Understanding Hong Kong Stablecoins through the History of Hong Kong Currency

Written by: Liu Honglin

Hong Kong’s stablecoins have felt a bit like a tide receding over the past six months.

In June 2025, the Hong Kong SAR government published the “Stablecoin Ordinance (Effective Date) Notice” in the Gazette, designating August 1, 2025, as the implementation date. On July 29, the Hong Kong Monetary Authority (HKMA) encouraged institutions interested in applying for a license to contact them by August 31. If they felt ready and wanted to be considered early, they should submit their applications by September 30.

By the end of September, a total of 36 institutions had submitted formal applications, including tech companies, exchanges, payment providers, and traditional financial institutions—all eager to get on the first train.

Recently, however, the trend has shifted noticeably.

The latest leaked information from the media indicates that only three entities have been approved so far, two of which are banks. The previously popular candidates with mainland Chinese backgrounds are not among them. After the release of the mainland’s “Document No. 42” in February this year, many naturally concluded that the cooling of Hong Kong stablecoins was mainly due to tighter regulations on Chinese financial institutions by mainland authorities.

This judgment has a basis in reality. Document No. 42 explicitly states that virtual currencies do not have the same legal status as fiat currency. Without proper approval, no domestic or foreign entity or individual may issue stablecoins pegged to the RMB outside China, and foreign entities are also prohibited from providing related services illegally within China. For many organizations that initially hoped to link “Hong Kong stablecoins” with “offshore RMB” or “cross-border scenarios,” this is a clear boundary.

However, interpreting this as “the wind has shifted after Document No. 42” overlooks a more important layer. Because even without this document, it’s not surprising that Hong Kong’s stablecoin scene has reached this point. It’s not a sudden shift from an open field to a bank-dominated game; rather, it’s a winding journey back to the most familiar track of Hong Kong’s financial system.

To understand this clearly, the best approach isn’t to start with blockchain but to look at Hong Kong’s monetary history.

Hong Kong’s banknotes are not issued by a single government authority.

Historically, there have been eight note-issuing banks, dating back to the mid-19th century—some as early as 1846. The logic at the time was simple: whoever had credit could issue notes accepted by the market.

This wasn’t due to technological reasons but because port trade and financial activities required a circulating, redeemable medium of payment. Bank balance sheets for a long period served this credit function.

But financial history repeatedly shows that money, while seemingly part of commercial activity, is actually a systemically sensitive institutional arrangement. Allowing banks to issue notes can improve market efficiency, but problems quickly emerge: if each bank can issue notes and their creditworthiness varies, it can lead to discounts, bank runs, and chaos.

1935 was a pivotal year in Hong Kong’s monetary history.

Amid fluctuations in silver prices and international policy shifts, Hong Kong abandoned the silver standard in November 1935, like mainland China, and in December, established the Exchange Fund through the Currency Ordinance—later known as the Foreign Exchange Fund.

Its purpose was not to create a modern central bank that controls everything but to institutionalize the issuance of currency and reserve backing.

During World War II, Hong Kong was occupied by Japanese forces. Banks, lacking full backing, were forced to issue banknotes. After the war, dealing with these notes became a challenge: authorities couldn’t simply declare them invalid, nor could they easily distinguish between “legally issued” notes and those printed under duress.

Once banknotes lose their recognizable, redeemable, and verifiable institutional foundation, it’s no longer just a financial issue but a matter of social order.

For ordinary people, money isn’t an abstract theory; it’s whether you can buy rice, medicine, or pay rent tomorrow. In this sense, the core of a monetary system has never been its form but the stability of trust.

Later, Hong Kong’s monetary system oscillated between the pound sterling system and the US dollar system multiple times. When the pound devalued in 1967, the Exchange Fund’s assets and bank balance sheets were impacted, requiring ongoing adjustments to maintain public confidence. The move toward a linked exchange rate wasn’t a matter of “technical preference” but a typical “crisis-driven choice.”

The definitive shaping of Hong Kong’s current monetary system was the linked exchange rate regime introduced in 1983.

That year, Hong Kong faced a currency and confidence crisis, with the Hong Kong dollar plunging sharply and even a panic buying spree. The HKMA, in its commemoration of the 30th anniversary of the Linked Exchange Rate, vividly recalled: hot summer nights, long lines outside supermarkets, people rushing to buy daily necessities fearing further devaluation, shelves emptied and refilled late into the night.

Subsequently, the Hong Kong dollar was pegged at 7.80 to the US dollar, establishing the linked exchange rate system. Its stability relies on a “bank-like” strict constraint: the monetary base must be supported by US dollar assets, and the system maintains stability through a clear, transparent exchange mechanism.

The three note-issuing banks—HSBC, Standard Chartered, and Bank of China Hong Kong—issue banknotes under this system. They must exchange US dollars with the Exchange Fund at the specified rate when issuing notes; when redeeming, they retrieve US dollars from the fund at the same rate. This “liability certificate” arrangement anchors banknotes to US dollar reserves, not to the banks’ own creditworthiness.

Today’s familiar three banks—HSBC, Standard Chartered, and BOC Hong Kong—are products of this gradual evolution. BOC Hong Kong began issuing notes in 1994.

Understanding this history, it’s clear that today’s stablecoins bear a striking resemblance to Hong Kong’s traditional monetary logic.

The keywords in Hong Kong’s stablecoin regulation—full reserve, high liquidity, custody and segregation, hard redemption—each echo elements of its monetary history.

First, full reserve. The HKMA explicitly requires that the reserve assets backing each type of stablecoin must at all times be at least equal to the outstanding redemption value. Allowing “appropriate over-collateralization” as a buffer aligns with the “support ratio” concept from the monetary issuance system.

Second, high liquidity. Reserve assets must be cash, bank deposits within three months, high-quality short-term debt, or overnight reverse repos—assets with minimal investment risk. This conservative asset list isn’t about resisting financial innovation but a direct response to “bank run” scenarios—when redemption pressure hits, the ability to quickly liquidate and avoid price drops determines the survival of the stablecoin.

Third, custody and segregation. Reserve assets must be separated from the issuer’s own assets, ideally held by licensed banks or approved custodians, with legal arrangements like trusts ensuring priority for redemption in bankruptcy. This mirrors the layered structure of “liability certificates—Exchange Fund—note-issuing banks” from the paper currency era: key underlying assets are separated from the issuer’s credit, minimizing systemic risk.

Fourth, strict redemption. Regulations require issuers to establish robust redemption mechanisms, generally completing payouts within one business day. If delays occur, prior approval from regulators is needed. This is a typical “regulation that embeds bank run scenarios” approach: assume the worst, and require issuers to provide auditable redemption pathways.

The licensing process itself reflects a “bank-like” prudence. Interested applicants should first express intent to the HKMA for informal discussions, allowing regulators to better understand their background and business model before submitting formal applications. This is why the market often describes Hong Kong’s stablecoin licensing as “by invitation”—not explicitly in law, but the process effectively creates a de facto threshold through pre-application communication.

Capital requirements are also noteworthy. Non-licensed entities must maintain at least HKD 25 million in paid-up capital. However, this does not apply to licensed banks, which are already under the higher standards of the Banking Ordinance. The stablecoin regime’s additional requirements for banks are more like “special constraints” layered on existing regulation rather than a complete overhaul.

This explains why, ultimately, stablecoins increasingly resemble banking activities.

Banks are inherently suited for this. Their core competence isn’t app design or marketing but liability management: accepting deposits, promising redemption at any time, and maintaining this promise through a comprehensive system of capital, liquidity, compliance, clearing, and risk controls.

Superficially, stablecoins are tokens, but in essence, they are promises of redemption. Given their similar nature, the regulatory system naturally favors those best equipped to handle risk.

This also explains why most of the “first batch candidates” repeatedly mentioned in the market are closely related to banks.

The authorities previously disclosed that in July 2024, three groups of stablecoin issuers participated in the sandbox: JD Chain, RD InnoTech, and a consortium led by Standard Chartered with Animoca Brands and HKT. The sandbox aims to facilitate regulatory dialogue and business feedback but does not equate to licensing.

By around March 2026, reputable media such as South China Morning Post and Bloomberg reported, citing sources, that HSBC and the consortium led by Standard Chartered are more likely to be among the first approved, with regulators favoring banks already holding the right to issue Hong Kong dollar notes. There’s also speculation about a third candidate—licensed virtual asset platforms like OSL. OSL, which obtained a virtual asset trading platform license from the SFC in December 2020, has early compliance advantages, but its reserve, custody, redemption, and governance standards still differ significantly from “bank-like liabilities.”

However, these are media-based assessments based on multiple sources, not official regulatory announcements. To categorize the information by “verifiability”: it’s confirmed that Standard Chartered participated in the sandbox and is one of the three note-issuing banks; HSBC’s “more likely” status is media speculation; OSL’s potential inclusion is only market rumor without authoritative confirmation.

From a systemic perspective, this trajectory isn’t surprising. Hong Kong didn’t suddenly decide that “stablecoins are best handled by banks”; rather, its monetary evolution naturally leads to a new payment instrument characterized by “full reserve, strict redemption, rigorous auditing, and heavy custody” being integrated into the banking system.

Understanding Hong Kong’s monetary history makes it clear that, when it comes to stablecoins, many aspects that seem “again, banks” are actually logical. If stablecoins are to become mainstream in finance, in Hong Kong, they will likely originate from banks first.

In Hong Kong, stablecoins can’t become a fully open internet race; instead, they are a “bank-like” issuance on a new platform. Since it’s a form of bank-like issuance, it’s not surprising that the closest entities are banks. On the surface, it involves blockchain, Web3, and digital payments, but at the core, it’s still the old problem of trust and liability.

Mainland China’s Document No. 42 is important but more about clarifying external boundaries—especially sharply narrowing the most imaginative pathways for Chinese institutions, such as linking Hong Kong stablecoins with RMB symbols, cross-border retail services, or scenarios targeting mainland users.

If this judgment holds, the future of stablecoins in Hong Kong may not be a diverse startup competition but a different kind of division of labor: a highly concentrated issuance layer, with a relatively open application and service layer. Banks handle credit and redemption, while platforms, merchant networks, payment interfaces, custody, on-chain risk management, and clearing form new ecosystems on the periphery.

For Web3 entrepreneurs, the real opportunity isn’t just “can I issue a coin,” but “can I meet the needs of those institutions that will eventually get licenses”—including compliance KYC and anti-money laundering, on-chain monitoring and risk management, reserve disclosure systems, smart contract audits, merchant and wallet distribution networks. These are more practical business opportunities.

Hong Kong’s stablecoin landscape today isn’t because it suddenly became conservative; it’s because it finally looks like Hong Kong. The key factor shaping its future remains its own financial history.

In this sense, the new story of Hong Kong stablecoins isn’t really new.