.svg)
Hong Kong’s new Stablecoins Ordinance is another milestone in the global trend towards regulating digital assets in the same way as traditional financial services.
It follows the June 2023 for virtual asset trading platforms (VATPs), which requires any person operating a VATP to obtain a licence from the Securities and Futures Commission (SFC).
Under the Stablecoins Ordinance, any person who issues stablecoins referencing an official currency must obtain a licence from the Hong Kong Monetary Authority (HKMA).
This applies to all persons who issue stablecoins from within Hong Kong and to those who issue Hong Kong dollar-denominated stablecoins from outside the special administrative region.
Since the Ordinance was passed by the Legislative Council, the Hong Kong Monetary Authority (HKMA) has issued a draft and a draft .
The second guideline provides 48 pages of highly prescriptive requirements related to anti-money laundering and counter-terrorism financing (AML/CTF) compliance among licensed stablecoin issuers.
Both draft guidelines are accompanied by that are open for comment until June 30, 2025.
However, the government has set August 1, 2025, as the date that the Ordinance will come into effect.
The bigger picture
The establishment of the stablecoin licensing framework will impose new AML compliance expectations on covered firms, due to the “intermediary” role played by stablecoin issuers.
When these issuers offer or redeem stablecoins for fiat currency, or facilitate transactions, the HKMA considers their role akin to that of a financial institution, providing an interface between the customer and the wider financial system.
Licensed stablecoin issuers will therefore be included in the definition of “financial institutions” under Hong Kong’s Anti-Money Laundering and Counter-terrorist Financing Ordinance (AMLO).
In making this designation, the HKMA said it follows the principle of “same activity, same risk, same regulation”.
In its accompanying consultation paper, the HKMA said it believes stablecoin issuers should be subject to the AMLO’s “special requirements for virtual asset transfers”.
The inclusion of licensed stablecoin issuers as “financial institutions” under the AMLO also means that these entities will be subject to extensive customer due diligence (CDD) and transaction monitoring requirements.
As per the draft guideline, licensed stablecoin issuers will be expected to conduct CDD on their direct customers before establishing a business relationship and during the course of business.
This will involve collecting identity documents, data and information from , as well as establishing the customer’s purpose and intended nature of business.
Where customers have beneficial owners, licensees will be expected to take “reasonable measures” to verify their identities.
Transaction monitoring is the second key area of concern for the HKMA in its draft guideline.
Given that most stablecoin transactions take place on the secondary market, stablecoin issuers typically have poor visibility of who is using their stablecoin and why.
To mitigate this, the HKMA expects licensed stablecoin issuers to make significant investments in transaction monitoring capabilities, targeting both primary and secondary transactions.
In the primary market, transactions should be monitored to ensure that they are consistent with the licensee’s knowledge of the customer, the customer’s business, risk profile and source of funds.
In the secondary market, licensees should focus on risk-based transaction monitoring to identify the destination of stablecoin transactions after issuance, and the source of stablecoin transactions upon redemption.
As such, licensees should establish and maintain adequate and effective systems and controls to conduct screening of stablecoin transactions using blockchain analytics tools.
Why should you care?
The Stablecoins Ordinance provides an insight into the HKMA’s compliance expectations for stablecoin issuers.
Although the extent to which the ordinance will change between now and its introduction is uncertain, firms that plan to get licensed in Hong Kong now have an indication of what they might need to focus on in their applications.
Areas of interest may include:
- A risk-based approach (RBA) in the design and implementation of AML policies, procedures and controls.
- Risk assessments of customers, countries, products, services and transactions, supported by qualitative and quantitative analyses.
- Mechanisms for approval by senior management of risk assessment findings.
- Demonstration of risk mitigation procedures.
- Appropriate compliance management arrangements, including the appointment, at a minimum, of a compliance officer and money laundering reporting officer (MLRO).
- Evidence of an independent audit function.
- AML employee screening and training programmes.
- Demonstration of CDD compliance capabilities.
- Demonstration of transaction monitoring capabilities, with reference to technology solutions.
Firms that can meet the HKMA’s criteria and maintain compliance are set to benefit from a prime position in the growing stablecoin market.
As an international financial centre, Hong Kong is poised to play a key role in the growth of stablecoins globally.
However, as the Ordinance and draft guidelines make clear, deficient AML practices, either by prospective licensees or by fully licensed firms, will not be tolerated.
