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Hong Kong’s Regulation of Stablecoins

04 Aug 2025 GS 3 Economy
Hong Kong’s Regulation of Stablecoins Click to view full image

Context:

  • New law: Stablecoins Ordinance comes into effect August 1, 2025.

  • Issued by: Hong Kong Monetary Authority (HKMA).

  • Makes it illegal to:

    • Offer unlicensed fiat-referenced stablecoins (FRS) to retail investors.

    • Market unlicensed FRS in Hong Kong.

What Are Stablecoins?

  • Cryptocurrencies pegged to stable assets (e.g. USD, gold).

  • Types of pegging:

    • Fiat currency (USD, EUR).

    • Commodities (e.g. gold).

    • Other cryptocurrencies (e.g. BTC).

    • Algorithms or mixed models.

  • Goal: Maintain price stability, unlike volatile cryptos like Bitcoin or Ether.

  • Different from CBDCs:

    • Stablecoins are privately issued.

    • CBDCs are state-backed digital currencies.

Why Is Regulation Needed?

  • Stability risks: Some stablecoins become “unpegged” (e.g., USDT has fallen to $0.92).

  • Collapse examples: Terra–LUNA/UST crash in 2022 wiped out billions.

  • Trust issues:

    • Not all issuers are transparent.

    • Reserve claims are often unaudited or unclear.

  • Real-world use:

    • Used in countries with unstable currencies (e.g., Argentina, Turkey, Afghanistan).

    • Key for cross-border payments and savings.

  • Growing influence: Over $250 billion worth of stablecoins circulate globally (e.g., Tether USDT – 163+ billion in supply).

Hong Kong’s Licensing System

  • Issuers must:

    • Be licensed by HKMA.

    • Maintain reserves (fiat/cash equivalents).

    • Ensure redemption rights and asset stability.

    • Comply with anti-money laundering (AML) and counter-terrorism laws.

  • Only a few licenses will be granted initially — HKMA is cautious.

Global Regulation Trends

  • USA: GENIUS Act (2025) under Trump administration:

    • Requires 100% reserves, monthly public reserve disclosures.

  • Japan & Singapore: Have stablecoin-specific frameworks.

  • China: Crypto-restricted, but mainland companies hope to use Hong Kong as a regulatory bridge.

Hong Kong is aiming to balance innovation and safety in its growing fintech ecosystem by regulating stablecoins. The move is part of a global trend to bring credibility, stability, and transparency to an asset class that’s becoming increasingly important for global finance.

By definition, a stablecoin is a type of cryptocurrency designed to maintain a stable value, usually by being pegged to a real-world asset like a fiat currency (e.g. USD) or a commodity (e.g. gold).

But...

Why Some “Stablecoins” Become Unpegged

Sometimes, a coin calls itself a stablecoin, but:

  1. It loses its peg due to market stress or design flaws.

  2. It never had proper backing or mechanisms to stay stable.

  3. Algorithms failed to maintain balance between supply and demand.

These are still referred to as stablecoins, but technically they have failed in function, and become “unpegged” stablecoins.

Examples of Unpegged “Stablecoins”

  1. TerraUSD (UST)

    • Was algorithmic, not backed by fiat.

    • Lost its peg in May 2022 — fell from $1 to below $0.10.

    • Still called a stablecoin, but it ceased being stable.

  2. Tether (USDT)

    • Claims fiat backing, but has seen temporary de-pegging (e.g. fell to $0.92 in high volatility).

 Conclusion

The label "stablecoin" refers to the intent and design, not necessarily the outcome.
If a coin loses its peg, it becomes an “unpegged stablecoin” — a failed or malfunctioning stablecoin — but the name still sticks because of its original purpose.



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