Hong Kong presents a stablecoin bill to solidify its digital asset regulatory framework.

At a legislative council meeting on Dec. 18, Christopher Hui, Hong Kong’s Secretary for Financial Services and the Treasury, presented a stablecoin bill in its second reading. In light of fiat stablecoin issuers’ increasing significance in the financial sector, the law aims to provide a legal framework for them.

The suggested regulation requires stablecoin issuers to have reserves equivalent to the value of circulating stablecoins, made out of liquid, high-quality assets. The right to redeem stablecoins at face value without exorbitant fees or delays would also be ensured for holders. The framework also incorporates strict risk management procedures, disclosure requirements, and anti-money laundering safeguards.

The Hong Kong Monetary Authority (HKMA) would have the power to license stablecoin issuers, keep an eye on compliance, and look into infractions to guarantee monitoring. Widespread support for the bill during last year’s public consultation strengthened Hong Kong’s resolve to regulate virtual assets sensibly and by international norms.

Hui also mentioned in his speech that, “fiat stablecoins have the potential to develop into a generally accepted medium of payment, thus posting a more urgent risk to monetary and financial stability.”

He explained that the rapid adoption of stablecoins if left unchecked, could disrupt traditional financial systems, undermine monetary policies, and create vulnerabilities due to their reliance on private entities for issuance and reserves.

These concerns are amplified by the growing significance of stablecoins, which have reached a market capitalization of $220 billion at the time of writing. Leading the market are issuers like Tether, with a market capitalization of $142 billion, and Circle’s USDC, valued at $42 billion. While these assets provide stability in a notoriously volatile market, their size and reliance on centralized issuers pose systemic risks.

Hui’s concerns highlight that such large-scale reliance on private entities for issuance and reserve management could disrupt financial stability, particularly if reserves are mismanaged or redemption guarantees are not met during periods of economic stress.

This urgency for regulation is further emphasized by Hong Kong’s efforts to distinguish its digital asset framework from the stringent cryptocurrency restrictions in Mainland China.

The stringent cryptocurrency regulations in Mainland China stand in stark contrast to the Hong Kong plan. While China focuses on its central bank digital currency, the digital yuan, Hong Kong’s regulatory framework seeks to provide clarity and oversight to private issuers like Tether and Circle.

Hong Kong is working to promote a more diverse digital asset ecosystem, while China has outlawed the majority of private cryptocurrency activity.

By implementing these steps, Hong Kong aims to close the gap between established financial systems and the emerging digital asset market by implementing these steps. Clarity in regulations may help draw Web3 innovators and stablecoin issuers looking for a stable and safe working environment.