Hong Kong’s stablecoin KYC rules leaves industry observers concerned

Bo Tang, head and assistant director at HKUST, believes that Hong Kong’s stablecoin bill’s strict customer identification requirements could hinder the adoption of those currency-backed digital assets. He also said it could impede Hong Kong’s global digital finance market competitiveness.

Hong Kong’s long-awaited Stablecoin Ordinance was established on August 1, making it the first market globally to regulate fiat-referenced stablecoin issuers. Tang said the bill’s know-your-customer (KYC) rules, which require issuers to verify the identity of every holder, oppose the basis of secrecy and privacy.

HKMA claims stablecoin requirements mean to prevent illegal activities

The Hong Kong Monetary Authority stated that such parameters are necessary to prevent terrorism financing and money laundering. The agency argued that it wants to take a more cautious approach in its first steps as it navigates through the industry.

Tang said that such measures are a bit too strict and not good for acquiring users. He also argued that industry participants interested in cross-border payments using the country’s regulated stablecoins will require the receiver to open an account in Hong Kong just to pass KYC checks.

Tang maintained that the KYC rules limit the advantages of stablecoins over traditional payments, such as efficiency and privacy. He also argued that HKMA’s strict rules might be a way to limit the frenzy in the country among investors looking into companies that want to invest in stablecoins and virtual currencies. The fiat-backed digital assets maintain a constant value, and their underlying blockchain technology enables instant, borderless transfer of funds at low cost. 

Hong Kong-based crypto trader, Ricky Xie, noted that the country’s KYC rules are tougher than those in the U.S. He believes that many foreign users may opt out of the country’s stablecoin market because KYC is affecting not only those with accounts with the issuer, but also every stablecoin holder.

“The Ordinance has established a risk-based, pragmatic, and flexible regulatory regime. We believe that a robust and fit-for-purpose regulatory environment would provide favorable conditions to support the healthy, responsible, and sustainable development of Hong Kong’s stablecoin and other broader digital asset ecosystem.”

–Eddie Yue, Chief Executive of the Hong Kong Monetary Authority.

PwC’s digital asset Asia lead, Peter Brewin, believes that the main HKMA-regulated stablecoin users are Chinese companies. He argued that those firms use digital currencies for cross-border money transfers, trade, payments, and remittances.

The HKMA banned anonymous wallets to mitigate illegal transactions and improve transparency. Hong Kong’s Stablecoin Ordinance also comes with cross-border compliance obligations requiring firms to ensure their operations meet international standards. 

The regulation also prohibits any link between licensed stablecoin entities and decentralized finance (DeFi) platforms. The country’s financial regulator said the initiative aims to distance Hong Kong from the DeFi sector, raising concerns within the crypto community about the future of decentralized finance in the region.

HKMA plans to begin issuing licenses early next year

HKMA also requires stablecoin issuers to begin applying for licenses starting this month. The agency said it wants stablecoin issuers to comply with a flurry of requirements, such as proper management of asset reserves and segregation of client assets.

The country’s financial regulator said parties interested in applying for a license should contact the agency by August 31 so that it may communicate regulatory expectations and provide feedback. Interested parties that believe they are sufficiently fit for licensing should contact the agency by September 30.

The country’s financial regulator said it will issue its first license in 2026 at the earliest. HKMA’s deputy chief executive Darryl Chan also revealed that only a handful of entities will be granted licenses in the first batch of applications.

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