Hong Kong's move to apply 'Basel-like' standards to stablecoins ignites debate between regulation and innovation

Hong Kong’s stablecoin regulations have become a focal point for both financial institutions and market observers, with DBS Hong Kong CEO Sebastian Paredes warning that the new framework will significantly restrict the use of stablecoins in on-chain derivatives markets. Set to take effect on August 1, 2025, the rules require stablecoins to be fully backed by high-quality assets, maintain segregated liquidity, and allow same-day redemption at face value, essentially holding issuers to standards similar to those of banks Hong Kong’s new stablecoins law: what issuers and distributors need to know [ 1 ]. Paredes noted that while these safeguards are designed to address systemic risks, they will also limit the role of stablecoins in decentralized finance (DeFi), especially for derivatives trading.

The regulatory structure, detailed in the Stablecoins Ordinance and HKMA’s guidance, obliges issuers to hold reserves equal to 100% of their outstanding tokens and to meet strict liquidity requirements that can withstand five days of market stress. Furthermore, anti-money laundering (AML) and know-your-customer (KYC) standards now apply to stablecoin operations, mandating real-time oversight of wallet addresses and transaction flows. While these measures improve transparency, they also raise operational expenses, particularly for smaller issuers who may find it difficult to comply with the capital and regulatory requirements.

The effects of these regulations are already being felt. Since their introduction, stablecoin activity in Hong Kong has dropped sharply, with some companies experiencing significant losses as they adapt to the new rules. Ant International, a major industry player, has announced plans to seek a license, hoping to benefit from being an early entrant despite slim profit prospects. At the same time, some smaller issuers are leaving the market or partnering with licensed banks to overcome regulatory barriers.

Analysts say the tough stance is a response to previous market failures, such as the collapse of TerraUSD in 2022 and the

de-pegging incident in 2023. Regulators in Hong Kong are determined to avoid situations where stablecoins lose their value due to insufficient reserves or poor liquidity controls. However, critics contend that the strict requirements could hinder innovation, as the high costs favor large firms and may discourage new projects in DeFi and international payments.

Hong Kong’s approach is also being measured against new regulatory models in the U.S. and Singapore. While the U.S. Senate has advanced the bipartisan GENIUS Act, which also calls for strong reserve backing, Hong Kong’s rules go further with detailed liquidity and leverage restrictions. Singapore, on the other hand, is expected to take a more adaptable route, integrating stablecoins with tokenized deposits to encourage broader innovation.

Despite these obstacles, some in the industry remain hopeful. The HKMA plans to introduce additional regulations, including disclosure formats and AML protocols, by the end of 2025, which should provide more guidance for market players. Moreover, cross-border pilot programs with partners like the Bank of Thailand’s Project Inthanon and the UAE’s mBridge initiative are set to explore international uses for regulated stablecoins by late 2026.

Paredes’ comments reflect a wider debate between regulatory prudence and market growth. While he reaffirmed DBS’s dedication to developing stablecoin solutions in Hong Kong, he pointed out that the current rules put stability ahead of innovation, shifting the bank’s focus to broader digital asset strategies. This is in line with DBS’s recent moves into tokenized structured products and blockchain-based government grant distribution, highlighting its shift toward regulated, institutional-grade services.

As the stablecoin sector continues to change, industry participants will be watching closely to see whether Hong Kong’s regulatory model can balance risk control with a vibrant digital asset market. The next few months will show if the city’s “Basel-style” approach to stablecoins attracts institutional investment or pushes activity to more flexible markets.