Stablecoin Regulation in Hong Kong: A Complete FAQ Guide

Section 3 of the Hong Kong Stablecoin Ordinance defines: “…a stablecoin is a cryptographically secured digital representation of value that—

A stablecoin is any cryptographically secured digital token used for payments, debts, or investment, that runs on a blockchain or distributed ledger, and is meant to keep its value steady against an asset (like gold) or a basket of assets.

It does not include government or central bank issued money, limited-purpose tokens (e.g. loyalty points), regulated securities, stored-value facilities, or bank deposits in Hong Kong or other jurisdictions.

A specified stablecoin is a regulated category of stablecoin. It must be pegged to one or more official currencies (like the Hong Kong dollar, US dollar, euro, yen), or to other units of account that the Hong Kong Monetary Authority designates. It may also include classes of digital value that the Authority declares by Gazette notice.

This definition ensures that only currency-referenced stablecoins or formally designated tokens fall within the strict regulatory perimeter.

A specified stablecoin is a regulated category of stablecoin. It must be pegged to one or more official currencies (like the Hong Kong dollar, US dollar, euro, yen), or to other units of account that the Hong Kong Monetary Authority designates. It may also include classes of digital value that the Authority declares by Gazette notice.

This definition ensures that only currency-referenced stablecoins or formally designated tokens fall within the strict regulatory perimeter.

The primary purpose is to establish a comprehensive regulatory framework for entities that issue stablecoins referenced to fiat currencies.

“… provides a detailed overview of the ‘Guideline on Supervision of Licensed Stablecoin Issuers’ issued by the Hong Kong Monetary Authority (HKMA). The primary objectives of this framework are to safeguard monetary and financial stability, ensure robust user protection, and provide clear regulatory standards for the sustainable development of the stablecoin market in Hong Kong” (Handbook, Executive Summary, referencing HKMA Guideline).

Any entity issuing a fiat-referenced stablecoin in Hong Kong, or actively marketing such a stablecoin to the Hong Kong public, must be licensed by the HKMA.

“Any entity issuing a fiat-referenced stablecoin in Hong Kong, or actively marketing such a stablecoin to the Hong Kong public, must be licensed by the HKMA” (Handbook, Executive Summary, Pillar 1: Mandatory Licensing Regime).

This clarifies the jurisdictional scope of the regulation. It covers not only issuers physically based in Hong Kong but also those based elsewhere who are targeting the Hong Kong market. This broad reach aims to prevent regulatory arbitrage, ensuring that all stablecoins circulating within or actively promoted to Hong Kong fall under the HKMA’s oversight, thereby providing consistent consumer protection and risk management.

Stablecoins issued in Hong Kong must be “fully backed by a reserve of high-quality and highly liquid assets” at all times.

“The cornerstone of the Guideline is the requirement that stablecoins must be ‘fully backed by a reserve of high-quality and highly liquid assets’ at all times. The market value of these reserves must be at least equal to the par value of the stablecoins in circulation” (Handbook, Executive Summary, Pillar 2: Full Backing of Reserve Assets).

It also means the issuer cannot lend out the reserve assets for profit in a way that risks their liquidity or value.

The Guideline safeguards user protection, by ensuring that stablecoin holders have the fundamental right to redeem their stablecoins at par value on a timely basis. It also mandates transparency and clear disclosure.

“The framework places significant emphasis on protecting users. A key provision is the right of stablecoin holders to ‘redeem the FRS in circulation at par value on a timely basis’. This right must be clearly communicated and executed without unreasonable barriers” (Handbook, Executive Summary, Pillar 4: User Protection and Redemption Rights).

This provision aims to prevent situations where users might be unable to convert their stablecoins back into fiat currency, or where they might suffer losses due to redemption delays or discounts. Coupled with transparency requirements (like white papers and public attestations), this ensures users have access to critical information and a clear pathway to liquidate their holdings, thereby building trust and reducing systemic risk.

Licensed Stablecoin issuers must provide a high degree of transparency by publishing a detailed public white paper for each stablecoin and by providing monthly, independently audited reports on their reserve assets.

“Licensed issuers must provide a high degree of transparency. This includes publishing a detailed public white paper for each stablecoin and providing monthly, independently audited reports on the reserve assets” (Handbook, Executive Summary, Pillar 5: Transparency and Disclosure).

Transparency is vital for market confidence and regulatory oversight. The white paper ensures that potential users understand the stablecoin’s design, risks, and the issuer’s operations before they engage. The requirement for monthly, independently audited reports on reserve assets provides ongoing, verifiable proof that the stablecoin remains fully backed. This regular, third-party verification minimizes the risk of misrepresentation or fraud regarding the backing assets, offering an external validation of the issuer’s financial integrity.

The HKMA Stablecoin Guideline mandates that the market value of reserve assets must, at all times, equal or exceed the par value of all outstanding stablecoins, including any restricted ones.

“The market value of reserve assets must always equal or exceed the par value of outstanding stablecoins” and “all stablecoins, even restricted ones, must be fully backed” (Handbook, Section 2.1: The Full Backing Mandate, referencing Guideline, Section 1).

This “full backing mandate” is the cornerstone of the HKMA’s approach, designed to ensure liquidity and confidence. It means that for every stablecoin issued, there must be at least an equivalent value of high-quality assets held in reserve. This prevents fractional reserve practices that could lead to a stablecoin losing its peg during periods of high redemption demand. The inclusion of “restricted ones” emphasizes that no stablecoin under the licensee’s issuance is exempt from this strict backing requirement.

Reserve assets must be high-quality, highly liquid, and have minimal investment risks. Eligible assets include cash and short-term bank deposits, specific marketable debt securities, cash from overnight reverse repurchase agreements, and dedicated investment funds composed solely of these eligible assets.

“Reserve assets must be ‘high-quality, highly liquid, and have minimal investment risks’. Eligible Assets Include: Cash and short-term bank deposits. Specific marketable debt securities. Cash from overnight reverse repurchase agreements. Dedicated investment funds composed solely of the above assets” (Handbook, Section 2.2: Quality, Composition, and Currency of Reserve Assets, referencing Guideline, Section 1).

The HKMA limits the types of assets permitted in the reserve to those that are extremely safe and easily convertible into cash without significant loss of value. This conservative approach aims to minimize market risk, credit risk, and liquidity risk within the reserve portfolio. By restricting assets to those with “minimal investment risks,” the Guideline ensures that the stablecoin’s value remains stable and the reserve can meet redemption demands even during financial market turmoil.

Reserve assets must be legally segregated from the licensee’s other assets through an effective trust arrangement and held separate from other funds, protected from creditors’ claims. They must also be held by qualified custodians.

“Reserve assets must be segregated from other assets of the licensee, protected from creditors’ claims, and held separate from other funds… achieved through an effective trust arrangement… Custody: Qualified custodians (licensed banks or HKMA-acceptable custodians)” (Handbook, Section 2.3: Segregation and Professional Safekeeping, referencing Guideline, Section 1).

No, licensees are expressly prohibited from paying interest or interest-like incentives on stablecoins.

“‘Licensees must not pay interest or interest-like incentives on stablecoins'” (Handbook, Section 2.4: Prohibition of Interest Payments, referencing Guideline, Section 1).

This prohibition is intended to clearly differentiate stablecoins from traditional bank deposits or other interest-bearing investment products. It reinforces the stablecoin’s primary role as a payment instrument or store of value, rather than an investment vehicle designed to generate returns. This also ensures that the reserve assets are not subjected to additional risks by being used to generate yield, thereby maintaining their full backing and liquidity. The income from reserve assets belongs to the licensee, but this cannot be passed on to stablecoin holders as interest.

Licensees must provide daily statements (on request), weekly public reporting on their website, and crucial monthly independent attestations by qualified auditors. Any breaches or discrepancies must be reported to the HKMA immediately.

“Reporting Frequency: Daily… Weekly… Monthly: ‘Regular independent attestations by qualified auditors are mandatory… submitted to HKMA monthly and disclosed publicly’. Immediate Notification: ‘breaches or discrepancies… to the HKMA immediately'” (Handbook, Section 2.5: Stringent Disclosure, Reporting, and Attestation, referencing Guideline, Section 1).

Transparency and independent verification are paramount for public confidence. The multi-tiered reporting structure (daily internally, weekly publicly, monthly externally audited) provides continuous oversight of the reserve assets’ status. The requirement for independent auditor attestations is particularly important as it offers an objective, third-party validation of the issuer’s claims about its reserves, significantly reducing the risk of misrepresentation or fraud. Immediate notification of issues further ensures that the HKMA can intervene promptly if any problems with backing or compliance arise.

In Hong Kong, new stablecoins can only be issued after a valid customer request and upon the licensee’s receipt of corresponding funds in the referenced fiat currency.

“Stablecoins can only be issued after a valid customer request and upon the licensee’s ‘receipt of funds in the referenced currency'” (Handbook, Section 3.1: The Issuance Process: Controlled Creation, referencing Guideline, Section 2).

This rule enforces a strict “1:1” relationship between incoming fiat currency and newly minted stablecoins. It prevents the arbitrary creation of stablecoins, ensuring that every unit in circulation is directly backed by real money held in the reserve. This controlled creation mechanism is fundamental to maintaining the stablecoin’s peg and preventing inflationary practices that could destabilize its value.

Every stablecoin holder has the fundamental right to redeem their stablecoins at par value.

“The framework emphatically states that ‘Holders have the right to redeem stablecoins at par value'” (Handbook, Section 3.2: The Right to Redemption: Guaranteeing Liquidity, referencing Guideline, Section 2).

This is a crucial user protection feature. It means that one unit of a fiat-referenced stablecoin must always be convertible into one unit of the underlying fiat currency without any discount or premium, effectively guaranteeing its liquidity and stability. This right is critical for stablecoins to function reliably as a means of payment or store of value, assuring users that their digital holdings can always be exchanged for the underlying fiat.

Redemption requests must typically be processed promptly, generally within one business day, unless a different timeframe has been explicitly approved by the HKMA.

“Redemption requests must be processed promptly, typically ‘within one business day’, unless a different timeframe is approved by the HKMA” (Handbook, Section 3.2: The Right to Redemption: Guaranteeing Liquidity, referencing Guideline, Section 2).

1

Business Day
Standard timeframe for processing redemption requests

This requirement ensures that stablecoin holders can quickly access their underlying fiat currency, enhancing the stablecoin’s utility and trustworthiness. Delays in redemption can erode confidence and hinder the stablecoin’s use in real-world transactions. The strict timeframe minimizes liquidity risk for users and promotes efficient market operations.

In an insolvency scenario, stablecoin holders have a direct claim on the segregated reserve assets, facilitating their redemptions.

“In an insolvency scenario, holders have a direct claim on the segregated reserve assets to facilitate their redemptions” (Handbook, Section 3.2: The Right to Redemption: Guaranteeing Liquidity, referencing Guideline, Section 2).

If a licensee uses third parties (e.g., exchanges, wallet providers) for distribution, the licensee remains fully responsible for compliance and must conduct thorough due diligence on these partners to ensure they are reputable and operate in a sound manner.

“If a licensee uses third parties (e.g., exchanges, wallet providers) for distribution, the licensee remains responsible. It must conduct thorough due diligence on these partners to ensure they are reputable and operate in a sound manner” (Handbook, Section 3.3: Distribution Channels and Third-Party Oversight).

This establishes the “ultimate responsibility” principle. Even when outsourcing aspects of their operations, licensees cannot outsource their regulatory obligations. This requirement forces issuers to carefully vet their partners and continuously monitor their activities, extending the reach of regulatory oversight and ensuring that the entire stablecoin ecosystem operates to high standards, regardless of which entities are directly interacting with the end-user.

Licensees must implement robust customer due diligence (CDD) and Know Your Customer (KYC) policies in line with Hong Kong’s Anti-Money Laundering (AML) and Counter-Financing of Terrorism (CTF) guidelines. They must also take active measures to prevent offering services in jurisdictions where it would be unlawful.

“Licensees must implement robust customer due diligence (CDD) and Know Your Customer (KYC) policies in line with Hong Kong’s Anti-Money Laundering (AML) and Counter-Financing of Terrorism (CTF) guidelines. They must also take active measures, such as IP blocking and identity verification, to prevent offering services in jurisdictions where it would be unlawful” (Handbook, Section 3.4: Customer Onboarding: KYC and AML/CTF Compliance).

This provision integrates stablecoin issuers into the broader financial system’s efforts to combat financial crime. By mandating strict KYC/AML/CTF procedures, the HKMA aims to prevent stablecoins from being used for illicit activities like money laundering or terrorist financing. The additional requirement for geographical restrictions through measures like IP blocking underscores the HKMA’s commitment to ensuring global regulatory compliance and preventing stablecoins issued under its regime from being exploited in jurisdictions with less stringent oversight.

For licensees that are not authorized institutions (e.g., banks), they must maintain at least HK$25,000,000 (or equivalent) in paid-up share capital.

“For licensees (excluding authorized institutions)… must maintain ‘at least HK$25,000,000 (or equivalent) in paid-up share capital'” (Handbook, Section 4.1: Minimum Capital Requirements, referencing Guideline, Section 4).

HK$25M

Minimum Capital
Required paid-up share capital for non-bank stablecoin issuers

This capital requirement is distinct from the stablecoin reserve assets and serves as a financial buffer for the operating entity itself. It ensures the issuer has sufficient financial resources to absorb operational losses, fund its ongoing expenses, and invest in necessary infrastructure without jeopardizing the stablecoin’s backing assets. It acts as a prudential safeguard, ensuring the issuer’s financial stability and its ability to continue operations even during periods of stress, thereby protecting the overall integrity of the stablecoin service.

The capital serves as a buffer to absorb potential losses, fund ongoing operational expenses, and ensure the issuer’s capacity to conduct an orderly wind-down if required, without impacting stablecoin holders.

“This capital serves as a buffer to absorb losses and fund operations without touching the reserve assets” and “ensuring it has a secure and stable source of funding” (Handbook, Section 4.1: Minimum Capital Requirements).

The HKMA’s rationale is to ensure the long-term viability and resilience of the stablecoin issuer as a business entity. By requiring significant capital, the HKMA mitigates the risk that operational or business failures of the issuer could spill over and affect the stablecoin’s ability to maintain its peg or allow for redemptions. It also provides resources for a controlled exit from the market, protecting users and the broader financial system from abrupt disruptions.

Generally, a licensee cannot engage in other business activities without explicit prior consent from the HKMA. Any approved “Other Business Activities” must not pose significant risks or create conflicts of interest.

“A licensee cannot engage in other business activities without prior consent from the HKMA. Any approved ‘Other Business Activities’ must not pose significant risks to the stablecoin issuance operations or create conflicts of interest” (Handbook, Section 4.2: Restrictions on Other Business Activities).

The purpose is to maintain focus on the core stablecoin business, mitigate potential conflicts of interest, and prevent undue risks that could jeopardize the stablecoin issuance operations or the protection of stablecoin holders.

“This ensures that the licensee’s core business must always remain the secure issuance and management of stablecoins… to ensure they do not introduce undue risks or dilute the issuer’s focus on its primary, regulated function” (Handbook, Section 4.2: Restrictions on Other Business Activities).

This rule underscores the HKMA’s prudential approach. It seeks to prevent the stablecoin entity from engaging in speculative or unrelated ventures that could deplete its capital, introduce unmanageable risks, or create situations where the interests of the stablecoin business conflict with other commercial interests. By maintaining a narrow focus, the HKMA aims to ensure that the licensee’s resources and attention are primarily dedicated to ensuring the safety and stability of the stablecoin.

The “three-lines-of-defence” model assigns distinct roles: business units (first line) own and manage risk; independent risk management and compliance functions (second line) oversee risk; and an independent internal audit function (third line) provides objective assurance.

“The Guideline promotes a ‘three-lines-of-defence’ model… First Line: Business units… Second Line: Independent risk management and compliance functions… Third Line: An independent internal audit function” (Handbook, Section 5.1: The Three Lines of Defence Model).

This model establishes clear responsibilities for risk ownership, oversight, and independent assurance. It’s designed to ensure that risks are identified and managed at every level of the organization, with built-in checks and balances. This layered approach helps to prevent control failures, promotes a strong risk culture, and provides the Board and senior management with reliable information about the effectiveness of their risk management framework.

Licensees must ensure smart contracts undergo “annual smart contract audits” by independent parties. For private keys, requirements include secure hardware, multi-signature protocols for high-risk operations, strict access controls, and robust procedures for key backup, recovery, and destruction.

“Smart Contract Security… smart contracts must undergo ‘annual smart contract audits’ by a qualified independent party… Wallet and Private Key Management… using secure hardware, multi-signature protocols for high-risk operations, strict access controls, and robust procedures for key backup, recovery, and destruction” (Handbook, Section 5.2: Technology and Cybersecurity Risk).

Given the digital nature and potential for large-scale financial impact, technology and cybersecurity risks are critically important. Smart contract audits are essential to identify coding errors or vulnerabilities that could be exploited, leading to loss of funds or de-pegging events. The stringent private key management rules are designed to prevent unauthorized access and theft, as private keys are the ultimate control mechanism for stablecoin operations and reserve assets. These measures aim to build trust in the technical infrastructure underpinning the stablecoin.

Every Hong Kong Stablecoin licensee is required to have a pre-prepared “plan for orderly wind-down of licensed stablecoin activities” to protect stablecoin holders’ interests and ensure a smooth market exit.

“A critical, forward-looking requirement is for every licensee to have a pre-prepared ‘plan for orderly wind-down of licensed stablecoin activities’… It must detail how stablecoins will be redeemed, how reserve assets will be managed during the wind-down, and how users will be informed” (Handbook, Section 5.3: Operational Risk and Business Continuity).

This requirement anticipates potential failures and aims to mitigate their impact. An orderly wind-down plan ensures that even if an issuer becomes insolvent or decides to exit the market, stablecoin holders can still redeem their funds in a structured and transparent manner. This protects users from abrupt market disruptions and reduces systemic risk, reflecting a prudential approach that considers the entire lifecycle of a regulated entity. It builds confidence that even in adverse scenarios, user funds are safeguarded.

A Hong Kong Stablecoin Licensees must diligently manage risks associated with outsourcing critical functions, including thorough due diligence on service providers, robust service level agreements (SLAs), and continuous monitoring, ensuring the licensee retains appropriate oversight and control.

“Licensees must diligently manage risks associated with outsourcing critical functions, ensuring providers are competent and that the licensee retains access and control” (Handbook, Section 5.3: Operational Risk and Business Continuity).

While outsourcing can bring efficiencies, it also introduces new risks. The HKMA holds the licensee ultimately responsible for outsourced activities, meaning they cannot simply delegate away their regulatory obligations. This forces licensees to carefully select and manage their third-party providers, ensuring that these external entities also operate to the required regulatory standards, especially for critical functions that could impact the stablecoin’s stability or security. This prevents a “blind spot” in the regulatory perimeter.

The Board of Directors holds the responsibility for setting the strategic direction, overseeing management, and ensuring compliance with all regulatory requirements, including prudent management of the business in the interests of stablecoin holders and overall financial stability.

“The Board of Directors holds ultimate responsibility. It must be composed of qualified individuals… Senior management is accountable to the Board for implementing strategy and managing day-to-day operations” (Handbook, Section 6.1: Board of Directors and Senior Management Responsibilities).

The HKMA places the ultimate accountability squarely on the Board. This means that while day-to-day tasks are delegated, the Board is responsible for establishing a robust governance framework, overseeing its implementation, and ensuring that the company operates in a sound, ethical, and compliant manner. This top-down accountability is critical for fostering a strong risk culture and ensuring that the interests of stablecoin holders are prioritized.

“Fitness and propriety” means that all key personnel, including directors, senior managers, and major controllers, must be assessed as suitable for their roles based on their reputation, knowledge, experience, and financial soundness. It’s important for maintaining public trust and ensuring sound management.

“All key personnel… must be ‘fit and proper’ for their roles… The HKMA assesses this based on their reputation, knowledge, experience, and financial soundness” (Handbook, Section 6.2: Fitness and Propriety Requirements, referencing Guideline, Section 7).

This requirement is designed to ensure that the leadership and key decision-makers of a stablecoin issuer are individuals of integrity and competence. By vetting their character, qualifications, and financial history, the HKMA aims to prevent individuals with questionable backgrounds or insufficient expertise from holding positions of influence. This pre-emptive measure is vital for safeguarding the stablecoin’s operations, protecting users, and upholding the reputation of Hong Kong as a regulated financial center.

The compliance and internal audit functions must be independent, adequately resourced, and have direct reporting lines to the Board or a relevant committee to ensure their objectivity is not compromised.

“The compliance and internal audit functions must be independent, adequately resourced, and have direct reporting lines to the Board or a relevant committee to ensure their objectivity is not compromised” (Handbook, Section 6.3: Independent Functions: Compliance and Internal Audit).

A Hong Kong StablecoinLicensees must establish clear measures, such as information barriers and segregation of duties, to identify, manage, and disclose any potential conflicts of interest.

“Licensees must establish clear measures, such as information barriers and segregation of duties, to identify, manage, and disclose any potential conflicts of interest” (Handbook, Section 6.4: Conflicts of Interest Management).

Conflicts of interest can arise when an individual or entity has competing interests that could influence their decision-making, potentially leading to unfair advantages or harm to clients. In the stablecoin context, this could involve the issuer’s interests conflicting with those of stablecoin holders or the integrity of the market. Measures like “Chinese Walls” (information barriers) prevent sensitive information from being shared inappropriately, while segregation of duties ensures that no single individual controls multiple critical steps in a process, thereby reducing the opportunity for impropriety and protecting the interests of stablecoin holders.

A Stablecoin Public White Paper is a detailed document that licensees must publish on their website for each type of stablecoin issued. It must be written in non-technical language and include comprehensive information on the licensee’s background, the stablecoin’s design and stabilization mechanism, reserve asset arrangements, issuance/redemption procedures, underlying technology, and all associated risks.

“For each type of stablecoin issued, the licensee must publish a detailed white paper on its website. This document must be written in non-technical language and include comprehensive information on: The licensee’s background. The stablecoin’s design and stabilization mechanism. The detailed arrangements for reserve assets. The rights and procedures for issuance and redemption. The underlying technology and all associated risks” (Handbook, Section 7.1: Comprehensive Information Disclosure).

Conflicts of interest can arise when an individual or entity has competing interests that could influence their decision-making, potentially leading to unfair advantages or harm to clients. In the stablecoin context, this could involve the issuer’s interests conflicting with those of stablecoin holders or the integrity of the market. Measures like “Chinese Walls” (information barriers) prevent sensitive information from being shared inappropriately, while segregation of duties ensures that no single individual controls multiple critical steps in a process, thereby reducing the opportunity for impropriety and protecting the interests of stablecoin holders.

All licensees must comply with the Personal Data (Privacy) Ordinance (PDPO) to ensure the protection of customer data. This includes secure storage, transmission, disposal of personal data, and robust access controls.

“All licensees must comply with the Personal Data (Privacy) Ordinance (PDPO) to ensure the protection of customer data” (Handbook, Section 7.3: Personal Data Protection).

Protecting sensitive personal data is paramount in today’s digital landscape. By mandating compliance with the PDPO, the HKMA puts a mandate on stablecoin issuers to handle customer information responsibly, minimizing the risk of data breaches, misuse, or unauthorized access. This aligns the stablecoin regulatory framework with broader privacy laws, reinforcing user trust and mitigating reputational and legal risks for the licensees. It also covers secure data handling practices even if data is processed or stored internationally.

For a Hong Kong Stablecoin Licensees, Independent attestations, prepared by qualified auditors and published monthly, are crucial for verifying the issuer’s claims about its reserve assets, providing objective, third-party validation to the public.

“Regular independent attestations by qualified auditors are mandatory… submitted to HKMA monthly and disclosed publicly” (Guideline, Section 1, as referenced in Handbook, Section 2.5 and 7.1).

Independent attestations provide a critical layer of assurance beyond the issuer’s own reports. They offer an unbiased, professional verification that the stablecoin’s reserves are indeed full, liquid, and composed of eligible assets as claimed.

This external validation significantly enhances transparency and credibility, building confidence among stablecoin holders and the broader market that the stablecoin is genuinely backed and managed in accordance with regulatory requirements.

HKMA Licensed stablecoin issuers must maintain a minimum paid-up share capital of HK$25 million (or its equivalent in foreign currency). This capital serves as a financial buffer, ensuring the licensee can cover operational expenses during stress periods, fund orderly wind-down procedures if needed, and maintain market confidence in the stablecoin.

“Licensees must maintain at least HK$25,000,000 in paid-up share capital… to sustain operations and facilitate orderly exit” (Handbook, Section 8.1: Minimum Capital Requirements, referencing Guideline, Section 5.1).

HK$25M

Capital Buffer
Ensures operational stability and protects against business risks

This capital requirement is a prudential measure aimed at the solvency of the operating entity itself, distinct from the assets backing the stablecoin. It ensures that the issuer has sufficient non-reserve funds to absorb business losses, manage operational risks, and provide for a controlled cessation of business without impacting stablecoin holders’ funds. It signifies the HKMA’s intent for licensees to be financially robust and self-sufficient, capable of navigating adverse conditions.

The HKMA evaluates operational resilience based on the licensee’s ability to execute business plans under normal conditions, withstand shocks through liquidity stress testing and scenario planning, and ensure compliance across all relevant jurisdictions. The evaluation also considers the business model’s complexity, risk mitigation measures, potential impact on Hong Kong’s financial stability, and the effectiveness of contingency planning.

“Licensees must demonstrate capacity to: Execute business plans… Withstand shocks… Comply cross-border… The HKMA evaluates resilience based on: Business model complexity, Risk mitigation measures, Potential impact on Hong Kong’s financial stability, Contingency planning effectiveness” (Handbook, Section 8.2: Operational Resilience Standards).

Operational resilience is about an entity’s ability to prepare for, respond to, and recover from disruptions. The HKMA’s comprehensive evaluation ensures that licensees are not only compliant on paper but can actually maintain critical operations in the face of unexpected events, whether market shocks, cyberattacks, or other disruptions. This forward-looking approach helps prevent operational failures from translating into financial instability or affecting the reliable functioning of stablecoins in the market.

Licensees are expected to conduct liquidity stress testing on a quarterly basis.

“Liquidity stress testing (quarterly)” (Handbook, Section 8.2: Operational Resilience Standards).

4x

Annual Testing
Quarterly liquidity stress tests required per year

Regular liquidity stress testing helps licensees understand their potential vulnerabilities under various adverse scenarios (e.g., sudden redemption spikes, market illiquidity). By conducting these tests quarterly, licensees can identify potential shortfalls in their liquid assets or weaknesses in their liquidity management strategies, allowing them to take corrective action before a crisis hits. This proactive measure is vital for maintaining the stablecoin’s peg and ensuring timely redemptions under stressful market conditions.