Last week Hong Kong enacted legislation supporting the issuance of stablecoins. We noted that most of the relevant details are delegated to rulemaking by the Hong Kong Monetary Authority (HKMA). Yesterday the HKMA published two consultation documents outlining the draft guidelines for stablecoin issuers and anti-money laundering procedures. Responses are required by the end of June.
One of the more surprising rules relates to currency. While the backing assets need to match the currency of the stablecoin, this rule is relaxed for the Hong Kong Dollar (HKD) given its peg to the US dollar. So US dollar assets are allowed for a HKD stablecoin.
On the one hand, one can view this as appeasing the desires of the US administration to expand demand for US Treasuries. However, it is more likely a financial stability issue because of the relatively smaller volumes of HKD securities. If there are large volumes of HKD stablecoins issued, the demand for HKD denominated securities could be significant. If there were a sudden spike or fall in demand this could create stability issues.
Another common legal requirements is anti money laundering (AML) compliance. Like several other jurisdictions, the regulator requires additional due diligence on self hosted wallets. Stablecoin holders can request direct redemptions that should be processed within one working day. For both issuance and redemption, the issuer is expected to perform due diligence on a frequent counterparty or “a person who conducts an occasional transaction involving an amount equal to or above $8,000.” For self hosted wallets, in addition to enhanced due diligence, the HKMA suggests the issuer may impose transaction limits if appropriate.
Reserve and other stablecoin requirements
Regarding the reserves that back a stablecoin, the legislation simply stated that they should be high quality, highly liquid and low risk. The consultation expands on that significantly. Allowable investments include bank deposits of up to 90 day maturity and marketable securities with a maturity of less than one year. Those securities must be issued by a government body, central bank, public body or multilateral development bank. Overnight repo and money market funds that invest in the same assets are also acceptable. Additionally, the HKMA gives itself the latitude to approve other types of assets.
These requirements are a little more relaxed than some other jurisdictions that typically target 90 days maturity for securities, including Singapore and the draft US GENIUS Act legislation. It is also relaxed in other respects, such as allowing other business activities, although the HKMA has to approve them first.
Stablecoin issuers cannot pay interest to stablecoin holders, but the payment of marketing incentives is expressly allowed.
On a daily basis the issuer needs to publish figures about the issuance and reserves and report to the regulator on a weekly basis. They also must conduct regular attestations and audits, but the frequency is up to the HKMA.
Stablecoin issuers must have a minimum of HKD 25 million in capital or equivalent in another currency, but the regulator can specify a higher figure. This rule does not apply to banks.
