Context: Hong Kong is set to enforce a new Stablecoins Ordinance, requiring a licence for issuing fiat-referenced stablecoins (FRS). This move aims to regulate stablecoin issuers, ensure transparency, protect investors, and prevent financial risks like money laundering and unbacked digital assets.
Relevance of the Topic : Prelims: Key facts about Stablecoins; CBDCs.
What are Stablecoins?
- Stablecoins are a class of cryptocurrencies with their values linked to assets.
- Unlike cryptocurrency coins such as Bitcoin (BTC) and Ether (ETH) or even tokens such as Shiba Inu (SHIB), whose values can wildly rise and fall due to investor sentiments and other factors, stablecoins are designed to maintain relatively steady prices.
- This stability is achieved through the process of “pegging” the stablecoin to an asset such as:
- Fiat currency (like U.S. Dollars, EU Euros, Hong Kong Dollars, etc.)
- A commodity (like gold)
- Other cryptocurrencies (such as Bitcoin), by regulating their value via computer algorithms, or by mixing multiple strategies.
- While the price of Bitcoin might rise or fall in the coming years, a USD-pegged stablecoin should ideally remain around $1.
Difference between Stablecoins and Central Bank Digital Currencies
- CBDCs are digital currencies officially issued and controlled by a government’s central bank, while Stablecoins can be privately issued and can also be pegged to foreign currencies.
Why do Stablecoins require Regulation?
- Widespread Use: Stablecoins are used globally for trading, savings protection, and cross-border transactions, especially in countries facing currency instability (E.g., Argentina, Turkey, Afghanistan).
- Market Size: Over $250 billion worth of stablecoins are in circulation. E.g., Tether (USDT) alone has a supply of over 163 billion USDT.
- Lack of Transparency: Issuers may not always have adequate reserves backing their stablecoins, leading to trust issues and risks of fraud or insolvency.
- Potential Impact on Fiat Currencies: Excessive or unregulated issuance may affect the value and stability of the underlying fiat currencies or commodities.
- Risk of Collapse: History shows that algorithmic stablecoins (like UST in 2022) can fail, leading to massive investor losses and systemic risks.
- Need for Oversight: Regulation ensures reserve transparency, financial audits, consumer protection, and compliance with anti-money laundering (AML) norms.
Regulation of Stablecoins around the world
GENIUS Act:
- The US President signed the GENIUS Act (July 2025) to regulate stablecoins and protect the US Dollar.
- The Act requires 100% reserve backing with liquid assets like US dollars or short-term Treasuries for stablecoins.
- Those issuing this asset will also have to make monthly, public disclosures of the composition of their reserves, apart from complying with marketing rules.
Other countries that have started to regulate stablecoins include Japan and Singapore, while multiple other jurisdictions have more generic regulations that cover stablecoins along with other cryptocurrencies.
What is Hong Kong’s Stablecoins Ordinance?
- It will be illegal for people to offer any unlicensed fiat-referenced stablecoin (FRS) to a retail investor, or actively market the issue of unlicensed FRS to the public of Hong Kong.
- Companies that want to legally issue stablecoins to users in Hong Kong will have to obtain a licence from the Monetary Authority as well as meet set requirements when it comes to managing reserve assets and redemption, asset stabilisation, and processing user requests.
- In addition to this, they will have to comply with the applicable regulations that prevent money laundering and terrorist financing, thus making sure that their assets are properly disclosed and audited.
Also Read: Central Bank Digital Currency (CBDC)
