Hong Kong’s shiny new Stablecoin Bill is the best kind of progress: the sort that lets policymakers hold a ribbon-cutting ceremony while telling the rest of the world, “see, we’re open for business.”
On May 21st, the Hong Kong LegCo waved the Bill through, giving the Hong Kong Monetary Authority (HKMA) clear authority to license any issuer of a fiat-referenced stablecoin sold to the public or backed by Hong Kong dollars. Issuers must keep 1-to-1 reserves, publish independent attestations, and offer same-day redemption – exactly the guard-rails investors have been begging for since “algorithmic” became a dirty word in 2022. Officials pitched the law as a “risk-based, same-activity = same-rules” upgrade to the city’s digital-asset playbook, and—credit where it’s due—it is.
The carrot looks great. The stick—courtesy of the HKMA’s prudential playbook—could turn out to be a club.
Since early 2024 the HKMA has been working to transplant Basel’s capital rules for crypto into local law. Under the draft Banking (Capital) (Amendment) Rules, exposures to anything that fails Basel’s “Group 1” quality tests—including most stablecoins—would attract eye-watering capital charges: up to a 1,250% risk-weight or an aggregate exposure limit of just 1% of Tier 1 capital. For banks, that is code for “don’t bother.” Consultation closed in February and the Authority aims to lodge the final rules with LegCo this quarter, for go-live on 1 January 2026.
What does a “1,250% risk weight” really mean?
Think of risk-weights as a banker’s seat-belt rule: the higher the number, the more of the bank’s own money (capital) it must set aside as a safety cushion for every dollar of exposure.
| Asset | Basel risk weight | Capital the bank must hold (8% of RWA) |
|---|---|---|
| AAA government bond | 0% | 0¢ per $1 of bonds |
| Typical corporate loan | 100% | 8¢ per $1 of loans |
| Most crypto / “Group 2” assets | 1,250% | $1 per $1 of crypto |
So at 1250%:
- Every HK $10 million in stablecoins forces the bank to lock up HK $10 million of its own core equity.
- That is money the bank can’t lend out, invest, or use to earn a return—it just sits in the vault as a fire-proof buffer.
- By contrast, a normal corporate loan of HK $10 million only ties up HK $0.8 million in capital.
In plain English: a 1250% risk weight tells banks, “If you want to touch this asset, be prepared to stump up a dollar for every dollar you hold.” For most balance-sheet managers, that’s a deal-breaker.
Why that matters:
- Liquidity needs a balance-sheet. Licensed issuers will still need banking partners for cash management and reserve segregation. If holding a client’s stablecoin float forces a bank to park 100 % of its own capital against the exposure, the economics break down fast.
- Tokenised deposits collide with capital reality. Hong Kong’s e-HKD pilot and its Project mBridge experiments assume banks will someday tokenise real HKD deposits. Yet the prudential package treats most tokenised liabilities the same way it treats crypto—again, a 1,250% risk-weight if the token wanders outside Basel’s narrow “Group 1b” criteria.
- Global banks will follow the harshest rule-set. The US and EU have yet to implement Basel’s crypto rules; if Hong Kong jumps first and hardest, foreign branch banks will simply cap local exposure rather than re-write balance-sheet models city-by-city.
End result: you get a licensing regime that lets fintechs print compliant stablecoins—but no commercial bank is brave enough to hold or clear them at scale. Capital neutrality has been the secret sauce behind Hong Kong’s traditional FX market for decades; remove it and “stablecoin hub” becomes marketing, not market.
Is there a middle path?
The HKMA isn’t blind to the contradiction. Its January “soft consultation” floated an idea to recognise high-quality, fully-backed stablecoins—essentially pegged e-money with daily redemption—as Group 1 assets, subject to the same market-risk treatment as, say, dollars in a nostro account. Industry groups loved the sound of that but warned the definitions were still too tight. The ASIFMA response pointed out that requiring real-time, on-chain proof-of-reserve plus institutional-grade custody is doable, but only if banks get clarity that capital treatment will be closer to cash than to crypto roulette.
Whether the regulator buys that argument will decide if the new Stablecoin Bill blossoms or withers. Delay the capital rules, carve out fully-backed coins, or align exposure limits with other high-quality liquid assets, and Hong Kong keeps its lead. Stay wedded to Basel’s harshest interpretation and licensed issuers will be forced to park their reserves offshore—or worse, watch Singapore sweep up the business.
Bottom line
Passing the Stablecoin Bill is like laying pristine asphalt on the start-up lane of a Formula E circuit. But if you slap a 25 km/h speed limit on every vehicle at the gate, don’t act surprised when the paddock stays empty. Hong Kong has proven—again—that it can pass sleek digital-asset laws quickly. Now it must prove it can square prudential orthodoxy with the innovation it’s so keen to court. If not, the only thing truly “stable” will be the city’s inability to turn legislation into living, breathing markets.