Interpretation of Blockchain Technology Standards and Security Audit Solutions for Stablecoin Regulation in Hong Kong

Original source: Beosin

On August 1, 2025, the regulatory system for stablecoin issuers in Hong Kong will officially be implemented. The Hong Kong Monetary Authority (HKMA) has released the "Guidelines for Regulating Licensed Stablecoin Issuers" and the "Guidelines for Combating Money Laundering and Terrorist Financing Applicable to Licensed Stablecoin Issuers," both of which will take effect simultaneously, aiming to provide detailed regulatory guidance for stablecoin issuers.

The "Guidelines for Regulating Licensed Stablecoin Issuers" document provides detailed technical specifications for the regulatory framework for stablecoins implemented in Hong Kong, ensuring regulatory goals such as value stability (full reserve), redemption capability (timely redemption), risk isolation (independent reserve assets), and consumer protection. Below is the interpretation and audit plan by the Beosin security team regarding the blockchain technology specifications mentioned in the "Guidelines for Regulating Licensed Stablecoin Issuers," to assist licensees in meeting the blockchain technology requirements outlined in the guidelines.

1. Interpretation of Blockchain Technology Specifications

According to Sections 2.1, 3.3, and 5.4 of the "Guidelines for Combating Money Laundering and Terrorist Financing," licensees should adopt a risk-based approach to formulate and implement their anti-money laundering and terrorist financing policies, procedures, and controls based on the nature, scale, and complexity of their business, and implement an effective transaction monitoring system during issuance and redemption to identify and report suspicious transactions, effectively managing and mitigating the risks related to money laundering and terrorist financing.

1. Distributed Ledger

The "Regulatory Guidelines" do not specify a particular distributed ledger (such as Ethereum) as the issuance network for stablecoins. Section 6.5.5 explicitly recommends that licensees should thoroughly assess the security and reliability of the distributed ledger (such as its ability to withstand common attacks, and whether there are risks of code defects or vulnerabilities).

Licensees must rigorously evaluate the distributed ledger on which their stablecoin is issued, prioritizing public chain networks that have been market-validated and are operating stably. Additionally, licensees should establish extra measures to assist in redeeming stablecoins in the event of an irrecoverable failure of the distributed ledger, ensuring the security and stability of their stablecoin ecosystem.

2. Token Management

2.1 Technical Documentation

For each specific stablecoin that the licensee intends to issue, the licensee should clearly document:

The token standard used
The distributed ledger on which the specific stablecoin is issued
The architecture of all smart contracts related to the stablecoin (including token contracts, proxy contracts, multi-signature contracts, etc.), including upgradability (if any), state variables, functions, function modifiers, libraries, interfaces, etc.

2.2 Access Control

Section 6.5.3 of the "Regulatory Guidelines" suggests that licensees should clearly define all operations related to the full lifecycle management of each specific stablecoin, covering deployment, configuration, minting, burning, upgrading, pausing, resuming, blacklisting, whitelisting, freezing, unfreezing, and any operational wallet usage.

For each operation in the stablecoin lifecycle, licensees should implement appropriate levels of authorization and triggering conditions. High-risk operations (such as deploying/upgrading contracts, large-scale minting, freezing accounts, etc.) must be executed through a multi-signature agreement (e.g., requiring 3 out of 5 signatures).

Additional risk control measures:

Set transaction speed limits
Allow minting only from whitelisted addresses
Set time locks for specific operations
Conduct pre-signed transactions for certain operations, perform off-chain simulation verification before broadcasting transactions, and check signed transactions

2.3 Technical Audit

Annual + Event-Driven Audit: Section 6.5.5 of the "Regulatory Guidelines" recommends that licensees should at least engage a third-party professional organization (such as Beosin) to audit the smart contracts related to their issued stablecoins annually. Additionally, whenever the smart contracts for a specific stablecoin are initially deployed, redeployed, or upgraded, an audit should also be conducted promptly. This aims to fill the blind spots of internal audits, ensuring that smart contracts execute correctly as designed, meet expected functions, and largely confirm that contracts are free from vulnerabilities or security flaws.

2.4 Stablecoin Monitoring System

Sections 6.5.6 and 6.8.3 of the "Regulatory Guidelines" recommend that licensees implement measures to continuously monitor the availability, capacity, performance of the underlying technology, as well as expected updates or changes, and report any anomalies (such as smart contract vulnerabilities; events related to the distributed ledger, such as hard forks and soft forks, severe network congestion, outages, attacks, and irrecoverable failures; unauthorized use of private keys, etc.).

3. Key Security

Key management (including private keys and mnemonic phrases) is one of the most detailed and important contents stipulated in the "Regulatory Guidelines." Licensees should establish comprehensive management measures and operational processes covering the entire lifecycle of keys, including but not limited to key generation, distribution, storage, usage, backup, recovery, and destruction. Especially for critical operations involving stablecoin smart contracts, such as contract deployment and upgrades, permission role management, large-scale minting, and burning, higher security standards should be adopted to ensure key security and prevent unauthorized access and potential risks.

Here are the implementation recommendations for the key lifecycle:

Key Generation: For critical keys, the generation process should be conducted in a completely offline environment and employ higher-level security measures. In practice, the generation of seeds and/or private keys should be completed in a physically isolated environment, and strict physical security controls must be implemented to prevent unauthorized access or leakage risks.
Key Storage: Keys should be stored in secure storage media with appropriate authentication mechanisms, such as hardware security modules (HSM). The storage location should be in Hong Kong and have strict access control and monitoring systems, or be in other secure locations recognized by the HKMA. Other hardware or software devices used to manage seeds and/or private keys should also be properly protected in equally secure environments. For multiple mnemonic phrases and/or private keys involved in multi-signature schemes, they should be stored in mutually isolated secure environments to reduce concentration risks.
Key Distribution: Licensees should use secure and reliable methods for distributing mnemonic phrases and/or private keys to ensure their integrity and confidentiality. Specific measures include applying integrity verification mechanisms, physical security protections (for manual distribution scenarios), and using verified encryption algorithms for transmission and storage, to prevent leakage or tampering during distribution.
Key Usage: Licensees should adhere to the principle of least privilege and strictly limit access to keys. Keys should only be used in trusted environments or physically isolated secure environments to reduce the risk of key leakage or misuse.
Key Rotation and Destruction: Licensees should consider regularly rotating keys to reduce security risks arising from key leakage. Additionally, they should establish and execute key destruction processes to ensure that keys that are no longer in use or have expired are completely destroyed, preventing illegal recovery or misuse.
Key Backup: Licensees should ensure that mnemonic phrases and/or private keys are backed up in multiple secure locations in Hong Kong (or other locations recognized by the HKMA). The storage location and nature of the backups must be kept strictly confidential from third parties. Licensees should ensure that they cannot rely solely on a single physical location's backup to recover seeds and/or private keys. Backups should be stored on reliable media and take necessary security measures to prevent unauthorized access, while also having anti-tampering features to ensure the integrity and security of the backups.

Stablecoin Security Audit Plan

In response to the security and operational management requirements for stablecoin smart contracts, Beosin has launched the following audit plan to provide licensees with detailed auditing and technical support in blockchain technology, aiming to ensure that licensees continuously meet the relevant regulatory requirements and operational standards set by the HKMA.

1. Smart Contract Security Audit

1.1 Audit Scope:

The contract security audit covers the following content:

Core contract functions of the stablecoin (minting, burning, transferring, freezing, pausing, etc.)
Design and implementation of the permission and role management system
Upgrade mechanisms (UUPS / Transparent Proxy)
Emergency mechanism-related functions (Pause, Freeze, Blacklist, Whitelist, etc.)
Event logging and on-chain behavior traceability
Interface standard compatibility (ERC 20, Permit, Metadata, etc.)

1.2 Audit Content:

(1) Minting and Burning

Whether the mint() function is restricted to authorized roles.
Whether burn() correctly reduces the balance and total supply.
Whether there are bypass paths or logical vulnerabilities (e.g., bypassing permission checks through upgrades).
Whether it supports binding off-chain deposit confirmations (e.g., PoR signatures or administrator confirmations).

(2) Transfer Logic

Whether transfer() and transferFrom() comply with the ERC 20 standard.
Whether transfers from frozen addresses or blacklisted addresses are blocked.
Whether token movement can be effectively prevented in a paused state.

(3) Pausing and Freezing

Whether pause() / unpause() and freeze() / unfreeze() are restricted to specific role permissions.
Whether the paused state can completely freeze token transfers, minting, burning, and other operations.
Whether the address freezing function is effective for transfers and minting.

1.2.2 Permission Structure and Role Management

(1) Role Definitions (not fully listed)

ADMIN: Highest permission, manages all roles and upgrade operations.
MINTER: Authorized to mint tokens.
PAUSER: Authorized to pause and resume contracts.
FREEZER: Authorized to freeze and unfreeze addresses.
UPGRADER: Authorized to initiate contract upgrades.

(2) Permission Configuration Checks

Whether all roles are reasonably allocated during deployment or initialization.
Whether high-permission roles are controlled by multi-signature wallets to avoid single points of failure.
Whether it supports revocation and emergency replacement (e.g., timelock management).

(3) Multi-signature and Time Lock Control

Whether high-sensitivity operations such as minting and upgrading need to go through a multi-signature + timelock process.
Whether the timelock delay is \u0026gt;= 48 hours, allowing licensees and regulatory authorities to observe and respond.
Whether the contract adopts a secure upgrade proxy model (e.g., UUPS).
Whether the initialize() function has the initializer modifier.
Whether there is a risk of secondary initialization.
Whether _authorizeUpgrade() is only callable by specific roles.
Whether the storage structure before and after the upgrade remains consistent to prevent variable overwriting.

1.2.4 Event Logging and Operation Tracking

Are all key operations emitting clear events?

Recommended events include:

Mint(address to, uint 256 amount, address by)
Burn(address from, uint 256 amount, address by)
Pause(address by) / Unpause(address by)
Freeze(address target, address by) / Unfreeze(address target, address by)
Upgrade(address newImpl, address by)
Each event is recommended to include: operator, target address, timestamp, detailed parameters.
Log information should facilitate audit traceability and regulatory review.

1.2.5 Standard Interface Compatibility

Whether the ERC 20 standard interface is fully implemented (name, symbol, decimals, balanceOf, etc.).
Whether EIP-2612 (Permit, gasless authorization) is supported.
Whether ERC 20 Metadata is supported for wallet identification and display.
Whether all standard interfaces return values and handle exceptional inputs according to specifications.

2. Operational Governance and Upgrade Security Strategy

2.1 Audit Scope

Focus on the governance structure design, permission management logic, security of contract upgrade processes, and control mechanisms for key operations in the long-term operational process of the stablecoin contract system. The aim is to ensure the project has sustainable operational capabilities and mechanisms to resist risks such as permission abuse and version hijacking.

2.2 Audit Content

Contract Upgrade Plan: Assess whether a secure upgrade model (e.g., UUPS or Transparent Proxy) is adopted, check whether the upgrade function has permission control and access restrictions, and confirm whether the storage layout of the logic contract and proxy contract remains consistent to avoid storage conflict risks.
Upgrade Permission Boundaries and Authorization Mechanisms: Verify whether upgrade operations are restricted to proprietary roles (e.g., UPGRADER), whether mechanisms like _authorizeUpgrade() are used for authorization protection, and confirm that such permissions are not bypassed by other logic.
High-Permission Operation Control Mechanisms: Check whether the system has permission separation and the principle of least privilege, such as whether minting, upgrading, freezing, and other operations are managed by independent roles to avoid risks of permission abuse from multiple responsibilities.
Multi-Signature Wallet and Timelock Configuration: Confirm whether key permissions (e.g., ADMIN, UPGRADER) are controlled by multi-signature wallets, and whether a Timelock contract is used to increase the delay window for key operations, introducing a governance observation period and risk buffer.
Role System and Permission Lifecycle Management: Assess whether long-term operational roles and temporary roles (e.g., operational accounts, upgrade administrators, etc.) are clearly defined, and check for mechanisms for permission handover, revocation, and recovery to prevent long-term loss of control over roles.
Emergency Control Mechanisms: Analyze whether emergency measures such as contract pausing (pause), role freezing (freeze), and permission revocation (revoke) are supported to guard against systemic risks from potential attacks, external security incidents, or internal operational errors.
Upgrade Behavior Records and Audit Logs: Verify whether all events related to upgrades and operations have on-chain logs (e.g., Upgrade, GrantRole, Pause, etc.), ensuring traceability for post-event audits and compliance investigations.
On-Chain Governance Adaptability and Scalability: If an on-chain governance module is planned for future introduction, it is recommended to assess whether the current permission structure supports governance contract takeover operations and can trigger upgrades, revocations, freezes, etc., based on governance results.

3. Log Analysis and Risk Monitoring

3.1 Audit Scope

Focus on the on-chain behavior logs of the stablecoin contract during operation and the associated risks. Beosin provides log collection, behavior modeling, risk identification, compliance reporting, and real-time monitoring system services to ensure that licensees have comprehensive operational traceability, visualized risk control, and compliance response capabilities.

On-Chain Log Collection and Analysis

Based on on-chain events triggered by contracts (e.g., Mint, Burn, Transfer, Freeze, RoleGranted, etc.), establish operational records for the entire lifecycle of the stablecoin and support compatible analysis of logs from different contract versions and deployment environments.

Automated Behavior Analysis

Combine logs with on-chain state snapshots to automatically identify abnormal operation paths, unusual transaction frequencies, and other suspicious/high-risk behaviors through behavior modeling.

Risk Level Identification and Report Generation

Output standardized behavior audit reports, including time, address, transaction hash, operation type, permission path, etc., for project retention and review by the HKMA; the report should also indicate the operational risk level for internal project reference.

Monitoring System Integration and Alert Mechanism

Beosin provides a dedicated on-chain monitoring system that supports real-time monitoring of multi-dimensional indicators (e.g., large-scale minting, abnormal burning, permission changes, triggering of blacklist transactions, etc.). Once preset risk thresholds are triggered, the system will immediately issue alerts to assist the project in responding promptly.

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