Global Financial Centres Paving Way For Regulatory Clarity On Stablecoin

A significant development in the global adoption of digital assets took place last month, highlighting evolving stablecoin regulatory frameworks, as U.S. President Donald Trump signed the GENIUS Act into law. This is the first US statute that directly regulates stablecoins, reflecting the Trump administration's pro-innovation regulatory approach. Following this development, Hong Kong, a significant financial hub in Asia, implemented the Stablecoin Ordinance on August 1, providing a legal framework for stablecoin issuers to operate within.

Following this pro-innovation regulatory legislation is significant because it both fosters innovation and increases clarity of policy. The stated rules mandate full-reserve backing for stablecoins with liquid, high-quality assets to protect institutions and markets, and offer licensing structures for stablecoin issuers, bringing the activity of stablecoin activities within regulated markets. They also require reserve segregation and guaranteed fixed redemption by the issuer, increasing protection and safety for consumers. These common features suggest that despite having been created in different jurisdictions, both regulatory frameworks are harmonized with important regulatory principles of customer protection, operational transparency, financial sustainability, and prevention of fraud and other crime.

However, there are a few differences in how the two regimes imagine the role of stablecoins. Hong Kong’s Ordinance is principles-based: it restricts the type of stablecoins permitted to fiat-pegged tokens and leaves other matters such as reserve composition and disclosure frequency to regulatory discretion. Such flexibility does show a willingness to innovate and provides the regulator the ability to be flexible as markets evolve. The US GENIUS Act is rules-based.

Though it doesn't explicitly ban algorithmic stablecoins, it creates a mechanistic link between the issuance of stablecoins and the banking system, requires stricter criteria to qualify reserve assets, and contains disclosure and audit requirements created by more legislation. It expresses a preference for systemic stability, legal safety, and investor protection for the greatest number of people, even if it compromises other benefits of regulatory flexibility. In essence, both frameworks are responding to the same set of challenges – volatility, consumer/investor risk, and financial stability – but they operationalise solutions differently.

It is not only the US and Hong Kong who have introduced such statues and forwarded regulatory clarity. Earlier, the EU, Singapore, and the UAE enacted their own frameworks to regulate stablecoins, built on similar principles but adapted to local contexts. The EU statute, for example, permits for both asset- and fiat-backed stablecoins and does not explicitly prohibit algorithmic stablecoins, as does the GENIUS Act. In contrast, the UAE allows asset- and fiat-backed stablecoins while explicitly prohibiting algorithmic models, aligning more closely with Hong Kong's Ordinance. In contrast, Singapore only allows fiat-backed stablecoins denominated in the Singapore dollar or any of the G10 countries' currencies, and algorithmic stablecoins are not permitted. These variations demonstrate how jurisdictions use the same underlying concepts while tailoring their policies to domestic financial realities. Meanwhile, China and South Korea are formulating regulations in this area. The evolution of these legal frameworks may soon provide an opening for global standard-setting bodies such as the BIS, FSB, and IMF to harmonise rules across borders and reduce regulatory arbitrage, contributing to a more cohesive set of stablecoin regulatory frameworks worldwide.

With such developments all across the globe, Indian policymakers are still adopting a wait and watch policy. It can be said that India generally waits for dust to settle to make decisions for itself, but we should also be cautious and should not be left behind while others move ahead and make a mark with this new financial innovation.