Hong Kong's regulatory framework is tightening, but the stablecoin bill is plagued by misunderstandings.

This podcast features veteran Hong Kong compliance lawyer Wu Wenqian, who provides an in-depth analysis of Hong Kong's newly enacted Stablecoin Act and clarifies multiple market misunderstandings. He points out that overseas stablecoins like USDT and USDC are not issued in Hong Kong and are therefore not subject to the new regulations; over-the-counter trading of major stablecoins is still permitted in Hong Kong. The podcast also discusses retail investor participation, know-your-customer (KYC) requirements, the regulatory approval process, the background of large institutions like JD.com entering the market, and the strategic responses of banks and traditional enterprises. Furthermore, the podcast analyzes the difficulties in applying for stablecoin licenses, the challenges of adapting the Act to compliance scenarios, and the divergent approaches to crypto policy between Hong Kong and the United States, offering an outlook on the potential and limitations of stablecoin development in Hong Kong. Clarifying Misconceptions: The Scope of the Stablecoin Ordinance and Its Relationship with Overseas Projects Colin: Welcome, Mr. Wu, to our podcast. Lawyer Wu previously served as the Head of Legal and Compliance at OKX and Huobi, and is very familiar with Hong Kong's compliance policies. The recent enactment of Hong Kong's Stablecoin Act has garnered significant attention and controversy. There has been considerable discussion regarding many of the details of this bill, particularly regarding whether foreign stablecoins will be prohibited from circulation in Hong Kong and the requirement that every holder complete Know Your Customer (KYC) procedures. Therefore, we invited Lawyer Wu to provide an explanation. Lawyer Wu has previously spoken with me, and he believes there are many misunderstandings surrounding this bill. Let's begin by asking Lawyer Wu to share what he believes are the core misunderstandings. Lawyer Wu: Thank you, Colin, for giving me this opportunity to address these common misconceptions regarding the Stablecoin Act. The Hong Kong Stablecoin Ordinance officially came into effect on August 1st. Recently, I've been speaking with many people in the cryptocurrency community and industry, and they're all concerned about a few issues. The first is whether USDT and USDC will be banned in Hong Kong. So, first, let me explain what exactly this ordinance regulates. It governs stablecoins issued in Hong Kong. In other words, if your company or entity issues a stablecoin in Hong Kong, you're regulated. Secondly, if you issue a stablecoin outside of Hong Kong, but it's pegged to the Hong Kong dollar and maintains a stable value, that's also regulated. Thirdly, if regulators determine that your issuance qualifies as a stablecoin, it's also regulated. The key point to clarify is that only stablecoins issued in Hong Kong or denominated in Hong Kong dollars to maintain a stable value are regulated. By this standard, Tether's USDT and Circle's USDC don't need to apply for a license in Hong Kong. First, they aren't issued in Hong Kong, have no employees or offices there, and aren't denominated in Hong Kong dollars. Therefore, they aren't subject to regulation and don't require a Hong Kong license. This is the first misconception. The second misconception is that trading USDT and USDC in Hong Kong is already banned, meaning that trading USDT or USDC is completely prohibited in Hong Kong. However, as I just mentioned, the ordinance regulates the "issuance of stablecoins." "Issue" here refers to the initial registration of a stablecoin on the blockchain, commonly referred to in the cryptocurrency world as "minting," not the act of buying or selling. Therefore, over-the-counter trading of USDT and USDC in Hong Kong does not constitute issuance. Therefore, trading USDT and USDC in Hong Kong's OTC market is not subject to regulation under this ordinance. Although Hong Kong may establish a licensing system for the OTC market in the future—for example, Customs has previously discussed this issue—an OTC license has not yet been issued, and the current stablecoin regulations do not cover OTC transactions. The third point concerns the HKMA's authority to formulate regulations. Some say the HKMA can arbitrarily define certain activities as stablecoin issuance, but this is not the case. Even if the HKMA deems certain activities to constitute stablecoin activities, they must follow statutory procedures, complete notification and registration in Hong Kong, and wait for an objection period before they can take effect. This demonstrates that the HKMA cannot arbitrarily define which activities require licensing; otherwise, it would be an overreach of its authority. Fourth, whether something is considered "issuing a stablecoin" in Hong Kong depends on multiple factors, such as: Is the management team operating in Hong Kong? Is the issuer or corporate entity registered in Hong Kong? Does the maintenance, liquidation, or burning of the stablecoin occur in Hong Kong? Are the reserve assets denominated in Hong Kong dollars and held in Hong Kong banks? These factors all determine whether a project is considered to be issuing a stablecoin in Hong Kong. Therefore, I believe there are currently many misunderstandings regarding stablecoin regulation, which require further clarification. Regulatory vacancy: Undecided oversight of OTC transactions, retail trading a focus of controversy. Colin: So, Mr. Wu, you believe that USDT and USDC can still be used or traded in Hong Kong before the OTC legislation is enacted, correct? Mr. Wu: Yes. The simplest example is that USDT is still tradable on the HashKey platform. HashKey is a licensed virtual asset trading platform (VATP). USDT is currently traded normally on this platform, with no issues at all. Colin: I understand. So how do you think the future OTC legislation might regulate these two most popular stablecoins? Lawyer Wu: Nothing has been finalized yet. Looking back, Customs and Excise Department conducted a consultation in 2023 and issued a summary report about six months later. However, a few months ago, regulators re-opened the OTC consultation process. So, the Hong Kong government has yet to decide whether Customs and Excise Department or the Securities and Futures Commission (SFC) will oversee OTC transactions. I've previously spoken with officials from the Customs and Excise Department and other government agencies, and there's a possibility that OTC services will be regulated by both sides. On the one hand, retail OTC services like money changers, common in Hong Kong, could be regulated by Customs. On the other hand, OTC activities involving self-purchase, such as those brokered by online platforms, could be regulated by the Competition Commission (also known as the Pricing Commission). However, there's no definitive conclusion on this matter yet. So, we still don't know whether OTC transactions involving USDT and USDC will be permitted. The biggest question is who is transacting with them—if it's professional investors or institutional traders, then there's generally no problem; they can engage in these transactions. However, the most crucial regulatory focus will be on retail investors. Whether retail investors can trade USDT and USDC remains a question mark. Customs' previous consultations suggested prohibiting retail trading of these two stablecoins. However, during our consultations, various people in the cryptocurrency community and compliance experts expressed concerns: If future OTC licenses disallow USDT trading, Hong Kong's entire licensing system would be marginalized. Currently, USDT and USDC still represent the largest sources of trading volume. If retail investors are unable to trade OTC, this would impact Hong Kong's position as an international crypto financial center and the effectiveness of these licensing systems. So, for now, there's no final decision on whether retail investors can trade USDT under the licensed system. I personally hope so, because if they can't, the impact would be significant. Colin: Yes, but at the moment, the situation doesn't look optimistic. I feel that regulatory restrictions on retail investors are still relatively conservative. Currently, only four cryptocurrencies are open to retail trading, and popular ones like Solana and BNB haven't been approved. It seems a bit difficult to imagine USDT and USDC being approved for retail trading. Lawyer Wu: This is indeed a problem, and it may also be one of the reasons why OTC licenses have not been issued yet. I believe the Hong Kong government hasn't yet figured out how to regulate retail investors' access to USDT and USDC. Back in 2023, everyone expected the licenses to be issued by the end of the year, and there was constant push and consultation, but there was no clear result. Therefore, the issue of retail trading is indeed the most core and sensitive aspect of overall regulation. KYC Controversy Focus: Regulations Don't Mandate It, But Regulators Preference Closed-Loop Models in Practice Colin: Another hot topic this time, besides the question of whether USDT and USDC will be usable in the future, which we discussed initially, is the question of whether KYC is mandatory for coin holders. I'm sure you've noticed this. Neither US, Singapore, nor EU regulations appear to explicitly mandate KYC for all coin holders. If Hong Kong truly mandates KYC for everyone, it would, in a sense, sever the DeFi ecosystem, as it's currently difficult for every DeFi user to complete KYC. What are your thoughts on this? Lawyer Wu: Actually, the current regulations don't explicitly stipulate that all coin holders must complete KYC. This isn't spelled out in the regulations. However, in the HKMA's license application process, stablecoin issuers must first explain their business scope and operating model to the HKMA before applying. Only after the regulator understands and approves these details will they issue an application form. This means the regulator will determine whether you are suitable for a license based on the business model you submit. For example, if JD.com wants to issue a stablecoin for transactions or settlement within its internal ecosystem, such as buying and selling goods on the JD.com platform or clearing accounts between merchants, every person participating in the transaction must complete real-name authentication on the JD.com platform. So, in this scenario, every user of JD's stablecoin has already completed KYC. In this closed-loop environment, I believe the HKMA recognizes this model and deems JD appropriate for issuing stablecoins. If you had a different business model, for example, submitting a proposal to the HKMA to use stablecoins within the DeFi ecosystem that emphasizes open transactions, anonymous user access, and no identification of coin holders—in this case, I believe the likelihood of the HKMA approving your license application would be very low. I want to emphasize that this is another area where misunderstandings are common. While the law doesn't mandate KYC for all stablecoin holders, in practice, the HKMA will review your business model based on your submission. If you can't demonstrate sufficient anti-money laundering and counter-terrorist financing capabilities, approval will be difficult. This actually depends on the business content, and is a "model-oriented" regulatory logic. So in summary, the regulations do not explicitly stipulate KYC requirements, but in the actual approval process, regulators prefer closed-loop, controllable scenarios where users have registered their real names. Large institutions are enthusiastic: Why are JD.com, Ant, and state-owned enterprises applying for stablecoin licenses? Colin: In fact, the law has a rather vague statement, including in a later interview - unless the licensee can prove to the HKMA that it is capable of combating money laundering, terrorist financing, etc., the identity of every stablecoin holder should be verified by the licensee or a third-party institution. In fact, he later acknowledged these points in the interview. So, I understand that these KYC requirements were initially somewhat mandatory, right? Wu: Yes, that's right. I think that's true. The first one or two institutions that were able to obtain licenses would have needed to complete a complete KYC process in a closed-loop environment to more easily obtain a license. There's no doubt about that. Colin: Yes, the situation in Hong Kong right now is quite interesting, as you've probably noticed. Many banks, including large Chinese banks, local banks, and a number of state-owned enterprises, are applying for stablecoin-related licenses. Large internet companies like JD.com and Ant have also joined in. Why is there so much enthusiasm? At the same time, regulators appear cautious, and the number of licenses issued doesn't seem to be very high. There's a sense that mainland China is very enthusiastic, while Hong Kong regulators are relatively calm and cautious. What are your thoughts on this situation? Lawyer Wu: Yes, that's indeed the case. Looking at the current environment in Hong Kong, there are two aspects worth noting. First, the composition of applicants. Many Chinese institutions are hoping to obtain licenses by issuing stablecoins, gaining a "legitimacy" and a relatively formal market position. I've also seen that many listed companies aren't just looking to issue stablecoins; they're also leveraging crypto concepts like stablecoins and RWAs to hype their stocks. This is a direction many listed companies are currently pursuing. They often begin by signing memoranda of understanding (MOUs) to create market hype about the upcoming launch of a blockchain or stablecoin business, thereby attracting investor attention and capital speculation. However, these initiatives are still in the conceptual stage. However, currently, very few projects have actually launched stablecoin issuance or conducted substantive business. For example, Hong Kong issued over a dozen Virtual Asset Trading Platform (VATP) licenses last year, but HashKey is by far the most active. User traffic and transaction growth for other platforms has been relatively slow. I recently spoke with several companies that have obtained VATP licenses, and they all shared a concern: Hong Kong's market is too small. If more than a dozen platforms operate simultaneously, the "market pie" will be too small to share, and how will they survive? The stablecoin market faces the same challenge. In this context, the regulatory authority's strategy is to conduct a preliminary screening and vetting process at the initial application stage, discouraging anyone from applying without authorization. You must first undergo detailed consultation with the HKMA. Only if they agree that your business model is viable will they issue a formal application form. Therefore, many people are currently seeking stablecoin licenses and pursuing this business, but only a few actually make it to the actual application stage, a process inherently fraught with challenges. A Comparison of US and Hong Kong Regulation: Hong Kong is Stable but Conservative, while the US has become attractive due to political changes. Colin: I see, Mr. Wu. You've previously overseen global compliance for several exchanges. Recently, the US SEC released a very significant statement and article, and many have drawn comparisons to the situation in Hong Kong. From your perspective, do you feel that Hong Kong's stance appears more conservative than that of the US, leading to some disappointment for the industry? What are your thoughts on this? Wu: I think it's more appropriate to say that Hong Kong's approach to this industry has remained consistent from the beginning, with minimal change. Hong Kong has always been relatively pragmatic. Unlike some countries, we don't rush to introduce various licenses or policies. Instead, we take a step-by-step approach, first consulting and conducting research before enacting legislation and establishing a licensing system. In contrast, policy fluctuations in the United States can be more dramatic. For example, with Trump's recent return to power, the regulatory environment for the US crypto industry has suddenly become much more relaxed. In fact, before Trump's return to power, the regulatory environment for the entire US cryptocurrency industry was quite repressive, and many people were even very disappointed with the US crypto market. But after Trump took office, this environment took a near 180-degree turn, and many projects and institutions regained confidence in the US market. This is why many people have recently turned to the US, believing the environment there to be more friendly. Hong Kong, on the other hand, has maintained a relatively stable trajectory. Our policies and regulatory logic have a certain degree of continuity and are not subject to drastic fluctuations due to shifts in political situation or public opinion. From this perspective, if we look at short-term opportunities, the US is indeed more attractive now. However, from the perspective of long-term development and regulatory stability, I believe Hong Kong may actually have the advantage. Looking back at that time two years ago, Binance, for example, was under considerable pressure, as was Coinbase. Almost all US exchanges were considering withdrawing from the US market. The situation at that time was extremely unfavorable for businesses, making it difficult for companies with long-term strategies to operate in such an environment. So, I think the US may be a better bet in the short term, but in the medium to long term, especially in terms of policy stability, Hong Kong still has certain advantages. Offshore RMB Stablecoins: Different definitions from Hong Kong Dollar Stablecoins, no conflict for now. Colin: Another focus right now is the issue of offshore RMB stablecoins. For example, the Hong Kong Stablecoin Bill, currently in place, doesn't impose restrictions on RMB stablecoins, right? So, what are the essential differences between offshore RMB stablecoins and other stablecoins? Wu: Actually, within Hong Kong's stablecoin framework, offshore RMB is not considered a stablecoin. Because the offshore RMB is essentially still a national legal tender, simply existing in offshore markets, it cannot be categorized as a reserve-backed stablecoin, as we typically understand it. For example, Hong Kong has previously discussed issuing E-HKD, or electronic Hong Kong dollars. This is actually a central bank digital currency (CBDC), which is completely different from stablecoins issued by commercial institutions. One is the digitization of a national sovereign currency, while the other is a stablecoin backed by an asset reserve mechanism. Therefore, I believe the two are different in definition and function, and currently, there does not appear to be a direct conflict between them. Colin: Do you think, under the current law, companies like JD.com could issue RMB-denominated offshore stablecoins in the future? Attorney Wu: That's hard to say at this point. There may be some overlap between the offshore RMB stablecoin market and the conventional stablecoin market, but in the current environment, the primary target for Hong Kong dollar-denominated stablecoin issuance remains Hong Kong dollar-denominated currencies. As for whether a scenario in which the Hong Kong dollar and RMB can be traded against each other in the future is highly likely, but I believe Hong Kong regulators, particularly the Competition Commission, are unlikely to accept a business model that simply uses offshore RMB as a stablecoin. This may be a direction for further exploration rather than the initial focus of stablecoin issuance. Hong Kong's current policy remains focused on Hong Kong dollar-denominated stablecoins. Hong Kong dollar stablecoins remain the current focus of development. Banks are actively participating: Setting up teams for reserve asset management and business expansion are two major drivers. Colin: There's an interesting phenomenon recently: almost all banks have begun setting up dedicated teams to work on stablecoins. This is quite unusual, as in other regions, such as the US and Singapore, cryptocurrency institutions typically lead the development of stablecoins. But now, many banks in Hong Kong are entering the market, and from what I understand, they are indeed establishing teams, whether preparing for license applications or exploring business directions. Have you noticed this trend? Are there any specific reasons behind it? Wu: I believe there are two main reasons behind banks starting to establish stablecoin teams. The first reason is the introduction of a new stablecoin licensing mechanism. One requirement is that any Hong Kong dollar stablecoin must hold its reserve assets within the banking system. This means that stablecoin issuers must establish partnerships with banks and entrust their reserve assets to banks for management. Therefore, banks must first gain exposure to the industry and understand its operations before they can properly serve as reserve custodians. This is essential preparation for banks. The second reason is market opportunity. We've seen significant growth in USDT (Tether) in the United States. If Hong Kong's stablecoin business can also grow, it will become a very stable business with long-term potential for banks. For banks, this type of financial service, backed by real assets and offering strong customer loyalty, holds immense commercial appeal. Furthermore, Hong Kong banks themselves have recently faced considerable pressure, such as continued declines in housing prices and the real estate market, and reduced revenue from traditional businesses. Naturally, they are looking to develop new growth areas. Against this backdrop, stablecoins appear particularly worthy of investment. Therefore, banks' willingness to proactively participate is a very logical and strategically significant choice. Competitiveness Question: Hong Kong's stablecoins are geared towards regulatory compliance, making it difficult for them to compete with USDT/USDC. Colin: There's also a topic of discussion right now. As you just mentioned, USDT and USDC have been very successful. One primarily circulates in developing countries, while the other also has a strong market share in regulatory compliance settings. So, are these stablecoins, launched under Hong Kong's stablecoin licensing system, truly competitive? Do they only serve users within their own ecosystems, or are they also likely to compete with mainstream international stablecoins like USDT and USDC? Wu: I think this question depends on the market structure. USDT and USDC currently have a massive market share, and almost all transactions within the cryptocurrency community are based on these two stablecoins. If a Hong Kong-based stablecoin, such as Meego, were to directly compete with USDT and USDC, I think it would be extremely difficult. However, the key point is that their target markets and use cases may be different. USDT and USDC primarily serve traditional cryptocurrency users, while stablecoins issued in Hong Kong may be more oriented towards regulatory compliance. For example, in the future, if there are some ODBA (On-Chain Digital Bond Authorization) or STO (Security Token Offering) projects, these projects may be restricted to trading only with Hong Kong-licensed stablecoins. This would create a completely independent market ecosystem. Conversely, USDT and USDC transactions often lack KYC and real-name verification processes. If used in securities trading, securitized token issuance, or in collaboration with the Hong Kong Stock Exchange, they may face obstacles such as identity verification and compliance. However, compliant stablecoins denominated in Hong Kong dollars are unlikely to face these issues. Therefore, from the perspective of market division, Hong Kong's stablecoins may not directly compete with USDT and USDC in the open market, but they may carve out a new niche in compliant application scenarios. In this way, Hong Kong's stablecoins can develop their own unique positioning. Exploring Application Prospects: Stablecoins Need to Find Their Own Position in Specific compliant scenarios. Colin: Regarding regulated stablecoins, what advantages do you think these stablecoins have over traditional payment methods or fiat currencies? For example, you mentioned that the Hong Kong Stock Exchange may adopt stablecoins in the future. I find it difficult to understand why they would do so. Is it really necessary for them? I haven't fully considered this question. What are your thoughts? Lawyer Wu: Yes, I think from the perspective of a traditional cryptocurrency user, like myself, I would definitely prefer USDT over Hong Kong's local stablecoins. This is normal. For those who have been using digital currencies for the past few years, USDT and USDC are already the most familiar and commonly used options. As for Hong Kong's stablecoins, their development depends on whether they can find their own application scenarios in the future. When they were first launched, the regulatory authority established a "sandbox" mechanism and organized various pilot projects. This was essentially to explore through practice what kind of business model would develop if a stablecoin was issued locally in Hong Kong. These are still undecided. In the foreseeable future, I believe Hong Kong's stablecoin is unlikely to compete head-on with USDT and USDC. This is almost certain. As I mentioned earlier, it may need to find its purpose and development space in a separate field. However, this also depends on the direction of the overall cryptocurrency market. Aside from relatively active concepts like RWA (real-world asset tokenization) and stablecoins, compared to the DeFi Summer of 2020 and 2021, the NFT explosion, and the subsequent meme coin craze, the market seems to have lost its clear direction in the past year or two. This is especially true with the entry of more and more traditional financial (TradFi) institutions, which has led to a more conservative market. At present, stablecoins are likely to develop primarily in regulatory compliance scenarios, such as LGBAs (regulated on-chain asset issuance platforms) and STOs (security token offerings). They will form an ecosystem distinct from the traditional cryptocurrency world. Personally, I believe these two systems should develop in parallel. The cryptocurrency world should continue to maintain its independence and move towards greater decentralization, while stablecoins in regulatory compliance scenarios will follow a completely different development path. In the foreseeable future, I don't see the two systems converging. Instead, I prefer a "two-pronged approach," with each developing its own ecosystem and business direction. Colin: Lawyer Wu, there's another rumor I haven't fully confirmed regarding Singapore's recent crackdown on unlicensed cryptocurrency firms. It's said this is because the FATF, the international anti-money laundering organization, is currently conducting an audit of Singapore. This is largely confirmed. However, there's also talk that the FATF may conduct another round of assessments of Hong Kong next year. If true, I wonder if this will impact Hong Kong's cryptocurrency policy, particularly the stringent anti-money laundering requirements in the current stablecoin regulations. What are your thoughts? Lawyer Wu: I haven't heard of this rumor yet, but if it's true, I believe it will definitely have some impact. From another perspective, Hong Kong's various regulatory agencies have significantly tightened their scrutiny of crypto-related companies, projects, and banking partners. This can be seen in real life. For example, for some companies active in the cryptocurrency industry, the process for opening bank accounts or applying for relevant licenses used to be relatively relaxed, but in the past six months, approvals have become significantly more difficult. This change is real. I think this tightening is reasonable. During the previous period of relatively lax regulation, many companies and institutions actively entered this field, taking aggressive actions. However, when regulators realized they might have been overly lax, they naturally adjusted to stricter regulations. It's like a cycle—when the policy is relaxed to a certain extent, problems arise, followed by a period of tightening. After the tightening continues for too long and the market becomes suppressed, it will be moderately relaxed again. Therefore, I believe Hong Kong's regulation is currently in the tightening phase of this "cycle." If the FATF truly conducts a new round of assessments of Hong Kong, regulators will likely place even greater emphasis on the robustness of anti-money laundering mechanisms, including stricter requirements for real-name registration, know-your-customer (KYC) mechanisms, and reserve transparency for stablecoins. This explains the current conservative nature of policy implementation. Market enthusiasm is recovering: Web2 companies are entering the market, and the atmosphere in Hong Kong is gradually warming, but many are still in the preparatory stages. Colin: One last question. How do you feel about the Web3 atmosphere in Hong Kong this year? There are also rumors that some Singaporean institutions have begun relocating to Hong Kong. I wonder if you've encountered this in your work or personal life?

Lawyer Wu: Regarding Singaporean projects coming to Hong Kong, I haven't seen many so far. There are some, but overall, not many. On the contrary, I feel that the overall atmosphere in Hong Kong has been much better in the past two or three months than at the beginning of the year.

From the end of last year to the beginning of this year, the Hong Kong market was relatively cold, almost stagnant, and the overall Web3 community wasn't very active. But in recent months, with the introduction and gradual implementation of stablecoin policies, I feel the market has become relatively hot again.

In particular, many companies originally working on Web2, such as client-side businesses, brand owners, and even traditional businesses like perfume companies, are beginning to plan their entry into Web3, considering issuing tokens, developing digital assets, or other on-chain businesses.

Overall, Hong Kong is indeed experiencing a period of renewed interest, with everyone discussing and willing to participate. However, it's also important to note that most institutions are still in the "imagination stage"—planning, researching, and envisioning, but few have actually implemented or executed projects.

Personally, I prefer to see companies that work quietly, quietly accumulating experience, and then suddenly develop a mature product or establish an independent track. This is the scenario I'm most excited to see. Only when the concept is truly implemented and put into practice can the enthusiasm of Web3 become a real driving force for the industry.