Specified Stablecoins

What Are Specified Stablecoins?

Specified Stablecoins is a regulatory classification introduced by Hong Kong to define fiat-referenced stablecoins subject to mandatory licensing. Under Hong Kong's regulatory framework, a specified stablecoin is a cryptographically secured digital representation of value that purports to maintain a stable value by referencing one or more official currencies.

The "specified" designation indicates that these tokens fall within the regulatory perimeter defined by Hong Kong's Stablecoin Bill. This distinguishes them from other digital assets like Bitcoin, utility tokens, or stablecoins that reference non-fiat assets such as commodities or cryptocurrency baskets.

The classification emerged from Hong Kong's broader effort to create a comprehensive regulatory framework for virtual assets while maintaining its position as an international financial hub. By creating a distinct category for fiat-referenced stablecoins, regulators can apply targeted requirements that address the specific risks these instruments pose to monetary stability and consumer protection.

Common examples of stablecoins that would qualify as specified stablecoins if issued or offered in Hong Kong include USD-pegged tokens like USDC and USDT, EUR-pegged tokens, and any future HKD-pegged stablecoins. The key criterion is the reference to an official government-issued currency.

Hong Kong Regulatory Framework

Hong Kong's approach to stablecoin regulation centers on the Stablecoin Bill, which establishes the legal foundation for licensing and supervising specified stablecoin issuers. The framework reflects input from the Hong Kong Monetary Authority (HKMA) and aligns with international standards from the Financial Stability Board (FSB).

Legislative Background

The regulatory journey began with HKMA discussion papers in 2022-2023, followed by public consultations that shaped the final framework. The Stablecoin Bill passed through the Legislative Council with the goal of creating regulatory clarity while fostering responsible innovation in the digital asset space.

The legislation grants HKMA authority to license and supervise specified stablecoin issuers, including the power to set prudential requirements, conduct inspections, and take enforcement action against non-compliant operators.

Regulatory Objectives

The specified stablecoin framework aims to achieve several objectives:

• Monetary stability: Ensuring that fiat-referenced stablecoins do not undermine confidence in the Hong Kong dollar or create systemic risks to the financial system.
• Consumer protection: Requiring issuers to maintain adequate reserves and honor redemption requests, protecting holders from losses due to issuer insolvency or fraud.
• Market integrity: Establishing standards for transparency, governance, and risk management that promote fair and orderly markets.
• International alignment: Positioning Hong Kong's framework to be interoperable with emerging stablecoin regulations in other major jurisdictions.

Licensing Requirements

Any entity wishing to issue specified stablecoins in Hong Kong, or to offer such stablecoins to Hong Kong residents, must obtain a license from HKMA. The licensing regime applies both to Hong Kong-based issuers and foreign issuers marketing to the Hong Kong market.

Eligible Applicants

License applicants must demonstrate financial soundness, operational capability, and fitness and propriety of key personnel. Corporate governance structures must include independent oversight and clear accountability for risk management functions.

Capital Requirements

Licensed issuers must maintain minimum paid-up capital that scales with the value of stablecoins in circulation. The capital buffer provides a cushion against operational losses and ensures issuers can meet obligations even under stress scenarios.

Operational Standards

Licensees must implement:

• Segregation of assets: Reserve assets must be held separately from the issuer's operating funds and protected from claims by the issuer's creditors.
• Custody arrangements: Reserve assets must be held with qualified custodians, typically regulated banks or licensed trust companies.
• Audit requirements: Regular independent audits of reserves with public attestation reports.
• AML/CFT compliance: Full compliance with Hong Kong's anti-money laundering and counter-terrorist financing requirements.

Reserve and Redemption Standards

Central to the specified stablecoin framework are requirements ensuring that holders can redeem their tokens for fiat currency at par value. These standards aim to prevent scenarios where stablecoins "break the peg" or become illiquid during market stress.

Reserve Composition

Reserves backing specified stablecoins must consist of high-quality liquid assets denominated in the same currency as the stablecoin's reference currency. Acceptable reserve assets typically include:

• Cash deposits at regulated banks
• Short-term government securities
• Other highly liquid instruments with minimal credit and market risk

The framework prohibits or restricts reserve investment in volatile assets, lending activities, or instruments that could impair liquidity during redemption events.

Redemption Rights

Specified stablecoin issuers must honor redemption requests at face value within prescribed timeframes. The framework specifies maximum redemption periods and may require issuers to maintain liquidity buffers to handle large or sudden redemption demands.

Holders have a direct claim on the issuer for redemption, providing legal recourse if the issuer fails to honor redemption obligations.

What Is Not a Specified Stablecoin?

The specified stablecoin definition deliberately excludes certain categories of stable-value tokens, which may face different regulatory treatment or fall outside the Stablecoin Bill entirely.

Algorithmic Stablecoins

Stablecoins that maintain their peg through algorithmic mechanisms rather than fiat reserves are not specified stablecoins. These include tokens that use mint-and-burn mechanisms, seigniorage models, or protocol-controlled value stabilization without holding equivalent fiat backing.

Crypto-Collateralized Stablecoins

Stablecoins backed by cryptocurrency collateral rather than fiat currency, such as DAI's original model using ETH collateral, fall outside the specified stablecoin definition. These may be subject to other virtual asset regulations but not the specific licensing requirements for fiat-referenced tokens.

Commodity-Referenced Tokens

Tokens pegged to commodities like gold or oil are not specified stablecoins under Hong Kong law, even if they aim to maintain stable value. The "specified" designation requires reference to official fiat currency.

Deposit Tokens

Tokenized bank deposits issued by licensed banks may receive different regulatory treatment as they represent claims on regulated deposit-taking institutions rather than standalone stablecoin issuers.

Asia-Pacific Regulatory Context

Hong Kong's specified stablecoin framework exists within a broader Asia-Pacific regulatory landscape where jurisdictions are developing varied approaches to stablecoin oversight.

Singapore

The Monetary Authority of Singapore (MAS) has implemented its own stablecoin regulatory framework, focusing on single-currency stablecoins pegged to the Singapore dollar or G10 currencies. Singapore's approach shares similarities with Hong Kong's focus on reserve requirements and redemption rights.

Japan

Japan amended its Payment Services Act to regulate stablecoins, distinguishing between "digital money type" stablecoins issued by banks and licensed intermediaries versus other forms of crypto assets.

Regional Implications

For stablecoin issuers targeting the Asia-Pacific market, Hong Kong's specified stablecoin licensing represents one piece of a complex regulatory puzzle. Issuers may need multiple licenses across jurisdictions, though regulatory cooperation efforts aim to reduce fragmentation over time.

Implications for Stablecoin Issuers

The specified stablecoin framework creates both opportunities and obligations for stablecoin issuers operating in or targeting Hong Kong.

Market Access

Obtaining an HKMA license provides legitimate market access to Hong Kong's substantial financial market. Licensed issuers can market their stablecoins to Hong Kong residents and integrate with Hong Kong-based exchanges and payment platforms without regulatory ambiguity.

Compliance Costs

Meeting licensing requirements involves significant compliance costs, including capital allocation, custody arrangements, audit expenses, and ongoing regulatory reporting. Smaller issuers may find these barriers substantial.

Competitive Positioning

A Hong Kong license may become a competitive differentiator as institutional adoption of stablecoins grows. Regulated status provides assurance to banks, payment processors, and institutional users who require counterparty compliance with financial regulations.

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