Implementation Guide for Smart Contracts Aimed at Stablecoin Issuers in Hong Kong

Part One Infrastructure and Compliance Strategies

1. Selection of underlying distributed ledger

Implementation Guide

• Prioritize mature public chains: It is recommended to prioritize mature and highly secure public blockchains such as Ethereum and Arbitrum.
• Rigorous assessment of alternatives: If considering the use of consortium chains or other types of distributed ledgers, a rigorous and quantifiable comparative analysis must be conducted to demonstrate that their security standards are not lower than, or even superior to, mainstream public chains.
• Risk Assessment Document: The assessment report must comprehensively cover its ability to withstand common attacks, the type of consensus algorithm, as well as the risks related to code defects, vulnerabilities, exploits, and other threats, and analyze in detail how these risks may potentially impact the issuance, redemption, and daily operations of the stablecoin.

2. Core Token Standards and Regulatory Function Expansion

Implementation Guide

• Basic Standard: Using ERC-20 as the base standard to ensure the fungibility of the tokens and their interoperability within a broader ecosystem.

• Functionality extension: The following functional modules must be integrated to meet regulatory requirements:

  • Pausable: used to implement a global pause and resume function for all token activities, which is a core tool for responding to major security incidents.

  • Mintable: Used to implement licensed issuers who need to mint new tokens through a controlled process and ensure that the token issuance is strictly corresponding to sufficient fiat reserve assets.

  • Burnable: Provides the function to destroy tokens. In the specific implementation, this function will be strictly controlled by permissions, rather than allowing arbitrary users to destroy them on their own.

  • Freezable: used to pause the token transfer function for specific accounts ( in case of suspicious transactions ).

  • Whitelist: Used to implement additional security measures, only allowing addresses that have passed due diligence and approval to participate in core operations ( such as receiving newly issued tokens ).

  • Blacklist: Used to implement transaction bans on addresses involved in illegal activities such as money laundering, fraud (, prohibiting them from sending/receiving tokens. Blacklist management needs to be linked with the AML/CFT system for real-time monitoring of suspicious transactions.

  • AccessControl: This is the foundation for implementing a fine-grained, role-based access control system. All management functions must go through this module for permission control to meet the requirements of separation of duties.

) 3. Main compliance models: the choice between blacklists and whitelists

Implementation Guide

• Blacklist mode ### default recommendation scheme (:

  • Advantages: It has higher practicality, can seamlessly interoperate with the vast decentralized finance )DeFi( ecosystem, providing users with a lower barrier to entry and a smoother experience.

  • Disadvantages: Compliance highly relies on strong, real-time off-chain monitoring and analysis capabilities to timely detect and block illegal addresses.

  • Implementation method: In the transfer function of the smart contracts, add logic checks to ensure that the addresses of the transaction sender )from( and the recipient )to( are not recorded in the blacklist.

• Whitelist mode

  • Advantages: Provides the highest level of AML/CFT controls, achieving prevention before the fact, rather than remediation after the fact.

  • Disadvantages: Greatly limits the universality and adoption rate of stablecoins, brings enormous operational costs for managing whitelists, and may make it difficult for them to become a widely accepted medium of exchange.

  • Implementation method: In the transfer function of the smart contracts, add a logic check that requires both the sender )from( and the receiver )to( addresses to exist in the whitelist. It is recommended to develop a dedicated Web user backend system for operations to enhance convenience.

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Part Two Smart Contracts Implementation

) 1. Design a refined access control system

Implementation Guide

A clear set of roles must be defined and assigned to different entities or employees controlled by multi-signature wallets to achieve separation of duties and minimize the risk of a single point of failure or collusion manipulation. Each role should be limited to specific functions, all operations require multi-signature authorization, and ensure that no single employee holds multiple high-risk roles simultaneously. All operations must be logged, and undergo annual third-party audits, with permission allocation supervised by administrators or the board.

• MINTER_ROLE: Responsible for handling the minting of stablecoin ###mint( operations, including creating token units upon receiving valid issuance requests and ensuring that the minting matches the corresponding increase in the reserve asset pool.

• BURNER_ROLE: Responsible for handling the destruction of stablecoin )burn( operations, including destroying token units upon receiving valid redemption requests.

• PAUSER_ROLE: Responsible for pausing ) pause ( operations of the stablecoin, such as temporarily stopping transfers, minting, or redemptions upon detection of abnormal events ) like security threats (.

• RESUME_ROLE: Responsible for restoring the operations of )resume( stablecoin, such as re-enabling transfers, minting, or redemption after the resolution of the pause event.

• FREEZER_ROLE: Responsible for freezing ) freeze ( and unfreezing ) remove freeze ( specific wallets or tokens, such as temporarily freezing assets upon detection of suspicious activities ) like money laundering risks (.

• WHITELISTER_ROLE: Responsible for managing the whitelist )whitelist(, including adding or removing allowed wallet addresses, for example, restricting issuance to whitelist addresses.

• BLACKLISTER_ROLE: Responsible for managing the blacklist ) blacklist ( and removing from the blacklist ) remove blacklist (, such as putting suspicious wallets on the blacklist to prevent transfers.

• UPGRADER_ROLE: If an upgradeable model is adopted, responsible for upgrading )upgrade( smart contracts, such as updating contract code to fix vulnerabilities or add features.

) 2. issuance ### coin ( mechanism

)# Implementation Guidelines

Pre-check: The function must check whether the target address to is on the blacklist or frozen before executing the issuance.

Operating procedure:

• Off-chain due diligence: Clients complete all necessary off-chain customer identification ### KYC ( and customer due diligence ) CDD ( processes. Additionally, AML/CFT regulations require that for customers establishing a business relationship or conducting occasional transactions exceeding a specific threshold ), such as 8,000 HKD (, CDD must be performed.
• Fund Reception: Customers transfer the equivalent amount of fiat currency into the bank account designated by the issuer.
• Internal verification: The issuer's internal system confirms receipt of funds and updates the accounting records of reserve assets accordingly.
• On-chain execution: The operations team creates and signs a multi-signature transaction, invoking the smart contracts' minting function to send the newly minted stablecoin to the wallet address that the customer has pre-registered and verified.

) 3. Redemption ### destruction ( mechanism

)# Implementation Guide

Redemption Preparation: Users first need to transfer the tokens they wish to redeem to the designated address controlled by the issuer.

Operation process:

• Off-chain request: The user submits an off-chain redemption request through the issuer's platform. Before processing the request, the issuer must conduct appropriate customer due diligence ###CDD(.
• System Verification: The issuer's system verifies the validity of the request and checks whether the user has completed the corresponding coin transfer operation on the chain.
• Fiat payment: The issuer will transfer an equivalent amount of fiat currency to the user's pre-registered and verified bank account.
• On-chain burning: After confirming the successful transfer of fiat currency, the multi-signature wallet holding the BURNER_ROLE calls the burn function to destroy the corresponding amount of tokens from the specified address.

) 4. Implement emergency control: suspend and freeze

Implementation Guide

Pause Function: Can only be called by a multi-signature wallet holding the PAUSER_ROLE, used to globally suspend the smart contracts functionality. Trigger conditions include detection of abnormal events ### such as network attacks or mismatched reserve assets (, requiring approval from the board or senior management. The resume function is handled by an independent RESUME_ROLE to achieve separation of duties.

Freeze function: Called by a multi-signature wallet holding the FREEZER_ROLE, used for transfer restrictions on specific addresses. Trigger conditions include suspicious activities ) such as AML alerts or court orders (, which require off-chain validation before execution. Unfreezing is handled by the same role, but requires additional audit verification, and relevant announcements must be made to prevent abuse.

) 5. Address filtering and blacklist mechanism

Implementation Guide

• Function implementation: Implement functions for adding and removing from the blacklist, which can only be called by a multi-signature wallet holding the BLACKLISTER_ROLE.
• Transfer restrictions: Addresses on the blacklist are prohibited from transferring/receiving tokens.
• Operation process: The analysis tool issues an alert, triggering an internal compliance review. After the compliance team reviews and confirms, the BLACKLISTER_ROLE multi-signature wallet initiates the blacklist addition transaction.

6. Upgradability of smart contracts

Implementation Guide

• Proxy model: For EVM-type smart contracts, a mature ERC-1967 proxy model can be used to achieve upgradeability.
• Access control: The upgrade function must be called only by a multi-signature wallet holding the UPGRADER_ROLE.
• Change Management Process: In accordance with regulatory requirements, a rigorous change management process must be completed before proposing any upgrades, which includes a comprehensive, independent third-party security audit of the new smart contracts.

7. On-chain event logs for analysis and reporting

Implementation Guidelines

In addition to the transfer ### Transfer ( and approval ) Approval ( events required by the ERC-20 standard, the contract must define and emit custom events for all management actions and state changes:

• Token Minting/Burning ) Minted/Burned ( Event
• Contract Pause/Resume ) Paused/Resume ( Event
• Blacklist Add/Remove ) BlacklistAdded/BlacklistRemoved ( event
• Whitelist Added/Removed ) event
• Address Frozen/Address Unfrozen ( Event
• Privilege role change ) RoleGranted/RoleRevoked ( event
• Contract Upgrade ) Upgraded ( Event

Part Three: Operational Security and Lifecycle Management

) 1. Secure Key Management Architecture

(# Implementation Guide

• Key Generation: Must be completed through a "key ceremony")key ceremony### that is well-documented, in a physically secure, air-gapped environment that is completely isolated from external networks.
• Key Storage: All management roles must be controlled by multi-signature wallets. The private keys used by the signers of these multi-signature wallets must be stored in HSMs or other secure hardware wallets. For the most critical roles, the corresponding keys must be kept in air-gapped systems, physically isolated from any online environment.
• Key Usage: A multi-signature policy must be enforced. For transaction signatures involving "important private keys", it may be necessary for relevant personnel to be present in person to operate.
• Backup and Recovery: The backup of key shards or mnemonics must be stored in multiple secure and geographically distributed locations within Hong Kong ### or at locations approved by regulators (, and must be protected with tamper-proof packaging.

) 2. Complete deployment process and runtime monitoring

(# Implementation Guide

Before the official deployment, a "pre-deployment checklist" must be developed and strictly enforced:

• Comprehensive Testing: Ensure unit test coverage is above 95%, core code coverage is 100%, and ensure the output unit test coverage report.
• Independent Audit: Complete independent security audit reports issued by at least one, preferably two reputable audit firms.
• Code freeze: After the audit is completed, freeze the code until it goes live, and no further code changes will be made.
• Regression Testing: Perform unit tests and conduct regression testing before official deployment.
• Compliance Approval: Obtain formal approval from the internal compliance team to confirm that the contract logic meets all relevant regulatory requirements.
• Deployment drill: Prepare detailed deployment scripts and conduct a full deployment drill on a test network that is completely consistent with the mainnet environment.
• Authorized deployment: The final deployment operation is executed by the authorized wallet.

After the deployment is complete, appropriate monitoring measures should be taken to promptly implement mitigation measures for the usage of privileged roles and newly emerging threats.

• On-chain activity monitoring: monitoring the management roles of