A stablecoin is a type of cryptocurrency designed to maintain a stable value by being pegged to a reference asset such as fiat currency (e.g., US dollar, Hong Kong dollar), commodities (like gold), or other cryptocurrencies. Unlike traditional cryptocurrencies such as Bitcoin or Ethereum, which are known for their price volatility, stablecoins aim to offer price stability, making them more practical for everyday transactions and as a store of value.
Stablecoins do not have legal tender status and are distinct from central bank digital currencies (CBDCs). They are typically non-interest bearing and do not provide returns to holders, but their stability makes them useful for payments, trading, and hedging against volatility in the crypto market.
Stablecoins maintain their stability through various mechanisms, broadly categorized into four types:
Fiat-backed Stablecoins (Off-chain Collateralized): These stablecoins are backed 1:1 by fiat currency reserves held by a central issuer or financial institution. For example, if a stablecoin issuer holds $10 million in fiat currency, it can issue $10 million worth of stablecoins. This backing ensures that each stablecoin token can be redeemed for its equivalent fiat value. Popular examples include TrueUSD (TUSD), Paxos Standard (PAX), and Gemini Dollar (GUSD).
Crypto-backed Stablecoins (On-chain Collateralized): These stablecoins are backed by other cryptocurrencies locked in smart contracts on the blockchain. They are often over-collateralized to account for the volatile nature of crypto assets. For instance, to mint $1,000 worth of DAI stablecoins, a user must lock up $2,000 worth of Ethereum as collateral. This mechanism uses decentralized finance (DeFi) protocols to maintain stability.
Commodity-backed Stablecoins: These stablecoins are pegged to physical assets like gold or other precious metals. The value of the stablecoin corresponds to the value of the underlying commodity held in reserve.
Algorithmic Stablecoins: These do not rely on collateral but instead use algorithms and smart contracts to control the supply of tokens in circulation. When the price deviates from the peg, the algorithm adjusts supply by minting or burning tokens to stabilize the price.
Each mechanism has its advantages and risks, particularly regarding transparency, reserve management, and susceptibility to market shocks.
The Stablecoins Bill is a legislative framework enacted in Hong Kong to regulate the issuance and offering of fiat-referenced stablecoins (FRS). Passed by the Legislative Council on 21 May 2025 and effective from 1 August 2025, the Bill establishes a licensing regime for stablecoin issuers to enhance financial stability and foster innovation in the virtual asset sector.
Key features of the Bill include:
Licensing Requirement: Any entity issuing or offering FRS in Hong Kong must obtain a license from the Hong Kong Monetary Authority (HKMA).
Reserve Management: Licensed issuers must maintain adequate reserve assets, segregate client assets properly, and implement robust stabilization mechanisms.
Compliance Obligations: Issuers must adhere to anti-money laundering (AML), counter-terrorist financing (CFT), risk management, disclosure, auditing, and fitness standards.
Advertising Restrictions: Only licensed stablecoin issuers may advertise their products to the public, reducing the risk of fraud.
Regulatory Powers: The HKMA has authority to supervise, inspect, and enforce compliance, including revoking licenses and imposing penalties.
Dispute Resolution: The Bill establishes a Tribunal to review regulatory decisions, ensuring fairness and legality.
The Bill aligns with international regulatory standards and aims to mitigate risks posed by the growing integration of stablecoins into the financial system.
Hong Kong’s regulatory approach under the Stablecoins Bill is comprehensive and forward-looking:
Regulatory Scope: The Bill covers fiat-referenced stablecoins, excluding CBDCs and other crypto assets not pegged to fiat.
Licensing and Supervision: The HKMA licenses issuers and oversees their activities, including reserve asset management and redemption processes.
Permitted Offerors: Only licensed entities such as banks, securities firms, stored value facilities, and virtual asset trading platforms may offer licensed stablecoins to retail investors.
Transitional Period: Entities operating stablecoin businesses before the Bill’s commencement have a six-month grace period to apply for licenses.
Enforcement: The HKMA can issue directions, conduct inspections, impose sanctions, and appoint statutory managers if necessary.
Consumer Protection: The regime enhances investor protection by ensuring transparency, operational soundness, and limiting retail exposure to licensed stablecoins only.
Advertising Controls: Advertising of unlicensed stablecoins is prohibited to prevent scams and misinformation.
This regulatory framework positions Hong Kong as a responsible and innovative hub for virtual assets, balancing innovation with financial stability.
Several stablecoins have gained prominence globally, categorized by their underlying collateral:
| Type | Examples | Description |
| Fiat-backed | Tether (USDT), USD Coin (USDC), TrueUSD (TUSD), Paxos Standard (PAX), Gemini Dollar (GUSD) | Backed 1:1 by fiat currency reserves, widely used for trading and payments. |
| Crypto-backed | DAI | Backed by cryptocurrencies locked in smart contracts, often over-collateralized. |
| Commodity-backed | Paxos Gold (PAXG), Tether Gold (XAUT) | Pegged to physical assets like gold. |
| Algorithmic | TerraUSD (UST, historical example), Ampleforth (AMPL) | Use algorithms to adjust supply and maintain peg without collateral. |
Stablecoins represent a significant step toward bridging traditional finance and the digital asset ecosystem by offering price stability and usability. With Hong Kong’s new regulatory framework coming into effect, the city aims to foster innovation while ensuring investor protection and financial system stability. Understanding stablecoins and their regulatory environment is essential for anyone engaging with digital assets in today’s rapidly evolving financial landscape.
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