Guests:

Xiao Feng, Chairman and CEO of HashKey Group

Host:

Liu Feng, Host of @Web3101cast, Partner at BODL Ventures, and Former Editor-in-Chief of Lianwen

Jane Hongjun, Founder and Podcast Host of Silicon Valley 101

Podcast Source:Silicon Valley 101 Podcast

Original Title:E202 | Conversation with Xiao Feng: Amidst the Hong Kong Stablecoin Market, Some Sober Reflections

Broadcast Date:July 31, 2025

Key Points

As Hong Kong Stablecoins Issue Licenses, Stablecoins, and RWAs Dr. Xiao Feng, Chairman and CEO of HashKey Group, known as the "Godfather of China's Blockchain," has become a hot topic in the Chinese-speaking world. He shared his sobering reflections on this trend, returning to common sense.

Highlights

• Hong Kong's regulation of stablecoins is unexpectedly strict.

• Stablecoins were not created for payment purposes.

• Mainland China will begin by accepting stablecoins and then cryptocurrencies as a whole. Mainland China's discussion of stablecoins focuses on the perspective of currency competition among major powers; Hong Kong is more concerned with anti-money laundering loopholes.

• Cryptocurrencies are better at combating money laundering than traditional finance.

• Consortium chains are unworkable, and stablecoins on consortium chains will not succeed.

• Most successful applications are created without permission.

• Hong Kong has the potential to once again become the world's center for digital asset trading.

• Singapore is positioned as the Switzerland of Asia, while Hong Kong is positioned as the Wall Street of Asia.

• Next year will see a period of rapid growth in the traditional financial market's embrace of cryptocurrencies.

• The underlying blockchain protocol is decentralized, but the application layer is necessarily centralized.

• While stablecoins are hot in Hong Kong, regulators are very cautious about the topic, which represents a significant gap.

• In Beijing, two points of consensus are gradually emerging. The first point of consensus is that China cannot continue to turn a blind eye to the global wave of US legislation and compliance regarding cryptocurrencies, stablecoins, and blockchain. The second point of consensus is how to respond. If China remains indifferent and refuses to embrace these new developments, it may be at a disadvantage in the competition among national currencies.

• By this time next year, we may be discussing RWAs. Mainland China may begin to accept asset tokenization. After RWAs, the third step may be to accept Bitcoin.

• Since you've begun accepting stablecoins, you must also embrace public blockchains. Otherwise, your stablecoins won't be globally competitive, and your efforts will be in vain.

• RWAs have three stages: the easiest is the tokenization of fiat currency; the second is financial assets; and the final is the tokenization of physical assets.

• Today, the market interprets stablecoins from a monetary perspective, lacking consideration of the underlying underlying logic.

• Without technology, accounting methods, and financial infrastructure, no token would exist.

• The most crucial aspect of Hong Kong's stablecoin legislation for licensed stablecoins is anti-money laundering.

• Stablecoins will become a measure of value in the virtual and digital worlds and a trading medium for all virtual and crypto assets.

• Exchanges are striving to build excellent liquidity for every trading pair. Building any liquidity pool incurs costs, and these costs need to be amortized.

• There are two reasons why Hong Kong has become a darling of the capital market. The first is the emergence of DeepSeek, and the second is that, due to Trump's policies, traditional US allies have weakened, and everything has become a business.

A Cool Reflection on the Stablecoin and RWA Craze

Liu Feng:

I can see that stablecoins have become a hot topic across Chinese-speaking regions, both in Hong Kong and mainland China. Could you please briefly explain to our audience why so much attention is being paid to Hong Kong's stablecoin regulations? Also, if possible, could you highlight some key areas of particular concern in Hong Kong's cryptocurrency and digital asset regulation?

Dr. Xiao Feng:

I personally feel the hype is a bit over the top. A few days ago, I was having coffee with a friend at a hotel cafe, and everyone at the surrounding tables was talking about stablecoins. We recently met with officials from the Hong Kong Monetary Authority about stablecoins, and they repeatedly reminded us that the stablecoin sector is overheated and that Hong Kong won't issue many licenses.

Hong Kong's initial stablecoin issuance will be very strict. Not only will licensing requirements be strict, but oversight will also be stringent, particularly with regard to anti-money laundering regulations for cryptocurrencies using stablecoins. August 1st is merely the date the Hong Kong Stablecoin Act comes into effect, but it doesn't mean anyone can apply for a stablecoin license starting that day. While there are rumors that dozens or even hundreds of companies have applied, I believe the number of applications that will actually be accepted by the HKMA will be very small. This is primarily due to the close scrutiny paid to each applicant's background, particularly their financial risk management background and their anti-money laundering experience and capabilities.

Hong Kong is an international financial center with decades of experience. Therefore, its regulatory authorities, whether the SFC or the HKMA (HKMA), are highly sensitive to developments in the international financial market. This is in stark contrast to mainland China. Mainland China's interpretation of stablecoins, particularly those based on offshore RMB, is primarily based on monetary factors, competition among major currencies, and the hegemony of the US dollar. But Hong Kong is different. I originally thought that if so many mainland Chinese institutions, people, and capital were willing to come to Hong Kong, whether developing, issuing, or using stablecoins, it would be a huge benefit for Hong Kong as an international financial center. My impression is that Hong Kong regulators are primarily concerned, or at least their core concern, with whether the issuance of stablecoins outside the bank account system will lead to a lack of oversight. In fact, financial regulators currently lack the means to regulate the circulation of stablecoins after Mint. So, Hong Kong is more concerned about whether there will be loopholes in its anti-money laundering efforts. As an international financial center, if Hong Kong is criticized by other major global financial centers for its anti-money laundering practices, its reputation as a global financial center would be significantly impacted. This, in turn, may be completely different from what everyone perceives. Although Hong Kong is enthusiastic about this topic, regulators are very cautious about it, which is a significant gap.

Looking Back: Received a Cold Reception by Hong Kong Regulators

Liu Feng:

You've actually been advocating for and promoting transparency and regulation of digital asset legislation in Hong Kong for many years. Could you share your thoughts on the current perception that Hong Kong, as a global financial center, fully embraces digital assets and cryptocurrencies, while still maintaining a significant level of concern and caution? What are your thoughts on this contrast, and the contrast over the years: past criticism and rejection, and now a seemingly open embrace, this new attitude?

Dr. Xiao Feng:

I can share a personal story that fully illustrates the point you just raised. HashKey was founded in Hong Kong at the end of 2018. In 2017, due to stricter regulatory measures in mainland China, we relocated our business to Hong Kong, as Hong Kong is legal and compliant. In early 2019, I visited the Hong Kong Securities and Futures Commission to apply for a crypto exchange license. The official who received me told me, "Mr. Xiao, you don't need a license to open a virtual currency exchange in Hong Kong, and it's not illegal. You can just turn left and start."

I actually heard this same thing in 2022 when I visited the head and deputy director of the Hong Kong Economic and Trade Bureau. I told them we wanted to apply for a Hong Kong stablecoin license. The deputy director replied, "Mr. Xiao, issuing stablecoins in Hong Kong is not illegal, and we have no right to regulate you." I told him we had actually invested in a stablecoin company in Hong Kong, but couldn't continue because no bank in Hong Kong dared to provide stablecoin services, and customers couldn't deposit or withdraw fiat currency normally.

Why did these two officials say the same thing? Because Hong Kong is a common law country. Within the framework of common law, the first principle is "anything not prohibited by law is allowed." Therefore, in 2019, Hong Kong had no laws regarding cryptocurrencies. You could do anything, and there was no legal prohibition against setting up an exchange. At the same time, both institutions (the Securities and Futures Commission and the Hong Kong Monetary Authority) said they had no authority to issue licenses or regulate you, because the second principle in the common law system is "nothing can be done without legal authorization." If you open an exchange on the street, they have no right to investigate and punish you.

I joked at the time, "Does that mean no one in Hong Kong will supervise me?" He replied, "Not that no one will supervise me. The Commercial Crime Investigation Department of the police station will supervise you. Although what you are dealing in is not securities, it is at least a commodity, and there are people who supervise consumer protection."

Indeed, people in the industry are saying that compliance costs in Hong Kong are high and that doing this in Hong Kong is not profitable. Compliance has costs, but these costs are also justified. After all, we are engaged in an emerging financial industry, and the new finance brought about by fintech has strong externalities. Over the past few hundred years, a set of rules have been gradually accumulated to protect investors and consumers. These rules naturally bring operating costs.

If our industry is unwilling to bear these costs, it may never grow. If you envision a $10 trillion, tens of trillions, or even a hundred trillion dollar market, then there will inevitably be spillover constraints, which you must bear.

New Hope: "Mainland China will begin by accepting stablecoins and then crypto as a whole."

Dr. Xiao Feng:

So, my view until now is that since 2017, when mainland China began restricting, regulating, and even banning certain crypto-related businesses, I've been wondering: When and where will mainland China begin to accept these things again? For years, there was no answer. In the past month and a half, I think I've found the answer, having attended many internal seminars in Beijing, driven by the impact of stablecoin legislation in Hong Kong and the United States.

Most of the discussions in mainland China took place after the passage of the Hong Kong Stablecoin Ordinance on May 21st. Subsequently, the United States also actively promoted related legislation, which sparked a lot of discussion in Beijing. During these discussions, I suddenly had a flash of inspiration and realized that mainland China will begin by accepting stablecoins and then embrace crypto as a whole. During this period, I participated in numerous discussions, which lasted for a month and a half. Although there were still differing opinions in Beijing as of Sunday, two points of consensus had gradually emerged. The first point of consensus was that China could no longer turn a blind eye to the global wave of US legislation and compliance regarding cryptocurrencies, stablecoins, and blockchains, nor could it fail to take countermeasures. The second point of consensus was how to respond. As my friends in Beijing put it, it was like, "Should we fight the Huaihai Campaign?" The question was already decided; we had to fight. How should we fight? Should we engage in a small-scale or large-scale campaign? Which military unit should be annihilated first? This is the question currently under discussion. Sitting there, I sensed that mainland China would begin to accept this from this point on. If China continues to turn a blind eye and refuses to embrace these new ideas, it could be at a disadvantage in the competition among national currencies. I believe China's top leaders have recognized this problem, which is why former Central Bank Governor Zhou Xiaochuan recently delivered a speech at the Lujiazui Forum, where his main point was to warn against the impact of US dollar stablecoins on the dollarization of the international monetary system.

This is clearly looking at the US dollar stablecoin from the perspective of national currency competition, and China clearly has no choice but to respond. I also predict that this is the saying, "There's a first day, and there's a fifteenth day." Since you've begun accepting stablecoins, you must also accept public chains. Otherwise, your stablecoin won't be globally competitive, and your money will be wasted.

So after accepting RWAs, what might be the next step? I believe that by this time next year, we might be discussing RWAs, and mainland China may begin to accept asset tokenization. After all, RWAs share a common attribute with stablecoins: they can support the real economy. Mainland officials, regulators, and the government are more likely to accept things that support the real economy. After accepting RWAs next year, you'll have to consider the third step, possibly accepting Bitcoin.

Challenges Impacting China's Embrace of Digital Assets: Increased Fraud

Liu Feng:

You've outlined a possible path for how we, in China, might truly embrace blockchain and digital assets in the future. It sounds like we started learning about this technology with stablecoins. Because of the currency wars between major powers, we've been forced to embrace stablecoins, which don't appear particularly crypto-like. Then, we'll gradually embrace products or forms like RWAs that utilize blockchain tokenization but can support the real economy. Later, we may find ourselves having to embrace broader blockchain-based technologies, as well as product forms, business models, and financial innovations.

I'd like to ask, what challenges do you foresee along the way? Could this bright future be impacted?

Dr. Xiao Feng:

I believe the challenges come from two aspects. On the one hand, it's true that the EU, the US, and some developed economies, as well as international anti-money laundering organizations and the Bank for International Settlements and the Financial Stability Board, have all expressed concern to Hong Kong regarding its aggressive promotion of stablecoins, particularly the RMB stablecoin. Stablecoins could facilitate oil trade between China and Russia, Iran, and Venezuela, as these countries are subject to UN sanctions. Previously, fiat currency channels were more complex and could be monitored. However, if the stablecoins used are independent of banks and SWIFT, they are completely disconnected from the entire system of financial rules and regulations established in Europe and the United States. This pressure is something they've already begun to monitor, and I believe they will continue to exert it. However, if we want to issue offshore RMB and stablecoins, there's definitely demand for them. Secondly, we've already seen some signs of this happening. The recent surge in popularity of stablecoins in mainland China, which has spread from Hong Kong to Beijing, and in some cases even more so than in Hong Kong, has led to a surge in fraud and scams. In fact, the current trend of pyramid schemes and scams under the guise of stablecoins is no longer limited to a single province; it's already occurring across many economically developed regions. As we've seen in the news, financial regulators in various provinces across mainland China have begun issuing warnings. This trend is indeed a cause for concern. I often remind myself not to add fuel to the fire. We all clearly remember the ongoing rectification of internet finance. We must not fall into this cycle of rectification, as it will seriously delay the mainland's acceptance of these stablecoins or RWAs. The current trend is indeed quite severe, and it puts pressure on the mainland. For regulators, if they haven't seen a positive development, and the first thing they see is the rampant scams in mainland China, they will obviously slow down their pace.

Rethinking the Three Stages of RWA (Real World Assets): Tokenization of Fiat Currency; Tokenization of Financial Assets and Physical Assets

Liu Feng:

For example, innovative applications like RWA utilize new blockchain technology to drive financial innovation. You also mentioned the potential for fraud. Could you share your thoughts on the correct, promising, and truly valuable use cases or directions for blockchain technology applications like RWA?

Dr. Xiao Feng:

RWA I call asset tokenization, and I divide it into three stages.The first stage can be traced back to 2014, with the tokenization of USDT fiat currency. The second phase should begin in 2024, with the tokenization of financial assets, which will begin with US companies like BlackRock, Fidelity, and Franklin Templeton tokenizing their US dollar bond funds and US dollar money market funds and putting them on-chain.

However, most people in the market are interested in discussing the tokenization of physical assets. I believe the most crucial issue in the tokenization of physical assets remains unresolved: oracles. How can you ensure a one-to-one correspondence between an off-chain physical asset and its on-chain digital twin, maintaining a permanent anchor and guaranteeing the existence of the offline asset?

Currently, there's no perfect solution for this technology. DePin is one such solution. DePin was a premature baby, having failed to find an independent business model in 20 years. DePin may be a future solution for the tokenization of physical assets, but the technology is not yet mature, so the tokenization of physical assets still has a long way to go. Large-scale adoption and widespread adoption require resolving the oracle issue.

The three phases are like the flow of water, from easy to difficult. The easiest option is, of course, fiat currencies like the US dollar, euro, and RMB. Their trust backing is straightforward and universally recognized. The second step, from the perspective of trust backing, is easier to solve with financial assets. Their issuers and custodians are both licensed financial institutions, subject to strict regulation, making the digitization and tokenization process much easier. Tokenizing physical assets is a very difficult task. I don't believe a perfect solution has been found yet; I believe it will take time. Therefore, I recommend that those interested in RWAs first transform their physical assets into financial products, and then tokenize them based on those financial products. For example, if a gold miner told me they produced 8 tons of gold annually, I wouldn't believe it. However, when you produce this gold, according to financial standards, there are standards for what kind of gold bars can serve as currency anchors or collateral assets.

Once completed, a licensed financial institution will issue a gold fund or gold ETF. These gold bars are inspected and placed in a vault by a reputable bank, which also serves as the custodian for these gold assets. The custodian will issue instructions to us, stating that it has received gold that meets the standards, and then help us mint a token for circulation on the blockchain. This is probably the best solution to date.

Liu Feng:

This makes token issuance very easy to understand and implement. Your point reinforces that, while RWAs are so-called real-world assets, not all real-world assets can be simply mapped onto a blockchain. Instead, they should undergo a very standardized process in the early stages. First, they must be verifiable and auditable, and second, they must be structured as much as possible. This will facilitate future transactions and make it easier for both parties to complete transactions. This is the process for effectively implementing RWAs.

But I think that in this process, RWA isn't creating a new asset; it's simply moving from physical objects to existing financial ledgers, and then onto a blockchain. This sounds more like a simple use case of using blockchain to complete settlement and transactions. In itself, it actually leverages the real-time settlement and consensus of blockchain or cryptocurrencies.

Returning to Common Sense: What Problem Does Blockchain Solve?

Three Evolutions in Human Accounting Methods

Liu Feng:

So the core of RWA isn't issuing coins or assets. This goes back to what you advocated for over a decade ago: Why do you believe blockchain and the crypto assets that rely on it are a true financial innovation of the future?

Can you go back and explain the fundamentals you've been talking about for the past decade, or even more than a decade, about why we need blockchain?

Dr. Xiao Feng:

In fact, including the recent discussion of stablecoins, everyone has viewed them from a macro perspective, interpreting them from the perspective of currency, lacking an underlying logic or technical foundation. Stablecoins, and indeed all tokens, are based on a new set of technologies. This new technology, first and foremost, is based on the blockchain's distributed ledger, which itself represents an update to human accounting methods.

Human accounting methods have undergone three evolutions.The earliest counting method can be traced back to 3500 BC, in Sumer, in what is now Iraq. A 3,500-year-old clay tablet was unearthed at that time, and later research revealed it to be a ledger recording income and expenses. This was the earliest simplified or single-entry accounting method, recording only income and expenses, ignoring everything else.

Later, around 1300 AD, new accounting methods emerged in the northern Italian city-states, particularly Florence and Venice. These methods not only recorded income and expenditure but also assets and liabilities. So, why did this new method of calculation emerge in Italy around 1300 AD? It has to do with technological developments, such as papermaking, and especially mathematics. Around 1200 AD, an Italian mathematician wrote a book called "Principles of the Abacus," which is very significant. Without certain mathematical inventions, there would be no new methods of calculation.

A third important change was the replacement of medieval Roman numerals by Arabic numerals. The introduction of Arabic numerals is related to the Renaissance, when much ancient Greek and Roman knowledge was preserved in Arabic and later translated. Technological advances made it possible to reinvent new accounting methods, especially the introduction of Arabic numerals. Furthermore, the complexity of economic activity also led to new demands. Shakespeare's "The Merchant of Venice" depicts the complex maritime trade of Italy at the time. This trade required partnerships, borrowing, and chartering ships, and also led to city-states imposing taxes, complicating accounting.

This need led to the creation of double-entry bookkeeping, which began to separate cash flows: cash flow from operations, cash flow from investments, and cash flow from bank loans. The complexity of human economic and commercial activities prompted changes in accounting methods. More than 730 years later, in 2009, the launch of the Bitcoin mainnet, a blockchain-based distributed ledger, ushered in a new accounting method, which we call distributed accounting.

From a technical perspective, this is related to asymmetric encryption algorithms in the 1970s, the development of the internet, and distributed databases. The development of computer programming languages and smart contracts as computer programs are all the result of this technological advancement. At the same time, needs are also changing. Human society is becoming increasingly virtualized and digitized, and more and more activities are taking place in the digital world. A fundamental characteristic of the digital world is that it transcends time, space, organizations, entities, and jurisdictions.

When these transitions occur, accounting methods must also adapt, because you can't use Chinese or US accounting standards. Human society has created a parallel universe for itself. In this parallel universe, what accounting methods do you use? Which currency do you use? Which country's accounting standards do you adopt, and which country's laws do you apply? If mistakes are made, will you be subject to Chinese or US law? All of these become unfeasible, or rather, extremely costly, so costly that the parallel universe cannot function. Therefore, new accounting methods—distributed ledgers and double-entry bookkeeping—came into being. The biggest difference is that prior to double-entry bookkeeping, accounting methods were all private ledgers, where individuals kept their own accounts and expected others to trust their own accounts. To ensure the authenticity of these accounts, society as a whole needs to establish a massive system to deter and punish falsifiers.

To enforce these laws, you need lawyers, accountants, police, procuratorates, courts, and even prisons. Otherwise, how can I trust that your accounts are accurate? In reality, the cost of this entire system is extremely high. Even within the safeguards and regulations of this system, almost no company's accounts are 100% authentic. Distributed Ledgers Are Reshaping Financial Market Infrastructure Liu Feng: This is the core and foundation of our entire credit and financial systems today. This is why, when Bitcoin emerged, the earliest crypto natives, or cryptocurrency nativists, challenged the very core of this system. Dr. Xiao Feng: Yes, this challenge has an overly idealistic side. Take anarchism, for example. I believe human society cannot become an anarchic state. A small number of people can live in a utopia, but for the 99% of people, utopia is impossible. The emergence of distributed ledgers stems from the fusion of this need and technology, leading to their creation in 2009. This ledger, first and foremost, means that a new set of financial market infrastructure is being rebuilt based on distributed ledgers.

The so-called financial market infrastructure, as defined in classic textbooks, can be summarized in one sentence: a complete set of institutional arrangements for trading, clearing, and settlement. Whether you're trading stocks, funds, bonds, or anything else, the fundamentals are the same. Traditional financial market infrastructure employs central registration, central depository, central counterparty, and central clearing. Any transaction cannot be completed without the assistance of three or more intermediaries. For example, stock trading, fund settlement at brokerage exchanges, and share clearing require the assistance of four intermediaries.

The new record-keeping method established on a distributed ledger eliminates these intermediaries, enabling peer-to-peer transactions. Peer-to-peer transactions are possible because of a different method of recordkeeping. On a public ledger, both Zhang San and Li Si record their entries on the same ledger, and the data is consensus-based.The blockchain distributed ledger is an open and transparent global public ledger. Everyone in the world records on the same ledger, and everyone in the world can access all the information on it. Therefore, there's no need for intermediaries, and transactions become peer-to-peer, rather than the aforementioned central registration, central depository, central trading, and central settlement. This allows for peer-to-peer transactions, instantaneous settlement, and virtually zero fees. From a business perspective, if a new financial market infrastructure can achieve higher efficiency, lower costs, and fewer links, it will undoubtedly be viable. Over time, it will undoubtedly replace the old system. If it can't, it violates the laws of business. Traditional financial market infrastructure relies on net settlement. Net settlement means that all financial institutions, such as the banking system, essentially halt at 5 p.m., and no further transactions are processed thereafter. What does "halt" mean? Everyone settles their accounts, and once that's done, the accounts are settled for the day. The new financial market infrastructure settles on a transaction-by-transaction basis, with both goods and cash exchanged. Settlement is complete once the transaction is confirmed. Therefore, you can see the huge difference between stock exchanges and crypto exchanges. Crypto exchanges are based on a transaction-by-transaction settlement system, so they can operate 24/7 without stopping to settle accounts.

Why can't stock trading operate 24/7? Because it's a net settlement system, there's a deadline by which accounts must be settled before everyone can conclude. That's why the New York Stock Exchange announced plans to implement 5+23-hour trading this year. Why 23 hours instead of 24?

Because it must stop; otherwise, accounts can't be settled. Therefore, the transformation of distributed ledgers has brought about changes in financial market infrastructure. Stablecoins and other tokens are all based on this infrastructure: blockchain technology, a new accounting method based on distributed ledgers, and a new financial market infrastructure built on top of this technology and accounting method. We should view stablecoins from this perspective, not just from the perspective of currency.

Liu Feng:

This is something I particularly wanted to ask you to share, because I've noticed that when people discuss stablecoins, they're simply discussing their convenience as a payment method. Many people would argue that they're not as good as the mobile payment systems we use, like WeChat or Alipay. However, only by truly understanding the distributed, decentralized ledgers behind stablecoins can we grasp their true significance.

While WeChat and Alipay are incredibly convenient for us Chinese, when it comes to cross-border, multi-counterparty transactions within a vast global financial system, even within the securities market, we discover a fundamental difference between today's system and the new financial system powered by blockchain, public blockchains, or cryptocurrencies. Therefore, understanding the significance of stablecoins is crucial to understanding why they represent a profound new financial innovation.

Dr. Xiao Feng:

Clearly explain the three layers of technology, accounting methods, and financial infrastructure. Without these three foundations, no token can exist. This applies not only to stablecoins, but also to other tokens, including RWA.

Key Focus of Hong Kong's Cryptoasset Regulation

Changes and Core Framework of Hong Kong's Cryptoasset Anti-Money Laundering Regulatory Policy

Hong Jun:

Here are a few questions about stablecoins.

First, how do Hong Kong's policies, regulations, and legislation require stablecoins to establish a comprehensive anti-money laundering mechanism?

Second, creating a regulated stablecoin is already extremely difficult. I think another major challenge is how to ensure liquidity and expand the market size of your stablecoin.

Dr. Xiao Feng:

The core issue of Hong Kong's stablecoin legislation for licensed stablecoins is actually related to anti-money laundering. Other technical issues can be addressed. Anti-money laundering standards across the entire financial market are completely consistent; there are no separate AML standards for cryptocurrencies. Hong Kong pursues the highest or most up-to-date global standards in anti-money laundering. Around 2021, the International Anti-Money Laundering Organization (IFMO) revised its AML standards for the first time, incorporating cryptocurrency anti-money laundering regulations. This prompted the Hong Kong Legislative Council to quickly begin revising its own AML regulations. Very early on, around 2022 and 2023, Hong Kong amended its AML regulations, adding two new sections.

The first section incorporated the IFMO guidance on cryptocurrency anti-money laundering into Hong Kong's AML regulations. Anti-money laundering regulations for gold were also added. This revision directly led to crypto exchanges like HashKey initially applying for a Type 7 ATS license, or Alternative Asset Trading License. After the Hong Kong Anti-Money Laundering Ordinance came into effect on June 1st of last year, we also had to apply for a Virtual Asset Service Provider (VATP) license under the Hong Kong Anti-Money Laundering Ordinance. Therefore, exchanges operating in Hong Kong essentially hold two licenses: a Type 7 Alternative Asset Trading License under the Hong Kong Securities Ordinance, and a VATP license under the Hong Kong Anti-Money Laundering Ordinance. Because the amendment to the Hong Kong Anti-Money Laundering Ordinance included crypto-related anti-money laundering regulations, the specific responsibility for these anti-money laundering duties was assigned to the Securities and Futures Commission (SFC). The SFC became the responsible authority for crypto-related anti-money laundering in Hong Kong and was required to have supervisory measures. Consequently, the Virtual Asset Service Provider (VATP) license was established within the Anti-Money Laundering Ordinance and officially took effect on July 1st of last year. This led to many exchanges announcing the closure of their Hong Kong operations on June 1st of last year.

License Type 7 has always existed in the Securities Ordinance. Before the Hong Kong Securities and Futures Commission (SFC) amended its anti-money laundering regulations and was granted AML responsibilities for cryptocurrencies, it only issued License Type 7 under the SFC. This is a very unique situation in Hong Kong.

In addition to adding another license, this regulation has also led to significant changes in Hong Kong's regulation of currency exchange point licenses over the past year and a half. In Hong Kong, currency exchange points are licensed by the Hong Kong Customs and Excise Department, which naturally includes exchanging cryptocurrencies for fiat currencies in its business scope. They began operating this business, but it grew so rapidly that the Hong Kong Customs and Excise Department considered it a potential money laundering issue. Consequently, the Hong Kong Customs and Excise Department independently drafted AML requirements for these currency exchange points and revised the requirements for currency exchange point licenses.

After the revisions, Hong Kong's new legislation clarified that the SFC is the primary entity responsible for AML for cryptocurrencies. Therefore, the Customs and Excise Department's claims no longer hold true, as the law does not grant them authority to regulate cryptocurrencies. So, last year, a proposal was made for currency exchange licenses to be jointly reviewed and issued by the Hong Kong Customs and Excise Department and the Securities and Futures Commission (SFC), but this was just an idea shared by both parties.

In May of this year, the law governing currency exchange point licenses, known as VA OTC licenses, was enacted. The new law adhered to public opinion, and Customs no longer participated in regulatory oversight. VA OTC licenses are now solely the responsibility of the SFC for review and issuance. The international anti-money laundering (AML) regulations regarding cryptocurrencies led to amendments to Hong Kong's Anti-Money Laundering Ordinance, impacting the entire crypto industry.

Why are AML measures for crypto assets more effective than those for traditional finance?

Hongjun:

So, what does AML specifically mean in business or practical terms? For example, does it refer to bank deposits and withdrawals from stablecoins or cryptocurrencies to fiat currency? Or, assuming that all stablecoins are on-chain in the future, will real-name registration be required? Does it have a specific meaning?

Dr. Xiao Feng:

Traditional finance and crypto AML have different approaches due to different technical logic. This is a very debatable issue. Traditional finance believes that crypto is completely incapable of AML due to its anonymous nature. Traditional finance's AML relies on identity, but on-chain identities are absent or anonymous, so they believe this presents a significant problem and makes AML impossible.

After I explained this to them, many traditional finance professionals believed that crypto AML is superior to traditional finance. This is because crypto AML tracks wallet addresses, which can track the flow of funds, such as where the money has and has not been. Within a single country, AML is relatively easy, as judicial authorities can access all bank records. However, in Hong Kong, accessing other banks' records can be much more complex, and identity-based discovery is much more difficult than in mainland China. However, if it's cross-border, involving two or more countries, and a person's money flows through several of them, anti-money laundering efforts are nearly impossible because other countries won't cooperate unless they comply with lengthy and complex legal procedures. Furthermore, national laws restrict the disclosure of customer information. Traditional finance's anti-money laundering system is actually a very inefficient, costly, and difficult-to-enforce mechanism, but cryptocurrencies don't require these restrictions. For example, on the HashKey exchange, whether it's a stablecoin or a token, technically we can track the token's creation date and its movement path. Global crypto anti-money laundering agencies' daily work involves labeling wallet addresses as blacklisted or legitimate. If an address appears on a blacklist, we deem it suspected of money laundering and will reject it. This is a more effective anti-money laundering mechanism. Traditional finance is gradually understanding and accepting this approach, believing it to be the best solution currently available.

Real Use Cases of Stablecoins

Liu Feng:

Why do financial institutions in Hong Kong, interested in stablecoins, choose stablecoins? While we can understand this from a high-level perspective, focusing on currency wars and sovereign states' struggles for monetary power, why should we, as participants, consumers, and users, get involved?

Dr. Xiao Feng:

I once argued that stablecoins solve the last mile of financial inclusion. Stablecoins are easier to access than the US dollar. They don't require a bank account or reliance on banks. Imagine a country with a severe dollar shortage. Even if you have a bank account and want to exchange dollars for US dollars, the bank may not be able to provide services because it doesn't have US dollars. Currently, the largest group of holders of US dollar stablecoins is in Nigeria, Africa. Among its 200 million-plus population, 30% to 40% own US dollar stablecoins, and most of these people likely don't have bank accounts. They can't open bank accounts, and banks can't provide them with services. Now, anyone with a mobile phone can exchange their local currency for USDT at a currency exchange in Nigeria. With USDT, anyone has global payment capabilities, enabling them to send money around the world. For example, a Filipino domestic worker in Hong Kong sends one to two thousand Hong Kong dollars each month to her parents in rural Philippines. The current system takes 15 days and incurs a 7% to 10% fee for her parents to receive this money. If a stablecoin is used, whether it's a Hong Kong dollar stablecoin, a US dollar stablecoin, or an offshore RMB stablecoin, her parents also have mobile phones. Currently, about 80% to 90% of people have mobile phones. Payments made with stablecoins arrive within seconds, eliminating the 7% to 10% fee. Crucially, the funds arrive in tens of seconds. This is true financial inclusion. Therefore, new technologies and financial market infrastructure are actually contributing to the realization of financial inclusion.

Liu Feng:

Why are these institutions so eager to apply for licenses? What do they see?

Dr. Xiao Feng:

If you were an institution that started planning three or four years ago, I believe you saw great potential. For those who hastily announced their stablecoin plans this month, I believe most of them are speculators who simply don't understand how to truly operate a stablecoin system.

Liu Feng:

Even if they have long-term plans, if we look back, if a Hong Kong stablecoin were launched today, who would want to use it? This also includes the much-anticipated RMB stablecoin. Given that our capital account remains closed, what are the real use cases for RMB stablecoins?

Dr. Xiao Feng:

Stablecoins are often framed in a narrow context, and I think this is incorrect. Stablecoins are more than just a payment tool. While the US legislation recognizes US dollar stablecoins as payment instruments, it also leaves a loophole, authorizing stablecoin regulators to submit a research report on non-payment US dollar stablecoins within one year of the law's implementation. In reality, 99% of current US dollar stablecoins are not used for payments, but rather for transactions. This can be considered transactions driven by payments, but primarily between crypto assets and stablecoins. The estimated payment volume of stablecoins used for payments in 2024 is $73.2 billion, which isn't a huge number, and the majority of this is spent on crypto asset transactions. Stablecoins are already trending towards becoming a medium of exchange and a measure of value. They will become a measure of value in both the virtual and digital worlds, serving as a medium of exchange for all virtual and crypto assets. In the future, Hong Kong dollar stablecoins and offshore RMB stablecoins will also largely be used as transaction media like RWAs. I believe this is their primary use case. While they can certainly be used for payments, it won't be their primary use case for at least three years.

Re-exploring the Development of the Cryptoasset World

Liu Feng:

The applications in the payment field that everyone is currently obsessed with will actually take longer.

Dr. Xiao Feng:

Yes, payment certainly has its associated functions. Stablecoins weren't created for payment purposes per se, but because crypto assets are so volatile, we need a relatively stable currency to price and trade these volatile assets. The stability of stablecoins is relative to Bitcoin's volatility, not to the US dollar. Some people now explain stablecoins by saying they're pegged 1:1 to the US dollar, but stablecoins don't exist for this purpose.

When stablecoins first emerged in 2014, the entire market was crying out that volatility was too high and that Bitcoin or other currencies couldn't be used as a medium of exchange. We needed a stable currency to price these volatile assets, such as, what's the value of one Bitcoin? $120,000 actually refers to 120,000 USDT, which are then used for transactions.

Stablecoins on consortium chains will not succeed

Liu Feng:

When USDT, or the US dollar stablecoin, was first introduced, it was practically unused for several years. At that time, all crypto assets were priced in fiat currency. Whether it was the US dollar or the RMB, for a long time the RMB was the primary pricing currency for all crypto assets.

Today, a key use case for the internationalization of the RMB is the pricing of crypto assets. However, due to our regulatory policies, this trend was halted, prompting the emergence of stablecoins. Today, we are discussing the return of stablecoins. This topic was probably discussed 10 years ago. At that time, there was a wave of people who wanted blockchain, not Bitcoin. Today, it seems that we want both blockchain and Bitcoin, and even more so, stablecoins.

Dr. Xiao Feng:

I remember that around the beginning of 2015 or the end of 2014, the UK Chief Scientist's Office released a policy report titled "Blockchain and Distributed Ledgers." The argument was that blockchain and distributed ledgers were good, but it was the cryptocurrency itself that was bad. Therefore, the concept of consortium chains was proposed. So where have these consortium chains gone to today? Both the market and technology have given the answer: consortium chains don't work. The essence of a blockchain lies in its own token. Without a token, it's still just the internet. In fact, we've seen that even those who were most opposed to coined blockchains are gradually accepting it. If you accept stablecoins, they're just tokens on the chain.

Liu Feng:

Is it possible that the stablecoins we're discussing today, or in the Chinese context, will be issued on consortium chains in the future? Is that a possibility?

Dr. Xiao Feng:

Some people have been trying to do this, but I believe it won't succeed. Who would use a consortium blockchain? If this use required an application, a license, and approval, just imagine how difficult it would be to promote from a market perspective. First, I have to apply, and then you have to spend a tremendous amount of effort to review each application individually, just like the Know Your Customer (KYC) process in traditional financial markets. The permissionless nature of blockchain is a crucial feature of its development. Because it's a permissionless network, anyone can join and leave freely. I can make my own decision. The most typical example is Bitcoin miners. I buy a mining machine, find a place with electricity and internet, and when I want to join, I join. If I don't want to, I can shut down the entire machine. This is how Bitcoin miners have been around since the beginning.

Most applications, or successful applications, are created in a permissionless environment. As we discussed earlier, the digital economy encompasses organizations that transcend time, space, jurisdiction, and entities. Who will authorize this? What standards govern licensing? Therefore, if you truly want to promote and succeed, you must adhere to the fundamental principles of blockchain, just as the existence of a cryptocurrency is a fundamental principle. If a bank were to build a public or open consortium blockchain, wouldn't it be even more difficult to find customers than offline? Without customers, what's the point of a blockchain? Ultimately, these problems stem from inefficiencies and low costs, preventing anyone from truly thriving.

Competition and Cooperation Between Traditional Securities Firms and Cryptocurrency Exchanges