Hong Kong's KYC Requirement Sets Regulation in Opposition to DeFi Advancement

DBS Hong Kong has cautioned that the city’s strict stablecoin Know Your Customer (KYC) and Anti-Money Laundering (AML) rules, which will be enforced starting August 1, 2025, may greatly limit the use of stablecoins in onchain derivatives trading. CEO Sebastian Paredes explained that these regulations require all stablecoin holders to verify their identities and mandate that issuers obtain licenses, creating a regulatory landscape that contrasts sharply with the usual anonymity and flexibility of blockchain assets. The Stablecoins Ordinance, introduced by the Hong Kong Monetary Authority (HKMA), aims to reduce financial crime by requiring licensed issuers to keep 100% high-quality reserves, allow real-time redemption at face value, and comply with liquidity and capital standards similar to Basel rules. While these steps are designed to promote stability, critics argue they could hinder innovation within decentralized finance (DeFi) sectors.

The updated rules also require stablecoin issuers to be listed in a public registry and undergo thorough audits, with penalties for those who fail to comply. As of July 2025, the HKMA noted that no licenses had been granted, advising market participants to be wary of unlicensed tokens. Paredes stated that DBS Hong Kong will focus on expanding stablecoin services within the regulatory framework rather than prioritizing derivatives, acknowledging the limitations set by the new rules. The regulations demand that every stablecoin user complete KYC checks, which is a significant shift from international standards where such checks are usually limited to exchanges or custodians. This policy has sparked concerns about scalability and user adoption, especially for DeFi protocols that depend on pseudonymity for onchain derivatives.

The consequences for

, a leading alternative to stablecoins, are still uncertain. Although the HKMA’s guidelines do not specifically mention individual tokens, the focus on licensing and reserve standards could indirectly influence XRP’s role in derivatives trading. Ripple’s recent partnership with DBS and Franklin Templeton to introduce tokenized trading and lending on the XRP Ledger demonstrates the bank’s ongoing interest in stablecoin innovation despite regulatory challenges. However, Paredes’ remarks indicate that the onchain derivatives sector may face difficulties under the new framework, as the KYC/AML requirements could discourage developers from using stablecoins in decentralized applications.

Hong Kong’s regulatory stance is similar to measures in the U.S. and Singapore, which also seek to apply banking-style controls to stablecoins. However, Hong Kong’s rules are among the strictest, requiring issuers to keep cash or short-term Treasuries in separate accounts and maintain leverage ratios below 2%. Some analysts believe these obligations could raise capital costs for stablecoin ventures, potentially giving an advantage to larger institutions with strong compliance systems over smaller startups. The HKMA’s move to require real-time redemption and liquidity coverage ratios, in line with Basel III, signals a broader trend of treating stablecoins as systemic risks comparable to traditional banks.

Industry experts remain split on the lasting effects of these regulations. Supporters claim the rules strengthen financial security and align with international efforts to combat stablecoin-related fraud, while detractors warn they could reduce DeFi market liquidity and push activity to less regulated regions. The HKMA has indicated it will take a selective approach to licensing, expecting only a few issuers to meet the tough standards. This could lead to further consolidation in the stablecoin sector, with major players dominating and smaller projects either leaving the market or partnering with licensed firms. For now, Hong Kong’s regulatory climate highlights the ongoing struggle between fostering innovation and ensuring oversight in the fast-changing crypto world.