Analysis of Hong Kong Stablecoin Regulations! USDT Faces Licensing Challenges and Full Compliance Roadmap

Hong Kong’s “Stablecoin Ordinance” requires licensed banks or a capital of HKD 25 million, full reserves, and is limited to professional investors (thresholds of HKD 8 million / HKD 40 million). Tether, registered in the British Virgin Islands, faces three challenges: capital requirements, auditing, and market access. Circle has already aligned with regulations and is positioning itself as a digital Hong Kong dollar hub to serve as an Asian center.

Three Core Requirements of Hong Kong’s Stablecoin Ordinance

The Hong Kong Monetary Authority’s “Stablecoin Ordinance” establishes a comprehensive regulatory framework, requiring all stablecoin issuers to meet clear compliance standards. According to publicly available regulatory documents, the core requirements include a licensing system, reserve management, and investor protection.

Regarding licensing, stablecoin issuers must be licensed banks in Hong Kong or companies with HKD 25 million in paid-up capital, applying through the HKMA’s licensing process. While this capital threshold is relatively moderate, the accompanying due diligence, compliance review, and ongoing supervision are extremely strict. Applicants must disclose detailed business plans, risk management frameworks, technical architecture, and governance structures. The HKMA will also assess the qualifications and track record of management teams to ensure their capability to manage financial institutions.

Reserve management requires stablecoins to be fully backed by reserves equivalent to what they anchor. For stablecoins pegged to the Hong Kong dollar, reserves must be in HKD cash or short-term HKD-denominated assets. For those pegged to the US dollar, reserves must be in USD cash or US short-term government bonds. These requirements aim to ensure that stablecoins can be redeemed at a 1:1 ratio at any time, protecting holders’ interests. Additionally, issuers must undergo periodic independent audits and report the composition and changes of reserve assets to the HKMA.

On investor protection, the ordinance stipulates that stablecoins are only available for purchase by professional investors. Hong Kong defines “professional investors” as individuals with financial assets of at least HKD 8 million or institutions with net assets exceeding HKD 40 million. This threshold is designed to ensure participants have sufficient risk tolerance and financial knowledge. While this limits retail investor participation, it also reduces systemic risk.

Core Requirements of Hong Kong’s Stablecoin Ordinance

Licensing Threshold: Licensed bank or company with HKD 25 million in capital

Reserve Requirement: Full reserves, periodic independent audits

Investor Restriction: Only open to professional investors (HKD 8 million asset threshold)

Penalty Mechanism: Unlicensed operation faces criminal liability and hefty fines

Tether Faces Three Major Compliance Challenges

As the world’s largest stablecoin issuer, Tether faces three main compliance challenges in Hong Kong. First is the corporate structure issue. Tether is registered in the British Virgin Islands, an offshore jurisdiction known for confidentiality but lax regulation. Hong Kong’s licensing requirements favor companies registered locally or in recognized jurisdictions, so Tether needs to restructure or establish a compliant subsidiary in Hong Kong.

Second is transparency in auditing. Over the years, Tether has been questioned over the completeness and frequency of its audit reports. Although Tether regularly publishes reserve attestations, these are typically snapshot confirmations rather than full financial audits. The HKMA requires compliance with international standards for annual audits conducted by recognized firms such as the Big Four, with detailed disclosure of reserve asset composition. Tether will need to significantly improve its audit standards and transparency to meet these requirements.

Third is market access restrictions. Hong Kong’s regulations limit stablecoins to professional investors, conflicting with Tether’s mass-market positioning. USDT’s core value proposition is inclusive finance, providing USD access especially in underbanked regions. However, the professional investor threshold means USDT can only serve high-net-worth individuals and institutions in Hong Kong, greatly reducing its potential market size.

Tether’s response strategies are currently unclear. The company could fully comply by establishing a licensed subsidiary and applying for a license, but this would require major operational and transparency adjustments. Alternatively, it could withdraw from the Hong Kong market and focus on jurisdictions with looser regulation. However, considering Hong Kong’s status as an Asian financial hub and its strategic connection to Mainland China, complete exit might mean losing a key market opportunity.

Circle’s USDC Compliance Strategy Compared

Compared to Tether’s hesitation, Circle’s USDC demonstrates a more proactive compliance stance. Circle is a US-registered company regulated by US financial authorities, with reserves mainly in USD cash and short-term US Treasuries, and undergoes periodic audits by the Big Four accounting firms. This compliance foundation makes it easier for Circle to adapt to Hong Kong’s regulatory requirements.

Circle has publicly stated it is evaluating license applications in Hong Kong and maintaining communication with the HKMA. If USDC successfully obtains a license, it would become the first mainstream compliant stablecoin operating in Hong Kong, potentially reshaping the stablecoin market landscape in Asia. For institutional investors prioritizing compliance, licensed stablecoins will be the only choice, and USDC could see significant market share growth.

The HKMA is also promoting the development of native stablecoins. Several Hong Kong banks and fintech firms are testing HKD stablecoins within the regulator’s sandbox. These local stablecoins will be directly pegged to HKD, providing compliant tools for local and cross-border payments. If successfully launched and accepted by the market, they could further squeeze USDT’s space in Hong Kong.

Hong Kong’s Strategy to Position as Asia’s Digital Financial Center

Hong Kong’s stablecoin regulation reflects a “block the wrong door, open the right door” approach. On one hand, it strictly restricts non-compliant stablecoins; on the other, it actively fosters a compliant ecosystem. The ordinance establishes a “Digital Asset Innovation Sandbox,” allowing qualified institutions to test tokenized securities, central bank digital currencies, and other innovative financial products. This balanced strategy aims to control risks while promoting innovation.

From a global competition perspective, Hong Kong’s regulatory framework is leading in both strictness and clarity. Singapore is also developing stablecoin rules but at a slower pace. The EU’s MiCA regulation has been implemented but details are still being finalized. US legislation on stablecoins is mired in partisan disputes. Hong Kong’s early establishment of a clear regulatory framework is expected to attract compliance-focused stablecoin projects and users, consolidating its position as Asia’s digital financial hub.

For investors, tightening regulation of stablecoins in Hong Kong means reassessing asset allocations. Those using stablecoins for trading or store of value should ensure their holdings comply with local regulations. Using non-compliant stablecoins could entail liquidity risks or forced conversions to compliant assets. Staying informed of regulatory trends and adjusting strategies accordingly is a prudent move for investors.