HONG KONG SAR, CHINA Law and Practice Contributed by: Pang Lee, Joyce Wang, Mark Liang and Francis Li, Cooley
6. Payments and Stablecoins 6.1 Payments
To navigate this, participants setting up DeFi struc- tures targeting the jurisdiction typically deploy special- ised legal wrappers, such as foundation companies or special purpose vehicles established in offshore juris- dictions. These legal entities hold the IP and interact with centralised service providers. Regardless of the corporate veil, the SFC evaluates the actual opera- tional substance rather than the label of decentralisa- tion. If a small group of developers retains substantial con- trol over protocol upgrades or administrative keys, regulators will treat the entity as a centralised operator subject to standard substance, capital and licensing requirements. Furthermore, protocols offering liquid- ity pooling that generate returns are highly likely to be classified as collective investment schemes under the SFO, requiring formal authorisation and prospectus registration. 5.3 Liability Hong Kong judges and regulators approach the con- cepts of accountability and liability in DeFi by pierc- ing the veil of decentralisation to identify the actors exercising functional control. The landmark Court of First Instance ruling in Mantra DAO Inc . v John Pat- rick Mullin and Others [2024] HKCFI 2099 set a cru- cial precedent. Despite the entity operating under a decentralised governance model where token holders ostensibly possessed ultimate decision-making pow- er, the court recognised that the specific individuals acting as “councillors” maintained functional control over the operational legal entities. The court ruled that these individuals owed explicit fiduciary duties to the token holders, including the obligation to keep proper accounts of the crypto- currency trading business and to disclose financial records. This decision firmly establishes that develop- ers and councillors cannot utilise a DAO structure to evade traditional fiduciary and legal liabilities if their actions cause financial harm or constitute misman- agement. Similarly, regulators actively pursue enforce- ment actions against the identifiable administrators of non-compliant DeFi protocols, utilising worldwide freezing orders and tokenised injunctions to trace and seize assets regardless of the protocol’s distributed architecture.
Payments in crypto-assets are technically permitted in Hong Kong, but they are not recognised as legal tender for fiat currency. The FSTB and the HKMA have consistently maintained that highly volatile cryptocur- rencies, such as Bitcoin, lack the reliability necessary to perform standard monetary functions. Businesses are free to accept them for commercial transactions, but they do so entirely at their own risk. The courts will not treat debts denominated in VAs as standard fiat debts, placing the full burden of man- aging the associated foreign exchange, taxation and AML/CFT compliance risks directly on the accepting merchants. Conversely, the government actively sup- ports the use of regulated stablecoins and tokenised commercial bank deposits to address pain points in cross-border settlements and payment efficiencies. 6.2 Stablecoins 6.2.1 Fiat Currency and Algorithmic Stablecoins Hong Kong law enforces a rigid and statutory distinc- tion between fiat-backed stablecoins and algorithmic stablecoins. FRS are defined as digital representa- tions of value that purport to maintain a stable value with reference to one or more official fiat currencies. Algorithmic stablecoins utilise complex smart contract algorithms and incentive mechanisms to maintain their peg through dynamic expansion and contrac- tion of token supply, without relying on fully backed physical reserves. Due to their inherent susceptibility to death spirals and bank-run risks, algorithmic stablecoins do not qualify for issuance under the licensing regime, effectively excluding them from the regulated local payment ecosystem. 6.2.2 Stablecoin Regulation Fiat-backed stablecoins are heavily regulated in Hong Kong. Rather than retrofitting stablecoins into the pre- existing Payment Systems and Stored Value Facili- ties Ordinance, the government enacted a bespoke, purpose-built framework, the Stablecoins Ordinance, which became fully operational on 1 August 2025.
301 CHAMBERS.COM
Powered by FlippingBook