HKMA) released the consultation conclusions and the guidelines for the *Guidelines for Licensed Stablecoin Issuers*, the consultation conclusions and the guidelines for the *Guidelines on Combating Money Laundering and Terrorist Financing (Applicable to Licensed Stablecoin Issuers)*, as well as two explanatory documents, providing detailed implementation rules for the stablecoin regulatory regime that is set to take effect on August 1.

Previously, the Hong Kong Legislative Council formally passed the *Stablecoin Ordinance* on May 21, establishing a licensing system for fiat-backed stablecoin issuers.

From the passage of the ordinance to the issuance of supporting guidelines and then to formal implementation, Hong Kong completed the "last mile" of the stablecoin regulatory system in less than three months.

With so many documents, what is the relationship between them?

As can be seen from the above, this complete regulatory system consists of one ordinance (the Stablecoin Ordinance), two sets of guidelines (and their consultation conclusions), and two explanatory documents, forming a complete chain from legal basis to implementation rules and then to operation guides.

Specifically, the entire document system includes:

1. Fundamental law: *Stablecoin Ordinance* (released in May)

2. Sets of regulatory guidelines: *Guidelines for Licensed Stablecoin Issuers*, *Guidelines on Combating Money Laundering and Terrorist Financing*

2. Consultation conclusions: recording the public consultation process of the above two sets of guidelines and the HKMA's responses

2. Explanatory documents: *Summary of the Licensing Regime for Stablecoin Issuers*, *Summary of Transitional Provisions for Existing Stablecoin Issuers*

Among them, the *Stablecoin Ordinance* is at the top of the pyramid. As the fundamental law, it establishes the legal status and basic framework of the stablecoin licensing system. The two sets of regulatory guidelines are at the implementation level, transforming the principled provisions in the ordinance into specific operational standards and compliance requirements. These guidelines have quasi-legal effect, and licensed institutions must strictly abide by them.

The consultation conclusions, as procedural documents, do not have direct legal effect, but they record the regulatory authority's responses to market opinions, helping market participants understand regulatory intentions and the considerations in formulating the guidelines.

The two explanatory documents are at the interpretation and guidance level, providing institutional understanding and application guides for market participants, helping potential applicants better understand regulatory requirements and application procedures.

In simple terms:

- The ordinance is responsible for "setting rules" — determining fundamental issues such as what a stablecoin is, who can issue it, and basic regulatory principles.

- The regulatory guidelines are responsible for "setting standards" — specific technical regulations such as capital adequacy ratios, risk management requirements, and information disclosure standards.

- The explanatory documents are responsible for "pointing out the path" — operational issues such as how to apply for a license, how to arrange the transition period, and how regulatory authorities enforce the law.

*Guidelines for Licensed Stablecoin Issuers*: The "Strictness" and "Flexibility" Behind the HK$25 Million Threshold

The HKMA released six documents at once. Considering reading efficiency, we will focus on interpreting the core implementation document: *Guidelines for Licensed Stablecoin Issuers*. Because it details the specific compliance requirements for issuers, which are related to the vital interests and operational paths of market participants.

If the *Stablecoin Ordinance* is the foundation laid by Hong Kong for stablecoin issuance, then this 89-page *Guidelines for Licensed Stablecoin Issuers* is more like the bricks and tiles filling this building.

From the HK$25 million capital threshold to the 12 specific requirements for private key management, the HKMA has outlined a regulatory framework that is both strict and pragmatic in an almost "detailed" manner.

Admission Threshold: Not a Game for Everyone

The minimum capital requirement of HK$25 million (approximately US$3.2 million) is at a medium to high level in global stablecoin regulation. In contrast, the EU's MiCA regulation requires a minimum capital of 350,000 euros for electronic money token issuers, while Japan requires 10 million yen (approximately US$75,000). Hong Kong's threshold setting has clearly undergone careful consideration — it must ensure that issuers have sufficient financial strength without completely excluding innovators.

But capital is only the first threshold. What is more worthy of attention is the "fit and proper person" requirement.

The regulatory guidelines dedicate an entire chapter to detailing seven key considerations: from criminal records to business experience, from financial status to time investment, and even the "external positions" of directors are taken into account... In particular, the requirement that independent non-executive directors must account for at least one-third of the board directly aligns with the governance standards of listed companies.

This means that to issue stablecoins in Hong Kong, one must not only have money but also "the right people". A Web3 startup composed of technical geeks may need to significantly adjust its governance structure and introduce professionals with traditional financial backgrounds to meet regulatory requirements.

Even more stringent are the restrictions on business activities. Licensees must obtain the HKMA's written consent before conducting any "other business activities". This basically positions stablecoin issuers as "specialized institutions", similar to traditional payment institutions or electronic money issuers. For those project parties hoping to build a "DeFi + stablecoin" ecological closed loop, this is undoubtedly a signal that they need to rethink their business models.

Reserve Management: 100% is Just the Starting Point

In terms of reserve asset management, Hong Kong has adopted a "100% + over-collateralization" dual insurance model.

The regulatory guidelines clearly require that the market value of reserve assets must be at least equal to the face value of the stablecoins in circulation "at all times", and at the same time, "consider the risk profile of reserve assets to ensure appropriate over-collateralization".

How much is this "appropriate"?

The guidelines do not give a specific figure, but from the provisions requiring licensees to set internal limits on market risk indicators and conduct regular stress tests, it is clear that regulators hope issuers will dynamically adjust the over-collateralization ratio according to their own risk profiles.

This "principle-oriented" regulatory approach gives issuers a certain degree of flexibility but also means higher compliance costs — you need to establish a complete risk assessment system to prove your "appropriateness".

In defining eligible reserve assets, Hong Kong has shown a prudent but not conservative attitude.

In addition to traditional options such as cash and short-term bank deposits, the regulatory guidelines also explicitly accept "tokenized forms of eligible assets". This reserves space for future innovation — in theory, tokenized U.S. Treasury bonds and tokenized bank deposits may become eligible reserve assets.

But the most notable is the trust segregation arrangement.

For example, licensees must establish an "effective trust arrangement" to ensure that reserve assets are legally segregated from their own assets and obtain independent legal advice to prove the effectiveness of such arrangements. This is not simply accounting segregation but to ensure that even if the issuer goes bankrupt, the rights and interests of stablecoin holders can be protected.

In terms of transparency requirements, Hong Kong has adopted a combination of "high-frequency disclosure + regular auditing". Issuers must publish the market value and composition of reserve assets weekly, and at the same time, independent auditors must verify them quarterly. In contrast, even USDC, which has a relatively high level of compliance, currently only publishes reserve reports monthly. Hong Kong's requirements will undoubtedly significantly improve the transparency of stablecoins.

Technical Requirements: Professional Private Key Management

In terms of private key management, a unique risk point in Web3, the regulatory guidelines show a surprising degree of professionalism:

From key generation to destruction, from physical security to leakage response, the 12 specific requirements cover almost every link in the private key life cycle.

For example, "important private keys must be used in an isolated environment" — this means that private keys used for minting and burning stablecoins cannot access the Internet and must be operated in a completely offline environment.

"Key use requires multi-person authorization" — no single individual can independently use key private keys.

"Key storage media must be placed in Hong Kong or places approved by the HKMA" — this directly rules out the possibility of托管 private keys overseas.

These requirements show that the HKMA is not simply applying traditional financial regulation but truly understands the characteristics and risks of blockchain technology. To some extent, this guideline can be regarded as a regulatory version of "best practices for enterprise-level private key management".

The requirements for smart contract audits are equally strict. Issuers must engage a "qualified third-party entity" to audit smart contracts when they are deployed, redeployed, or upgraded to ensure that the contracts "execute correctly", "are consistent with intended functions", and "are highly confident that there are no vulnerabilities or security defects". Considering that the smart contract audit industry is still in its early stages of development, the definition of "qualified" may become a challenge in practice.

In terms of customer identity authentication, regulatory requirements reflect the integration of Web3 and traditional KYC.

On the one hand, issuers must complete "relevant customer due diligence" before providing services; on the other hand, they are required to "only transfer stablecoins to pre-registered wallet addresses of customers". This design attempts to find a balance between anonymity and compliance.

Operational Standards: The "Banking" Road of Stablecoins

"T+1 redemption", "pre-registered accounts", "three lines of defense" — from these requirements in the original document, it can be seen that Hong Kong hopes stablecoin issuers will align their operational standards with traditional financial institutions to maximize risk control.

First, look at the redemption time limit.

"Valid redemption requests should be processed within one business day of receipt" — this T+1 requirement is stricter than many existing stablecoins. Tether's terms of service retain the right to delay or refuse redemptions, while Hong Kong's regulations elevate timely redemption to a legal obligation.

But this "banking" is not a simple copy. The regulatory guidelines also reserve flexibility for "abnormal situations" — if redemption needs to be delayed, prior written consent from the HKMA must be obtained. This mechanism is similar to the "suspension of withdrawals" clause in the banking industry, providing a buffer for system stability under extreme market conditions.

The three lines of defense risk management system directly draws on the mature practices of the banking industry:

The first line of defense is the business department, the second line is the independent risk management and compliance functions, and the third line is internal audit. For many Web3 native teams, this means a fundamental change in organizational structure — you can no longer be a flat technical team but must establish a hierarchical organizational system with clear responsibilities.

Of particular note is the management of third-party risks.

Whether it is reserve asset custody, technical service outsourcing, or stablecoin distribution, all arrangements involving third parties must undergo strict due diligence and continuous monitoring. The regulatory guidelines even require that if a third-party service provider is outside Hong Kong, the issuer must assess the data access rights of local regulatory authorities and promptly notify the HKMA when requested.

KYC Myth: Must Holders Be Identified by Real Name?

Currently, on social media, what everyone is most concerned about is the KYC issue.

Previous analyses have pointed out that regulatory documents strictly require that any stablecoin holder must undergo identity verification, which also means real-name identification.

Let's look at the original words of this document:

Although the regulatory guidelines distinguish between "customers" and "holders" in expression, a careful analysis reveals that this distinction is more like a "trap" — you can obtain and hold stablecoins relatively freely, but to realize their core value (redeeming fiat currency at any time), KYC is almost inevitable.

The regulatory guidelines use seemingly lenient expressions in many places:

"Licensees should only issue specified stablecoins to their customers"

"The terms and conditions should apply to all specified stablecoin holders (whether or not they are customers of the licensee)"

This distinction implies that there are two types of people: "customers" who need KYC and "holders" who do not. But when we delve into the specific service provision links, we will find that this distinction is more theoretical.

The key lies in the regulations on redemption services: "Issuance or redemption services shall not be provided to specified stablecoin holders and/or potential specified stablecoin holders unless relevant customer due diligence has been completed."

This means: Any holder who wants to exercise the right to redeem must first complete KYC and upgrade from a "holder" to a "customer".

The regulatory guidelines repeatedly emphasize that stablecoin holders have the right to "redeem at face value", which is regarded as the core guarantee of the "stability" of stablecoins. But in fact, the exercise of this right is conditional — you must be willing and able to complete KYC.

For those holders who cannot complete KYC due to privacy concerns, geographical restrictions, or other reasons, this "right" is actually unenforceable.

In addition to identity verification, geographical restrictions may be a higher threshold.

The guidelines require issuers to "ensure that specified stablecoins are not issued or offered in jurisdictions where trading of specified stablecoins is prohibited" and to "take reasonable measures to identify and block the use of virtual private networks" (VPN).

For global cryptocurrency users, this geographical fencing may be more restrictive than KYC itself.

But for Hong Kong, this may be an acceptable trade-off:换取 regulatory certainty and financial stability through moderate restrictions. However, for the global cryptocurrency ecosystem, whether this model will become mainstream remains to be seen.

Exit Mechanism: A "Safety Valve" for a Rainy Day

Among all regulatory requirements, the "business exit plan" may be the most easily overlooked but most important one.

The regulatory guidelines require each issuer to prepare a detailed exit plan, including how to sell reserve assets, how to handle redemption requests, and how to arrange the handover of third-party services.

Behind this requirement is the regulator's in-depth consideration of systemic risks.

Stablecoins are different from other crypto assets. Their promise of "stability" makes them more likely to be adopted on a large scale, but it also means that once problems occur, the impact will be wider. By requiring issuers to plan exit paths in advance, regulators attempt to ensure that even in the worst-case scenario, the market can absorb the impact in an orderly manner.

The exit plan must cover asset sale strategies "under normal and stressed conditions". This means issuers need to consider:

If market liquidity dries up, how to liquidate reserve assets without causing a stampede? If banking partners terminate services, how to ensure smooth redemption channels?

The answers to these questions will directly determine the viability of a stablecoin project in times of crisis.

The Deep Logic of Hong Kong's Regulatory Path

Looking at this regulatory guideline, it can be seen that Hong Kong has taken a unique path in stablecoin regulation: it is neither the U.S.-style "enforcement-oriented" (forcing compliance through law enforcement actions) nor the European-style "rule-oriented" (detailed written regulations), but a mixed model of "principles + rules".

On key risk points such as reserve management and private key security, the regulatory guidelines provide detailed rules; in specific implementations such as over-collateralization ratios and risk indicator settings, principled flexible space is retained.

This design reflects the pragmatic attitude of Hong Kong regulators, recognizing that the stablecoin industry is still evolving rapidly, and overly rigid rules may soon become outdated.

The HK$25 million licensing threshold is not low, but it is relatively reasonable compared to Hong Kong's capital requirement of US$5 million for virtual asset trading platforms; the technical requirements are detailed, but they also explicitly accept innovations such as "tokenized assets"; the operational standards are strict, but they also reserve emergency mechanisms for market fluctuations.

More importantly, this regulatory framework demonstrates Hong Kong's understanding of the nature of stablecoins: it is not simply a "cryptocurrency" but a key infrastructure connecting traditional finance and the digital economy. Therefore, regulatory standards must be high enough to maintain financial stability; but also flexible enough to adapt to technological innovation.

For market participants, the signal conveyed by this guideline is clear:

Hong Kong welcomes responsible innovators but be prepared to accept strict regulation.

Institutions that wish to issue stablecoins in Hong Kong need to carefully assess whether they have the necessary financial strength, technical capabilities, and compliance resources.

For the entire industry, Hong Kong's practice provides an important reference: stablecoin regulation is not about stifling innovation but about providing soil for the sustainable development of innovation.

When regulatory rules are clear and implementation standards are clear, the cost of compliance is predictable, and the boundaries of innovation can be explored.

This may be the key for Hong Kong, as an international financial center, to maintain its competitiveness in the era of digital assets.

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