-
CENTRES
Progammes & Centres
Location
Hong Kong’s stablecoin law offers Beijing a sandbox for innovation—without loosening its grip on monetary sovereignty.
Image Source: Getty
On May 21, 2025, Hong Kong’s Legislative Council passed the landmark Stablecoins Bill, ushering in a comprehensive regulatory framework for fiat-referenced stablecoins (FRS). This legislation does more than regulate cryptocurrencies. It potentially positions Hong Kong as a pivotal node in emerging global settlement networks. By introducing a licensing regime for FRS issuers and reinforcing oversight of virtual asset activities, the city is enhancing market integrity, consumer protection, and financial stability. In doing so, Hong Kong sets itself apart from mainland China’s more restrictive stance on digital assets, offering a well-regulated bridge for Chinese firms to access global digital finance. This move not only underscores Hong Kong’s ambition to become a leading digital finance hub but also signals its growing importance in the evolving architecture of global payments and settlements.
The discourse surrounding stablecoins in Hong Kong has been ongoing. In January 2022, the Hong Kong Monetary Authority (HKMA) initiated formal discussions on the regulation of stablecoins by publishing a discussion paper that invited public feedback on crypto-assets and potential regulatory approaches. This marked the beginning of Hong Kong’s efforts to establish a coherent framework for digital asset oversight. By January 2023, the HKMA issued a policy statement outlining its intention to regulate FRS through a risk-based licensing regime, signalling a clear commitment to bringing stablecoins within the fold of financial regulation. Following a year-long consultation process, the feedback period concluded in December 2023, allowing the HKMA to begin drafting legislative proposals informed by stakeholder input. This culminated in the introduction of the Stablecoins Bill to the Legislative Council in March 2024, with the draft legislation focused on licensing requirements for FRS issuers and alignment with international regulatory standards.
This move not only underscores Hong Kong’s ambition to become a leading digital finance hub but also signals its growing importance in the evolving architecture of global payments and settlements.
Hong Kong’s newly passed stablecoin legislation comes at a pivotal moment in the global race to regulate digital assets. In the same week that Hong Kong’s Legislative Council approved its Stablecoins Bill, the US Senate made strides on the GENIUS Act—underscoring a broader geopolitical momentum to shape the rules of digital finance. The US dollar plays a central role in the global economy as the dominant reserve currency and preferred medium for international trade and settlement. This dominance extends to the world of digital assets, where most major stablecoins, such as USDT and USDC, are pegged to the dollar. These dollar-backed stablecoins have become essential tools for cross-border transactions, crypto trading, and financial innovation, effectively reinforcing the dollar’s influence in emerging financial systems. As stablecoin adoption grows, their demand for US dollar-denominated assets, particularly short-term Treasuries, is also rising—positioning them as an increasingly important, if informal, support mechanism for US debt markets.
The GENIUS Act, in particular, has far-reaching implications. It mandates that stablecoin issuers hold 100 percent of their reserves in highly liquid US dollar assets, with a significant portion allocated to short-term US Treasuries. This requirement mirrors the current reserve structure of leading stablecoins such as USDT and USDC, which already maintain over 80 percent of their backing in such instruments. Meanwhile, the European Union (EU) has moved ahead with its own regulatory framework. The Markets in Crypto-Assets (MiCA) regulation has already taken effect, imposing a 1:1 liquid reserve requirement for stablecoins and prohibiting the use of algorithmic mechanisms entirely. The EU’s approach signals a commitment to strict oversight while fostering innovation within well-defined boundaries.
Against this global backdrop, China remains an outlier. The country has developed one of the most restrictive regulatory environments for cryptocurrencies, effectively banning most crypto-related activities over the past decade. However, its stance on Hong Kong’s stablecoin initiatives appears far more nuanced. Recently, Beijing has been using Hong Kong as a channel to offload or liquidate seized crypto assets. This juxtaposition suggests a strategic calculus: by allowing Hong Kong to serve as a controlled sandbox for innovation in digital assets, China may be testing ways to engage with the evolving global financial system without compromising its domestic restrictions. In doing so, it preserves the benefits of financial experimentation while safeguarding national monetary policy.
With the passage of the Stablecoins Ordinance, stablecoin issuers in Hong Kong will soon need to navigate a formal licensing process and align their operations with new regulatory benchmarks. This transition is likely to demand substantial investment in legal compliance, risk management, and technological systems.
For financial institutions, the framework offers both challenges and opportunities. As the digital asset landscape matures, traditional players may find new avenues for collaboration, particularly in co-developing innovative products with licensed stablecoin issuers. The ordinance, set to take effect later this year, marks a significant milestone in Hong Kong’s financial evolution. By laying down clear and enforceable rules, the city reinforces its commitment to fostering responsible growth in the virtual asset sector.
The practical application of blockchain technology, particularly through the tokenisation of real-world assets and fiat-referenced stablecoins, presents an increasingly attractive proposition for institutions seeking modernisation within clear regulatory boundaries.
This transition signals a significant inflexion point in the evolution of blockchain technology— from its initial association with speculative crypto-assets toward its integration into the architecture of formal financial systems. Rather than serving primarily as a platform for volatile, unregulated trading of cryptocurrencies, blockchain is increasingly being leveraged to enable the tokenisation of real-world assets and conventional financial instruments. Tokenisation refers to the process of digitally representing ownership rights to tangible or intangible assets on a blockchain, thereby enhancing liquidity, divisibility, and efficiency in asset management and transfer. This development not only reduces friction in traditional financial markets but also reflects the broader institutionalisation of blockchain, aligning it more closely with regulatory norms and long-term economic utility.
The practical application of blockchain technology, particularly through the tokenisation of real-world assets and fiat-referenced stablecoins, presents an increasingly attractive proposition for institutions seeking modernisation within clear regulatory boundaries. The Monetary Authority of Singapore’s Project Guardian focuses on exploring asset tokenisation and decentralised finance (DeFi) applications within traditional financial markets. Similarly, the United Arab Emirates is advancing real-world asset tokenisation as a key component of its national blockchain strategy. This is especially relevant in jurisdictions like mainland China, where a strict stance on cryptocurrencies continues to shape the digital finance environment. In this context, Hong Kong’s evolving regulatory regime offers a unique middle path, combining innovation with oversight, which may prove appealing to mainland institutions eager to explore blockchain’s potential without contravening national policy.
Despite this, China’s broader policy approach remains measured and cautious. While recognising the technological potential of blockchain, authorities remain wary of the systemic implications posed by the rapid expansion of dollar-backed stablecoins. The widespread adoption of such instruments could risk reinforcing the global dominance of the US dollar, thereby complicating China’s strategic objective of promoting the international use of the renminbi. This tension underscores a broader geopolitical and monetary challenge: the intersection of digital innovation, financial sovereignty, and global power dynamics. As stablecoins continue to evolve, their role within both domestic and international financial systems will require careful calibration to balance innovation with monetary autonomy and economic stability, particularly in politically and economically influential jurisdictions such as China.
Sauradeep Bag is an Associate Fellow at the Observer Research Foundation.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
Sauradeep is an Associate Fellow at the Centre for Security, Strategy, and Technology at the Observer Research Foundation. His experience spans the startup ecosystem, impact ...
Read More +
PREV
