In-depth analysis of the application for Hong Kong stablecoin license in 2025 (Part 1)

Author: Wang Wei, Tian Yuan Law FirmThe other shoe of Hong Kong's stablecoin regulation has finally landed.On May 21, 2025, the Hong Kong Legislative Council passed the Stablecoin Bill (hereinafter referred to as the "Bill") at its third reading. Only five days later, the Hong Kong Monetary Authority (HKMA) quickly followed up and issued a detailed "Draft Regulatory Guidelines" and "Consultation Document on Guidance on Combating Money Laundering and Terrorist Financing". This seamless connection between legislation and regulation marks the official completion of the compliance runway laid by Hong Kong for stablecoin issuers,and instantly switches the industry's focus from the policy deduction of "whether it can be done" to the practical operation level of "how to do it". Stablecoins, as digital assets anchored to legal tender, have a strategic value far beyond the scope of payment tools and are increasingly becoming a key infrastructure connecting traditional finance and the digital economy. Its core potential is reflected in multiple aspects: by reconstructing the clearing model, it provides a low-cost, high-efficiency solution for cross-border trade and remittances; as the value cornerstone of the decentralized finance (DeFi) world, it supports the circulation and lending of hundreds of billions of dollars of assets; at the same time, it also provides participants in the crypto market with risk management tools to hedge against volatility, and provides important practical references for the realization of inclusive finance and the exploration of central bank digital currencies (CBDCs). However, on the path to this "highway of value", risks and controversies follow closely, and several major events have profoundly exposed its potential fragility:The "death spiral" of algorithmic stablecoins: In May 2022, the sudden collapse of the algorithmic stablecoin TerraUSD (UST), which once had a market value of up to US$40 billion, and its ecological token Luna was a landmark systemic failure in the history of virtual assets. It not only directly led to the collapse of many well-known institutions including Three Arrows Capital, but also revealed to the market and regulators the inherent instability of algorithmic design under extreme pressure.The "trust deficit" of collateralized stablecoins: Even for Tether (USDT), the collateralized stablecoin with the largest market share, the transparency of its reserve assets has long been the focus of market attention. In 2021, the New York Attorney General's Office (NYAG) imposed a penalty on it, the core of which was its false statement of the status of its reserves. This shows that even with asset collateral, the "stability" promise of stablecoins will still face trust challenges if there is a lack of strict, credible third-party audits and continuous transparency guarantees.It is precisely based on the deep understanding of the "two sides of the same coin" of stablecoins - both efficient financial tools and potential sources of risk - that the regulatory system constructed by Hong Kong this time has a very clear policy logic: while recognizing and embracing its innovative value, it precisely controls its risk points by setting strict licensing thresholds.The core of its regulatory framework directly points to the main problems exposed before: solving the "trust deficit" through mandatory full, high-quality liquidity asset reserves and independent audits; avoiding the risk of "death spiral" by strictly prohibiting algorithmic stablecoins. Its ultimate goal is to attract responsible innovators from around the world under the premise of effectively protecting investors, so as to seize the rule-making power and market high ground in the emerging field of virtual assets while consolidating its position as an international financial center. For market participants who intend to join the game, this means that the era of simply discussing "why do it" is over. In-depth understanding and precise implementation of each specific requirement in Hong Kong's latest "Regulations", "Regulatory Guidelines" and "AML Consultation Document" is no longer an option, but a prerequisite for success or failure. Based on our many years of experience in legal compliance services for the Web3 industry and the financial industry, we will analyze this one by one. 1. Seven benchmarks for licenses: How does the HKMA screen "qualified players"?Obtaining a Hong Kong stablecoin issuer license means passing a comprehensive, high-standard stress test led by the Hong Kong Monetary Authority (hereinafter referred to as the "HKMA").The HKMA made it clear in the "Draft Regulatory Guidelines" that its assessment is not based on a single indicator, but a comprehensive and prudent overall examination of applicants. Its core intention is to ensure that only institutions with sufficient financial strength, sound governance capabilities and a high level of compliance awareness can enter this emerging field.These assessment criteria can be summarized into the following seven interrelated core benchmarks:1. Adequate capital and financial resources (Financial Resources): This is a direct test of the applicant's own risk resistance. The HKMA requires issuers to hold sufficient capital to absorb all kinds of losses that may occur in daily operations, to ensure that they have long-term and sustainable operating capabilities, rather than a "grassroots team" that may collapse at any time due to financial problems. 2.Quality and isolation of reserve assets (Reserve Assets Management): This is the cornerstone of trust in stablecoins and the core of regulatory review.The HKMA requires that reserve assets must always be fully backed, high-quality and highly liquid. More importantly, they must be legally isolated from the issuer's own assets and held by an independent qualified custodian.This move is intended to directly respond to market concerns about the lack of transparency of Tether's reserves and to institutionally eliminate the risk of reserve assets being misappropriated.3.A sound corporate governance framework (Corporate Governance): The HKMA focuses on the checks and balances and decision-making mechanisms within the issuer. This includes a board of directors with clear responsibilities (including independent non-executive directors), competent management, and an effective internal control system, especially the establishment and effective operation of the "three lines of defense". This ensures that the company will not deviate from the compliance track due to personal arbitrariness or internal management chaos. 4.A comprehensive risk management framework (Risk Management): Stablecoin business spans multiple fields such as finance, technology and compliance, and the risks are complex. The HKMA requires applicants to establish a framework that can fully cover technical security (such as private key management, smart contract auditing), market, credit, liquidity, operational and legal risks. This tests the applicant's ability to foresee and control business risks. To sum up, the seven benchmarks of the HKMA are closely linked and together constitute a strict access system. It is not only about screening applicants, but also about pre-setting a high-standard, sustainable and healthy development paradigm for the future stablecoin market in Hong Kong. II. In-depth analysis of core requirements and practical responses1. Capital threshold: HK$25 million is just the starting pointFinancial strength is the first and most rigid threshold for the HKMA to assess whether an applicant can operate in Hong Kong for a long time and stably. This is not only a test of the applicant's financial situation, but also a test of its determination and commitment to enter this high-risk field. The "Supervisory Guidelines" have clear provisions on this: "An applicant for a stablecoin issuer licence must have a minimum paid-up share capital of HK$25 million, or such higher amount as the Monetary Authority may specify, having regard to the scale and nature of the applicant’s proposed operations." ("An applicant for a stablecoin issuer licence must have a minimum paid-up share capital of HK$25 million, or such higher amount as the Monetary Authority may specify, having regard to the scale and nature of the applicant’s proposed operations.") leaf="">The core of this clause lies in its regulatory philosophy of "flexibility" and "prudence". It sets a clear entry benchmark for the market, but it is by no means a fixed "ceiling". The practical guidance significance for applicants is: ➤HKD 25 million is the "minimum consumption" rather than a "fixed price": Applicants must regard the HKD 25 million as a "stepping stone" for applying for a license. The HKMA will conduct a dynamic assessment, paying particular attention to the expected issuance scale (scale) and the complexity (nature) of the business model in the applicant's business plan. If your business blueprint is to issue a stablecoin with a scale of billions of Hong Kong dollars, or your business involves complex DeFi integration, lending and other high-risk activities, then the HKMA is very likely to require capital of more than HK$25 million to ensure that there is sufficient capital "buffer" to absorb potential operating losses and market risks. ➤Capital planning must be deeply tied to the business blueprint:When preparing application materials, capital planning cannot be an isolated financial data. Applicants must be able to clearly demonstrate to the HKMA why the amount of capital you have prepared is sufficient and prudent for the business model and risk exposure you have designed.This means that your financial forecasts and stress test scenario analysis must be closely aligned with the market strategy, technical architecture and risk management measures in the business plan.In fact, similar regulatory principles exist in the application for financial licenses in many jurisdictions. ➤This is a "continuous capital holding requirement":This money is not freely available after obtaining the license. It must continue to exist as the company's core capital and meet the capital adequacy requirements that the MAS may subsequently set. This requires the applicant to establish a comprehensive capital monitoring and management mechanism and be prepared to report regularly to the MAS on its capital status.Therefore, capital planning is not a simple proof of funds, but a comprehensive test of the applicant's business model, risk awareness and long-term operating determination. leaf="">A visionary applicant should prepare capital significantly higher than the minimum threshold and be able to provide a convincing, data-supported explanation of its adequacy. 2. Reserve management: the "trust anchor" of stablecoins and the absolute core of supervisionReserve management is the cornerstone of the entire stablecoin regulatory framework and a top priority for the HKMA's review. In the past few years, from the transparency controversy of Tether's reserve assets to the collapse of UST's algorithm, almost all major risk events have pointed directly to the "trust deficit" of reserve assets. Therefore, Hong Kong's regulatory rules focus most on this, and the six principles it sets are aimed at building a robust closed loop of trust. (1) “Fully backed” is the bottom line, leaving room for “over-collateralization”The word “stable” in stablecoins must be based on solid asset support. The HKMA has drawn a clear red line for this.The Regulatory Guidelines emphasize: “A licensed stablecoin issuer must ensure that its stablecoins are at all times fully backed by a pool of high-quality and highly liquid reserve assets. The Monetary Authority may also require an appropriate level of over-collateralization depending on the risk profile of the reserve assets.”“A licensed stablecoin issuer must ensure that its stablecoins are at all times fully backed by a pool of high-quality and highly liquid reserve assets. The Monetary Authority may also require an appropriate level of over-collateralization depending on the risk profile of the reserve assets.” ”Practical interpretation:“Fully backed” is an insurmountable lifeline. This means that the market value of the reserve assets shall not be lower than the total face value of the stablecoins in circulation at any time. This is a hard rule and there is no room for negotiation.“Appropriate level of over-collateralization” reflects the flexibility and prudence of supervision. The “appropriate” here is not determined unilaterally by the issuer, but the result of the dynamic assessment of the HKMA based on the risk profile of the reserve assets. For example, if the reserve assets contain a small number of securities with slightly higher price volatility, the HKMA may require a higher over-collateralization ratio as a risk buffer. Applicants must be prepared to communicate with the HKMA in depth and continuously on this matter.("Reserve assets must consist primarily of high-quality liquid assets (HQLA), such as short-term bank deposits with authorized institutions in Hong Kong, short-term government securities with satisfactory credit ratings, or other types of assets that the Monetary Authority may accept on a case-by-case basis. Algorithmic stablecoins or stablecoins backed by other virtual assets are generally not accepted.")Practical interpretation:The rules directly exclude algorithmic stablecoins and stablecoins backed by other virtual assets. This is obviously a lesson learned from the painful lessons of events such as Luna/UST, and eliminates such high-risk models at the source.This is easy to understand. In the eyes of regulators, algorithms are unstable, and other virtual assets are also unstable.Short-term deposits in licensed banks in Hong Kong and short-term government securities with high credit ratings are the reserve assets most recognized by the HKMA. The question that follows is whether this government bond is only Hong Kong government bonds, or is it possible to include US government bonds or Chinese government bonds. If Chinese government bonds include Chinese local government bonds? This remains to be explained by subsequent regulatory authorities. For applicants who wish to issue gold stablecoins or offshore RMB (CNH) stablecoins, the only channel is the "case-by-case" clause of "other assets that the Monetary Authority may accept based on specific circumstances." This door is not completely closed, but the threshold is extremely high. For gold stablecoins, applicants need to solve a series of thorny problems: leaf="">How to ensure that the liquidity of physical gold or gold ETFs is comparable to that of short-term government bonds? How to conduct daily, transparent and credible valuations? How can the custody solution be foolproof? Cooperating with local licensed institutions to issue financial products (such as ETFs) that track gold prices as reserves may be one way, but the applicant must prove that the product itself meets the strict definition of HQLA by the HKMA. AndFor CNH stablecoins, the challenge is to prove that the applicant has deep CNH liquidity that can still meet large-scale redemption needs under extreme market conditions, and to provide a convincing solution that can effectively hedge exchange rate risks. (3) Currency matching principleIn order to eliminate exchange rate risks caused by currency mismatches, the regulations set strict matching requirements. Practical interpretation: This is a hard and fast rule. To issue a Hong Kong dollar stablecoin, the reserves must be Hong Kong dollar assets; to issue a US dollar stablecoin, the reserves must be US dollar assets. In principle, any form of currency mismatch (such as issuing a US dollar stablecoin with Hong Kong dollar reserves) is not allowed. leaf="">“Prior written approval” is an exception reserved for extremely special circumstances, and applicants should not plan this as a regular business model. (4) Bankruptcy isolation This is the core institutional design to protect the security of user assets. The "Supervisory Guidelines" require: “Reserve assets must be segregated from the issuer’s own assets and the assets of other stablecoin arrangements, and held with a qualified custodian. The custodial arrangements must ensure that the reserve assets are protected in the event of the issuer’s insolvency.” ("The reserve assets must be segregated from the issuer's own assets and the assets of other stablecoin arrangements and held by a qualified custodian. The custody arrangement must ensure that the reserve assets are protected in the event of the issuer's bankruptcy.")Practical interpretation:"Bankruptcy remoteness" is a huge structural challenge for many Web3 startups. This usually means that an independent special purpose entity (SPV) must be established, and the ownership of the reserve assets must be completely separated from the issuer's operating entity through a trust arrangement. This involves complex legal structure design and high establishment and maintenance costs.Find and sign a "qualified custodian" custodian)” – usually a licensed bank or trust company – is a daunting task in itself. These traditional financial institutions have extremely strict due diligence on virtual asset businesses, long negotiation cycles and high custody fees. (5) Prohibition of interest paymentsThe HKMA has clearly drawn the line between stablecoins and deposits or investment products. The Regulatory Guidelines state: “A licensed stablecoin issuer must not pay any interest or similar return to stablecoin holders on their stablecoin holdings.” Practical interpretation: This regulation blocks the path of attracting users through "interest-bearing". Any business model that may be regarded as "similar to returns", such as staking rewards, airdrops based on holdings, etc., is very likely to touch the regulatory red line. The issuer's business model must be based on compliant sources of income such as transaction fees. (6) Mandatory transparency: Putting reserve assets under the sun Continuous and detailed information disclosure is the key to maintaining market confidence. The Regulatory Guidelines stipulate: "A licensed stablecoin issuer must provide regular and timely public disclosures on its reserve "A licensed stablecoin issuer must provide regular and timely public disclosure on its reserve assets, including its composition, valuation, and the reports of independent auditors. It must also submit periodic reports to the Monetary Authority." ("A licensed stablecoin issuer must provide regular and timely public disclosure on its reserve assets, including its composition, valuation, and the reports of independent auditors. It must also submit periodic reports to the Monetary Authority.") Practical interpretation: Obtaining a license is just the beginning, both for financial licenses and stablecoin licenses. Issuers must budget for frequent and in-depth public disclosures. This includes but is not limited to: daily or monthly reserve asset attestation reports issued by accounting firms, regular financial audit reports, AML/CTF system audit reports, and cybersecurity audit reports. This is a huge, ongoing operating expense. Regulatory requirements require the establishment of a proactive and timely reporting culture. Once any abnormal fluctuations or risk events occur in reserve assets, it is far wiser to report to the HKMA and submit solutions as soon as possible rather than trying to conceal or delay. So far, we have analyzed the most "hard-core" financial and asset cornerstones of the application for a stablecoin license in Hong Kong - namely, sufficient capital thresholds and sound reserve management. This constitutes the "anchor of trust" for stablecoins. However, solid hardware still requires a sophisticated software system to drive it. How to safely and efficiently deliver this trust to the market is a test of the issuer's real skills at the operational level. In the next article, we will continue to explore the operational lifeline of stablecoins, including their issuance, redemption and distribution mechanisms; explain in detail how applicants can cross the gap from the "wild growth" of Web3 to the financial-level "three lines of defense"; and ultimately provide interested parties with a detailed application process, cycle estimates and key "lightning avoidance guides". Stay tuned.