Decoding the Hong Kong Monetary Authority Document: The "Strictness" and "Flexibility" Behind Stablecoin Regulation

Hong Kong welcomes responsible innovators, but be prepared for strict regulations.

Written by: David, Deep Tide TechFlow

Hong Kong is accelerating the pace of legislation for stablecoins.

On July 29, the Hong Kong Monetary Authority published the consultation summary and guidelines for "Regulatory Guidelines for Licensed Stablecoin Issuers," as well as the consultation summary and guidelines for "Guidelines on Anti-Money Laundering and Counter-Terrorist Financing (Applicable to Licensed Stablecoin Issuers)," along with two institutional explanatory documents, providing detailed implementation rules for the stablecoin regulatory regime that will take effect on August 1.

Previously, the Hong Kong Legislative Council officially passed the "Stablecoin Ordinance" on May 21, establishing a licensing system for fiat stablecoin issuers.

From the passage of the regulations to the release 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 their relationship to each other?

As can be seen from the above, this complete regulatory system consists of a regulation (stablecoin regulation), two sets of guidelines (and their consultation summaries), and two explanatory documents, forming a complete chain from legal basis to implementation details to operational guidelines.

Specifically, the entire document system includes:

1 Basic Law: "Stablecoin Regulation" (published in May)

2 sets of regulatory guidelines: "Guidelines for Licensed Stablecoin Issuers" and "Guidelines for Combating Money Laundering and Terrorist Financing"

2 consultation summaries: Record the public consultation process of the two guidelines mentioned above and the response from the Monetary Authority.

2 documents: "Summary of the Stablecoin Issuer Licensing System" and "Summary of the Transitional Provisions for Existing Stablecoin Issuers"

Among them, the "Stablecoin Regulations" are at the top of the pyramid, serving as the foundational law that establishes the legal status and basic framework of the stablecoin licensing system. Two sets of regulatory guidelines are at the implementation level, converting the principled provisions in the regulations into specific operational standards and compliance requirements. These guidelines have quasi-legal effect, and licensed institutions must strictly adhere to them.

The consultation summary, as a procedural document, does not have direct legal effect but records the responses of regulatory agencies to market opinions, helping market participants understand regulatory intentions and the considerations behind the formulation of guidelines.

The two explanatory documents serve to provide interpretation and guidance, offering market participants an understanding of the system and application guidelines, helping potential applicants better understand regulatory requirements and the application process.

In simple terms:

• Regulations are responsible for "setting the rules" - determining what constitutes a stablecoin, who can issue them, and fundamental issues such as basic regulatory principles.
• Regulatory guidelines are responsible for "setting standards" — specific technical provisions such as capital adequacy ratios, risk management requirements, and information disclosure standards;
• The explanatory document is responsible for "indicating the path" - how to apply for a license, how the transition period is arranged, how regulatory agencies enforce the law, and other operational issues.

"Regulatory Guidelines for Licensed Stablecoin Issuers": The "Strictness" and "Flexibility" Behind the HKD 25 Million Threshold

This time, the Monetary Authority released a total of 6 documents. Considering reading efficiency, we will focus on interpreting the most core executive document: "Regulatory Guidelines for Licensed Stablecoin Issuers." This document details the specific compliance requirements for issuers, which relates to the vital interests and operational pathways of market participants.

If the "Stablecoin Regulation" is the foundation that Hong Kong has built for the issuance of stablecoins, then this 89-page "Regulatory Guidelines for Licensed Stablecoin Issuers" is more like the bricks and tiles that fill this building.

From the capital threshold of 25 million Hong Kong dollars to the 12 specific requirements for private key management, the Monetary Authority has outlined a regulatory framework that is both strict and pragmatic in an almost "meticulous" manner.

Admission threshold: Not everyone can play this game.

The minimum capital requirement of 25 million HKD (approximately 3.2 million USD) is relatively high among global stablecoin regulations. In comparison, the EU's MiCA regulation requires a minimum capital of 350,000 EUR for electronic money token issuers, while Japan requires 10 million JPY (approximately 75,000 USD). The threshold set in Hong Kong has clearly been carefully considered - it aims to ensure that issuers have sufficient financial strength while not completely shutting out innovators.

But the capital contribution is just the first threshold. What is more worth paying attention to is the requirement for "suitable candidates."

The regulatory guidelines used an entire chapter to detail 7 major considerations: from criminal records to business experience, from financial status to time commitment, and even the "external positions" of directors must be 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 not only needs money but also 'the right people.' A Web3 startup composed of tech geeks may need to significantly adjust its governance structure and bring in professionals with traditional financial backgrounds to meet regulatory requirements.

Stricter are the restrictions on business activities. Licensees must obtain written consent from the Monetary Authority before engaging in any "other business activities." This essentially positions stablecoin issuers as "specialized institutions," similar to traditional payment institutions or electronic money issuers. For those looking to build a "DeFi + stablecoin" ecosystem, this is undoubtedly a signal to reconsider their business models.

Reserve Management: 100% is just the starting point

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

Regulatory guidelines clearly require that the market value of reserve assets must be at least equal to the face value of the circulating stablecoins "at all times", while also "considering the risk status of the reserve assets to ensure appropriate over-collateralization."

What exactly is this "appropriate" amount?

The guidelines do not provide specific numbers, but based on the requirements for license holders to set internal limits on market risk indicators and conduct regular stress tests, it is clear that regulators expect issuers to dynamically adjust the excess collateral ratio according to their own risk situation.

This "principle-based" regulatory approach provides issuers with a certain level of flexibility, but it also means higher compliance costs—you need to establish a complete risk assessment system to demonstrate your "suitability."

Hong Kong has shown a prudent but not conservative attitude in the definition of qualifying reserve assets.

In addition to traditional options such as cash and short-term bank deposits, regulatory guidance also explicitly accepts "tokenized forms of qualified assets." This leaves room for future innovation— theoretically, tokenized U.S. Treasury bonds and tokenized bank deposits could both become qualified reserve assets.

But the most striking aspect is the trust isolation arrangement.

For example, the licensee must establish an "effective trust arrangement" to ensure that reserve assets are legally separated from their own assets, and they must obtain independent legal advice to prove the validity of this arrangement. This is not merely an accounting separation, but rather to ensure that even in the event of the issuer's bankruptcy, the rights of stablecoin holders can be protected.

In terms of transparency requirements, Hong Kong has adopted a combination of "high-frequency disclosure + regular audits." Issuers must disclose the market value and composition of reserve assets weekly, while independent auditors verify them quarterly. In contrast, even the relatively compliant USDC currently only publishes reserve reports monthly. Hong Kong's requirements will undoubtedly significantly enhance the transparency of stablecoins.

Technical Requirements: Private key management is very professional.

In the area of private key management, which is a unique risk point in Web3, regulatory guidelines have shown a surprisingly high level of professionalism:

From key generation to destruction, from physical security to leak response, the 12 specific requirements cover almost every aspect of the private key lifecycle.

For example, "Important private keys must be used in an isolated environment" - this means that the private keys used for minting and burning stablecoins cannot be exposed to the internet and must be operated in a completely offline environment;

"Key usage requires multiple authorizations" - No single individual can independently use the critical private key;

"The key storage medium must be placed in Hong Kong or in a location recognized by the Monetary Authority" - this directly rules out the possibility of hosting private keys overseas.

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

The requirements for smart contract auditing are equally strict. Issuers must engage a "qualified third-party entity" to conduct audits when deploying, redeploying, or upgrading smart contracts to ensure that the contracts are "executed correctly," "align with expected functionalities," and that there is "high confidence that there are no vulnerabilities or security flaws." Considering that the smart contract auditing industry itself is still in its early development stages, the definition of "qualified" may become a challenge in practice.

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

On one hand, the issuer must complete "relevant customer due diligence" in order to provide services; on the other hand, it requires that "stablecoins can only be transferred to customer pre-registered wallet addresses." This design attempts to find a balance between anonymity and compliance.

Operating Standards: The "Banking" Path of Stablecoins

"T+1 Redemption", "Pre-registration Account", "Three Lines of Defense" - From these requirements in the original document, it can be seen that Hong Kong hopes that stablecoin issuers align their operational standards with traditional financial institutions to maximize risk control.

First, look at the redemption deadline.

"Effective 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 reserve the right to delay or refuse redemptions, while Hong Kong regulations elevate timely redemptions to a legal obligation.

However, this "bankification" is not a simple replication. Regulatory guidelines also allow for flexibility in "exceptional circumstances" — if a redemption needs to be delayed, prior written consent from the Monetary Authority must be obtained. This mechanism is similar to the banking industry's "suspension of withdrawals" clause, which provides a buffer for system stability under extreme market conditions.

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

The first line of defense is the business unit, the second line of defense is independent risk management and compliance functions, and the third line of defense 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 clear hierarchical and responsibility-defined organizational system.

It is particularly important to pay attention to 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 rigorous due diligence and ongoing monitoring. Regulatory guidelines even require that if the third-party service provider is outside of Hong Kong, the issuer must assess the data access rights of local regulatory authorities and promptly inform the Monetary Authority when requested.

KYC Myths: Do You Need to Use Your Real Name to Hold Coins?

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

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

We can take a look at the original wording of this document:

Although the regulatory guidelines differentiate between "clients" and "holders" in their wording, a closer 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 unavoidable.

The regulatory guidelines use seemingly lenient expressions in multiple places:

• "Licensees should only issue designated stablecoins to their clients"
• "Terms and conditions shall apply to all specified stablecoin holders (regardless of whether they are clients of a licensed person)"

This distinction implies the existence of two types of groups: "clients" who require KYC and "holders" who do not require KYC. However, when we delve into the specific service provision stages, we find that this distinction is more theoretical.

The key lies in the regulations of the redemption service: "No issuance or redemption services may be provided to designated stablecoin holders and/or potential designated stablecoin holders unless the relevant customer due diligence has been completed."

This means that any holder who wants to exercise their redemption rights must first complete KYC to upgrade from "holder" to "customer."

Regulatory guidelines repeatedly emphasize that stablecoin holders have the right to "redeem at par," which is seen as the core guarantee of stablecoin "stability." However, in practice, 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 essentially unenforceable.

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

The guidelines require issuers to "ensure that they do not issue or offer designated stablecoins in jurisdictions where trading of designated stablecoins is prohibited," and they need to "take reasonable measures to identify and prevent the use of virtual private networks (VPNs)."

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

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

Exit mechanism: The "safety valve" of preparedness

Among all regulatory requirements, the "business exit plan" may be the easiest to overlook but is also the most important aspect.

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 deep consideration of systemic risks.

Stablecoins differ from other crypto assets in that their promise of "stability" makes them easier to adopt on a large scale, but it also means that if problems arise, the impact can be broader. By requiring issuers to plan exit strategies in advance, regulators aim to ensure that even in the worst-case scenario, the market can orderly absorb the shock.

The exit plan must cover the asset sale strategy under "normal and stressed conditions." This means that the issuer needs to consider:

If the market liquidity dries up, how can we liquidate reserve assets without causing a run? If banking partners terminate services, how can we ensure that redemption channels remain open?

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

The Deep Logic of Hong Kong's Regulatory Path

Looking at this regulatory guidance, it is evident that Hong Kong has carved out a unique path in the regulation of stablecoins: it is neither the US-style "enforcement-oriented" (forcing compliance through enforcement actions) nor the European-style "rules-oriented" (detailed written regulations), but rather a hybrid model of "principles + rules."

At key risk points such as reserve management and private key security, regulatory guidelines provide detailed rules; in specific implementations such as over-collateralization ratios and risk indicator settings, they retain a principled flexibility.

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

The licensed threshold of 25 million is not low, but compared to the capital requirement of 5 million USD for virtual asset trading platforms in Hong Kong, it is relatively reasonable; the technical requirements are very detailed, but they also clearly accept innovations such as 'tokenized assets'; the operational standards are very strict, but they also reserve an emergency mechanism for market fluctuations.

More importantly, this regulatory framework demonstrates Hong Kong's understanding of the nature of stablecoins: they are not merely "cryptocurrencies," but rather a key infrastructure that connects traditional finance and the digital economy. Therefore, regulatory standards must be high enough to maintain financial stability; but they must also be flexible enough to accommodate technological innovation.

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

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

Institutions that wish to issue stablecoins in Hong Kong need to seriously evaluate whether they possess the necessary financial strength, technical capabilities, and compliance resources.

For the entire industry, Hong Kong's practices provide an important reference: stablecoin regulation is not about stifling innovation, but rather about providing a sustainable environment for innovation to thrive.

When regulatory rules are clear and enforcement standards are defined, the cost of compliance is predictable, and the boundaries of innovation are explorative.

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