Estimated to have a global market capitalization of around US$200 billion, according to data from CryptoQuant, stablecoins have grown in prominence in recent years, with users seeing the asset class as a balanced position between decentralized finance and traditional finance. Unlike Bitcoin or Ethereum, stablecoins are a subclass of cryptocurrency designed to maintain a stable value relative to a specific asset such as US dollar, gold, or a basket of assets. Popular stablecoins include USD Coin, Tether and Binance USD.

Looking to address the growing focus on stablecoins in Asia, several markets have formalized or have started to craft financial regulations to safeguard holders of stablecoins, given the heightened risk of fraud and financial loss. It was only a few years ago when popular stablecoin TerraUSD wiped out US$45 billion in market capitalization within a week, exposing the risks of algorithmic stablecoins.

Last week, Hong Kong’s Legislative Council passed the Stablecoins Bill in a bid to reduce such risks by establishing a robust licensing regime for fiat-referenced stablecoins ( FRS ) issuers, overseen by the Hong Kong Monetary Authority ( HKMA ).

Issuers under the legislation, which is expected to come into effect later this year, must maintain full reserve backing with high-quality liquid assets, ensure redemption at par value, and comply with anti-money laundering ( AML ) and counter-terrorism financing ( CTF ) regulations. The bill, moreover, mandates a local presence, such as a Hong Kong-incorporated company or senior management, and extends extraterritorial oversight to stablecoins referencing the Hong Kong dollar.

“The ordinance adheres to the ‘same activity, same risks, same regulation’ principle, with a focus on a risk-based approach to promote a robust regulatory environment,” states Christopher Hui, Hong Kong’s secretary for financial services and the treasury. “This is not only in line with international regulatory requirements, but also lays a solid foundation for Hong Kong’s virtual asset market, which, in turn, promotes the sustainable development of the industry, protects users’ rights and interests, and strengthens Hong Kong’s status as an international financial centre.”

Stablecoin regulations in other markets

Fellow Asian financial hub Singapore likewise has a regulation that looks at stablecoins via the Payment Services Act of 2019, with a 2022 proposal refining rules for single-currency stablecoins ( SCS ). Like Hong Kong, Singapore requires licensing, full reserve backing, and AML/CTF compliance. However, its framework is narrower, focusing on single-currency stablecoins, and integrates into existing legislation rather than a standalone bill. Singapore’s extraterritorial oversight applies to stablecoins marketed to its residents, but it offers more operational flexibility when compared to the Hong Kong version, which has localization requirements.

Japan, another key player in the region, amended its Payment Services Act in 2022 to regulate stablecoins as “electronic payment instruments”. Stablecoin issuers in the country must hold reserves in demand deposits or low-risk assets like government bonds, with up to 50% in such assets – a more flexible approach than Hong Kong’s full-reserve mandate. Japan’s Financial Services Agency oversees compliance, emphasizing consumer protection. Unlike Hong Kong, Japan does not require a local presence, making its regime less restrictive but potentially less tailored to domestic market dynamics.

In the UAE, the country’s central bank has published a payment token services regulation effective last August, which requires stablecoin issuers to obtain licences, maintain reserves, and adhere to AML/CTF standards. Like Hong Kong, the Emirates aims to foster innovation while ensuring stability. However, it specifically bans algorithmic stablecoins.

Overall, Hong Kong’s Stablecoins Bill provides additional details to regulate stablecoins in the city, compared to similar ordinances in other jurisdictions in the region. For example, it explicitly grants holders of specified stablecoins the right to redeem their tokens without unduly burdensome conditions or unreasonable fees/delays. The regulation is also quite specific about reserve asset requirements for FRS issuers, including HK$25 million ( US$3.2 million ) in paid-up share capital or its equivalent in another currency.

The approval of the Stablecoins Bill marks a pivotal step in Asia’s digital asset evolution, offering a model for balancing innovation and regulation in the region. This, as the stablecoin industry globally is predicted to reach US$400 billion by the end of 2025, according to digital asset manager Bitwise.