Author | Wu Talks Blockchain

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This podcast features veteran Hong Kong compliance lawyer Wu Wenqian, who provides an in-depth analysis of Hong Kong's newly enacted stablecoin law and clarifies multiple market misconceptions. He points out that foreign stablecoins like USDT and USDC are not issued in Hong Kong and are therefore not subject to the new regulations; over-the-counter trading of major stablecoins remains permitted in Hong Kong. The podcast also discusses retail investor participation, know-your-customer (KYC) requirements, the regulatory approval process, the background of large institutional investors like JD.com, and the strategic responses of banks and traditional enterprises. Furthermore, the podcast examines the difficulties in applying for stablecoin licenses, the challenges of adapting the law to compliance scenarios, and the diverging approaches to crypto policy between Hong Kong and the United States, offering an outlook on the potential and limitations of stablecoins in Hong Kong.

For the full audio, please search for "Wu Shuo" on mainstream audio platforms at home and abroad, such as Xiaoyuzhou. This article does not constitute any investment advice, and the author's views do not represent those of Wu Shuo. Readers are advised to strictly abide by local laws and regulations.

Clarifying Misunderstandings: The Relationship between the Scope of Stablecoin Regulation and Overseas Projects

Colin: Welcome, Attorney Wu, to our podcast. Attorney Wu previously served as the Head of Legal and Compliance at OKX and Huobi, and is very familiar with Hong Kong's compliance policies. The recent enactment of Hong Kong's Stablecoin Bill has garnered significant attention and controversy. There's been much discussion about the bill's many details, particularly regarding whether foreign stablecoins will be prohibited from circulation in Hong Kong and the bill's requirement that every holder complete Know Your Customer (KYC) procedures. Therefore, we've invited Attorney Wu to provide insights.

Attorney Wu has previously discussed this with me, and he believes there are many misunderstandings about this bill. Let's first ask Attorney Wu to explain what he believes are the core misunderstandings.

Lawyer Wu: Thank you, Colin, for giving me this opportunity to address some of the common misunderstandings regarding the Stablecoin Ordinance. The Hong Kong Stablecoin Ordinance officially came into effect on August 1st. Recently, I've been in contact with many people in the cryptocurrency community and industry, and they're all concerned about a few issues. The first is whether USDT and USDC will be banned in Hong Kong. So, first, I want to explain what exactly this ordinance regulates. It regulates stablecoins issued in Hong Kong. In other words, if your company or entity issues a stablecoin within Hong Kong, you're subject to regulation. Secondly, if you issue a stablecoin outside of Hong Kong, but it's pegged to the Hong Kong dollar and maintains a stable value, you're also subject to regulation. Thirdly, if regulators determine that your issuance qualifies as a stablecoin, it will also be subject to regulation.

The key point to clarify is that only stablecoins issued in Hong Kong or denominated in Hong Kong dollars to maintain their stable value fall within the regulatory scope. By this standard, Tether's USDT and Circle's USDC do not need to apply for a Hong Kong license. First, they are not issued in Hong Kong, have no employees or offices in Hong Kong, and are not denominated in Hong Kong dollars. Therefore, they fall outside the regulatory scope and do not require a Hong Kong license.

This is the first misunderstanding. The second misconception is that USDT and USDC trading in Hong Kong is already banned, meaning that USDT or USDC cannot be traded in Hong Kong at all. However, as I just mentioned, the regulations regulate the "issuance of stablecoins." "Issue" here refers to the initial registration of a stablecoin on the blockchain, commonly referred to in the cryptocurrency world as "minting," not the act of buying or selling. Therefore, OTC trading of USDT and USDC in Hong Kong does not constitute issuance.

Therefore, USDT and USDC transactions in Hong Kong's OTC market are not covered by this regulation. While Hong Kong may establish a licensing system for the OTC market in the future—for example, the Customs Department has previously explored this issue—currently, OTC licenses have not yet been issued, and the current stablecoin regulations do not cover OTC transactions.

The third point concerns the HKMA's authority to formulate regulations. Some suggest the HKMA can arbitrarily define certain activities as stablecoin issuance, but this is not the case. Even if the HKMA deems certain activities to constitute stablecoin activities, they must follow legal procedures, complete public notification and registration in Hong Kong, and wait for an objection period before they can take effect. This demonstrates that the HKMA cannot arbitrarily define which activities require licensing; otherwise, it would be exceeding its authority.

Fourthly, whether a project is considered to be issuing a stablecoin in Hong Kong depends on multiple factors, including: Is the management team based in Hong Kong? Is the issuer or corporate entity registered in Hong Kong? Does the maintenance, liquidation, or burning of the stablecoin occur in Hong Kong? Are the reserve assets denominated in Hong Kong dollars and held in Hong Kong banks? These factors all determine whether a project is considered to be issuing a stablecoin in Hong Kong. Therefore, I believe there are currently many misunderstandings regarding stablecoin regulation, which require further clarification.

Regulatory vacuum: OTC trading oversight remains uncertain, with retail trading becoming a focal point of controversy.

Colin: So, Mr. Wu, you think that before the OTC bill is introduced in the future, USDT and USDC can still be used or traded in Hong Kong, right?

Attorney Wu: Yes, the simplest example is that USDT is still tradable on the HashKey platform. HashKey is a licensed virtual asset trading platform (VATP), and USDT is currently tradable on this platform without any issues.

Colin: I understand. So how do you think the future OTC legislation might regulate these two most popular stablecoins?

Attorney Wu: Nothing has been finalized yet. Looking back, Customs and Excise Department conducted a consultation in 2023, and a summary report was issued about six months later. However, a few months ago, regulators reopened the consultation on OTC products. So, the Hong Kong government has not yet determined whether Customs and Excise Department or the Securities and Futures Commission (SFC) will oversee OTC products.

I've previously discussed this with Customs officials and government officials, and there's a possibility that OTC services will be regulated by both sides. On the one hand, retail OTC services, such as money changers, are likely to fall under Customs oversight. On the other hand, OTC activities involving self-purchase, such as those brokered by online platforms, may fall under the purview of the Competition Commission (also known as the Pricing Commission). However, there's no definitive conclusion on this point.

So, we still don’t know whether OTC trading will be allowed for USDT and USDC. The biggest question is who will be trading with them – if it’s professional investors or institutional traders, then there’s generally no problem; they can conduct these transactions.

However, the most crucial regulatory focus is retail investors. Whether retail investors can trade USDT and USDC remains a question mark. Customs' previous consultations had suggested prohibiting retail trading of these two stablecoins. However, during our consultations, various individuals in the cryptocurrency community and compliance experts expressed concerns: If future OTC licenses exclude USDT trading, Hong Kong's entire licensing system would be marginalized. Since USDT and USDC still represent the largest sources of trading volume, preventing retail investors from trading them under OTC trading would negatively impact Hong Kong's position as an international crypto financial hub and the effectiveness of the licensing system.

So far, there's no final decision on whether retail investors can trade USDT under a licensed mechanism. I personally hope it can, because if it can't, the impact will be significant.

Colin: Yes, but the situation currently seems less optimistic. I feel that regulatory restrictions on retail investors are still quite conservative. Currently, only four cryptocurrencies are open to retail trading, and popular cryptocurrencies like Solana and BNB are not approved. It seems a bit difficult to imagine USDT and USDC being approved for retail trading.

Lawyer Wu: This is indeed a problem, and it may also be one of the reasons why OTC licenses have not yet been issued. I believe the Hong Kong government has not yet figured out how to regulate retail investors' access to USDT and USDC. Back in 2023, everyone expected the licenses to be issued by the end of the year, and there was constant push and consultation, but there was no clear result. Therefore, the issue of retail trading is indeed the most core and sensitive aspect of the entire regulatory process.

KYC Controversy Focus: Regulations do not specify mandatory requirements, but actual regulatory practices favor a closed-loop model

Colin: Another hot topic this time is, besides the question we discussed initially about the future use of USDT and USDC, another major point of contention: whether KYC is mandatory for coin holders. I'm sure you've noticed this. It seems that regulations in the US, Singapore, and the EU don't explicitly mandate KYC for all coin holders. If Hong Kong were to require everyone to complete KYC, it would, in a sense, sever the DeFi ecosystem, as it's currently difficult for DeFi to ensure that every user completes KYC. What are your thoughts on this?

Attorney Wu: Actually, the current regulations don't explicitly require all coin holders to complete KYC. It's not explicitly stated in the regulations. However, in the HKMA's license application process, stablecoin issuers must first explain their business and operating model to the HKMA before applying. Only after the regulator understands and approves these details will they issue the application form.

This means that the regulatory authorities will determine whether you are suitable for a license application based on the business model you submit. For example, if JD.com wants to issue a stablecoin for transactions or settlements within its internal ecosystem, such as buying and selling goods on the JD.com platform or clearing accounts between merchants, every person participating in the transaction must complete real-name authentication on the JD.com platform.

So, in this scenario, every user of JD.com's stablecoin has already completed KYC. In this closed-loop environment, I believe the HKMA recognizes this model and deems JD.com authorized to issue stablecoins. If you were to submit a different business model, for example, a proposal to the HKMA to use stablecoins within the DeFi ecosystem that emphasizes open transactions, anonymous user access, and no identification of coin holders, then I believe the HKMA's likelihood of approving your license application would be very low.

I want to emphasize that this is another area where people often misunderstand. Although the law itself does not require all stablecoin holders to complete KYC, in practice, the HKMA will review your business model based on your submission. If you cannot prove that your business has sufficient anti-money laundering and counter-terrorist financing capabilities, it will be difficult to obtain approval.

This actually depends on the business content, a "model-oriented" regulatory logic. So, in summary, while the regulations don't explicitly mandate KYC requirements, in the real-world approval process, regulators prefer closed-loop, controllable scenarios where users have verified their real names.

Large institutions are enthusiastic: Why are JD.com, Ant, and state-owned enterprises applying for stablecoin licenses?

Colin: The law actually has a rather vague statement, which was also mentioned in a later interview. It states that unless the licensee can demonstrate to the HKMA its ability to combat money laundering and terrorist financing, the identity of every stablecoin holder must be verified by the licensee or a third-party institution. He actually acknowledged this in the interview later. So, I understand that these KYC requirements were indeed mandatory at the outset, right?

Attorney Wu: Yes, that's right. I think that's true. The first one or two institutions that are able to obtain licenses will definitely need to complete the complete KYC process in a closed-loop environment. This will make it easier for them to obtain licenses. There is basically no doubt about this.

Colin: Yes, the current situation in Hong Kong is quite interesting, and you've probably noticed. Many banks, including some large Chinese banks, local banks, and a number of state-owned enterprises, are applying for stablecoin-related licenses. Large internet companies like JD.com and Ant have also joined in. Why is there so much enthusiasm? Meanwhile, regulators appear cautious, and the number of licenses issued doesn't seem to be very high. There's a sense that while mainland China is very enthusiastic about stablecoins, Hong Kong regulators are relatively calm and cautious. What are your thoughts on this situation?

Lawyer Wu: Yes, that's indeed the case. Looking at the current environment in Hong Kong, there are two aspects worth noting. First, the composition of applicants. Many Chinese institutions are hoping to obtain licenses by issuing stablecoins, seeking a legitimate entry point and a relatively formal market position.

I've also noticed that many listed companies aren't just looking to issue stablecoins; they're also leveraging crypto concepts like stablecoins and RWAs to hype their stocks. This is a trend many listed companies are currently pursuing. They often start by signing memoranda of understanding (MOUs) to create market hype about the upcoming launch of a blockchain or stablecoin business, thereby attracting investor attention and capital speculation. However, these initiatives are still in the conceptual stage.

However, there are currently very few projects that have actually launched stablecoin issuance or have substantial business operations. For example, Hong Kong issued more than a dozen Virtual Asset Trading Platform (VATP) licenses last year, but HashKey is by far the most active. User traffic and transaction growth on other platforms has been relatively slow.

I recently spoke with several companies that have obtained VATP licenses. They all share a common concern: Hong Kong's market is too small. If more than a dozen platforms operate simultaneously, the "market pie" will be too small to share. How can they survive? The stablecoin market faces the same problem.

In this context, the regulatory authority's strategy is to conduct a preliminary screening and understanding process at the initial stage of the application process, rather than allowing everyone to apply freely. Applications must first undergo detailed consultation with the HKMA, and only if they agree that your business model is viable will they issue a formal application form. Therefore, while many people are currently interested in applying for a stablecoin license and pursuing this business, only a small number actually make it to the actual application stage, a process inherently fraught with challenges.

Comparison of US and Hong Kong regulations: Hong Kong is stable but conservative, while the US is becoming more attractive due to political changes

Colin: I see, Mr. Wu. Actually, you've previously overseen global compliance for several exchanges. Recently, the US SEC released a very significant statement and article, and many have compared this to the situation in Hong Kong. From your perspective, do you feel that Hong Kong's approach is more conservative than that of the US, and that this has left the industry somewhat disappointed? What are your thoughts on this?

Wu: I think it's more appropriate to say that Hong Kong's approach to this industry has remained consistent from the beginning, with minimal change. Hong Kong has always been relatively pragmatic. Unlike some countries, we don't rush to introduce various licenses or policies. Instead, we take a step-by-step approach, first consulting and conducting research before enacting legislation and establishing a licensing system.

In contrast, policy fluctuations in the US can be more dramatic. For example, following Trump's recent return to power, the regulatory environment for the US crypto industry has suddenly become much more relaxed. In fact, before Trump's return to power, the regulatory environment in the US cryptocurrency industry was quite oppressive, and many people were even very disappointed with the US crypto market.

However, after Trump took office, this environment took a complete 180-degree turn, and many projects and institutions regained confidence in the US market. This is also why many people have recently turned to the US, believing that the environment there is more friendly.

Hong Kong, on the other hand, has maintained a relatively stable trajectory. Our policies and regulatory logic have a certain degree of continuity, and are not subject to drastic fluctuations due to shifts in political landscape or public opinion. From this perspective, if we look at short-term opportunities, the US is indeed more attractive right now. However, from the perspective of long-term development and regulatory stability, I believe Hong Kong may actually have the upper hand.

Looking back at that time two years ago, Binance, for example, was under immense pressure, as was Coinbase. Almost every US exchange was considering withdrawing from the US market. The situation at the time was extremely unfavorable for businesses, and it was difficult for a company with a long-term strategy to operate in such an environment. So, I think the US may be a better bet in the short term, but in the medium to long term, especially in terms of policy stability, Hong Kong still has certain advantages.

Offshore RMB stablecoin: Different from the Hong Kong dollar stablecoin, there is no conflict at present

Colin: Another area of focus right now is the offshore RMB stablecoin. For example, the Hong Kong Stablecoin Bill, currently in place, doesn't impose restrictions on RMB stablecoins, right? So, what are the essential differences between RMB stablecoins and other stablecoins?

Wu: In fact, within Hong Kong's stablecoin framework, the offshore RMB is not considered a stablecoin. This is because the offshore RMB is essentially a national legal tender, existing in offshore markets. Therefore, it cannot be categorized as a stablecoin, which exists in the form of a crypto asset and is backed by reserves.

For example, Hong Kong has previously discussed issuing E-HKD, or electronic Hong Kong dollars. This is actually a central bank digital currency (CBDC), which is completely different from stablecoins issued by commercial institutions. One is the digitization of a national sovereign currency, while the other is a stablecoin backed by an asset reserve mechanism. Therefore, I believe that the two are different in definition and function, and currently do not appear to be in direct conflict.

Colin: Do you think that under the current laws, companies like JD.com will be able to issue offshore stablecoins denominated in RMB in the future?

Wu: It's hard to say at this point. There may be some overlap between the offshore RMB stablecoin market and the conventional stablecoin market, but in the current environment, the primary issuer of Hong Kong's stablecoins is still Hong Kong dollar-denominated currencies.

As for whether the Hong Kong dollar and the RMB will develop into a scenario where they can be traded with each other in the future, this is very likely to happen. However, if the business model is simply designed using offshore RMB as a stable currency, I think Hong Kong's regulators, especially the Competition Commission, are unlikely to accept such a plan at this time.

This may be a direction for exploration in the next phase, rather than the initial focus of stablecoin issuance. Hong Kong's current policy remains focused on Hong Kong dollar-denominated stablecoins, and the Hong Kong dollar stablecoin remains the current development priority.

Active participation of banks: two major motivations for establishing teams to manage reserve assets and expand business

Colin: An interesting recent phenomenon is that almost all banks have begun setting up dedicated teams to work on stablecoins. This is quite unusual, as in other regions, such as the US and Singapore, stablecoin development is typically led by cryptocurrency institutions. However, in Hong Kong, many banks are entering the market, and from what I understand, they are indeed establishing teams, both in preparation for license applications and in exploring new business opportunities. Have you noticed this trend? Are there any specific reasons behind it?

Lawyer Wu: I think there are two main reasons why banks have started to set up stablecoin-related teams.

First, the new stablecoin licensing mechanism has been introduced. One requirement is that any Hong Kong dollar stablecoin must hold its reserve assets within the banking system. This means that stablecoin issuers must establish partnerships with banks and entrust their reserve assets to banks for management. Therefore, banks must first gain exposure to the industry and understand its operations before they can properly fulfill their reserve custody role. This is essential preparation for banks.

The second reason is market opportunity. We've seen a significant increase in USDT (Tether) volume in the United States. If Hong Kong's stablecoin business continues to grow, it will be a very stable business with long-term potential for banks. For banks, this type of financial service, backed by real assets and offering strong customer loyalty, holds immense commercial appeal.

Furthermore, Hong Kong banks themselves have recently faced considerable pressure, such as declining housing prices and the real estate market, and reduced revenue from traditional businesses. Naturally, they are looking to develop new growth areas. Against this backdrop, stablecoins are particularly worthy of investment. Therefore, the banks' willingness to actively participate is a very reasonable and strategically significant choice.

Competitiveness concerns: Hong Kong's stablecoins are oriented towards compliance scenarios and are unlikely to compete with USDT/USDC.

Colin: There's a topic of discussion right now. As you just mentioned, USDT and USDC have been incredibly successful. One primarily circulates in developing countries, while the other boasts a strong market share in compliant scenarios. So, are these stablecoins, launched under the Hong Kong Stablecoin Licensing System, truly competitive? Do they solely serve users within their own ecosystems, or are they potentially competing with mainstream international stablecoins like USDT and USDC?

Attorney Wu: I think this question needs to be examined from the perspective of market structure. USDT and USDC currently hold a massive market share, with nearly all cryptocurrency transactions based on these two stablecoins. If a Hong Kong-based stablecoin, such as Meego, were to launch, it would be extremely difficult to directly compete with USDT and USDC. I believe this is undeniable.

The key point is that the markets and use cases they target may be different. USDT and USDC are more likely to serve traditional cryptocurrency users, while stablecoins issued in Hong Kong may be more inclined towards the development of regulatory compliance scenarios.

For example, if there are some ODBA (On-Chain Digital Bond Authorization) or STO (Security Token Offering) projects in the future, these projects may be restricted to trading only with Hong Kong-licensed stablecoins. This would create a completely independent market ecosystem.

Conversely, USDT and USDC transactions often lack KYC and real-name verification processes. If used in securities trading, securitized token issuance, or collaboration with the Hong Kong Stock Exchange, these transactions may face challenges such as identity verification and compliance. However, compliant stablecoins denominated in Hong Kong dollars are unlikely to face these challenges.

Therefore, from the perspective of market division, Hong Kong stablecoins may not directly compete with USDT and USDC in the open market, but they may carve out a new path in compliant application scenarios. In this way, Hong Kong stablecoins can develop their own unique positioning.

Exploring application prospects: Stablecoins need to find their own position in specific compliance scenarios

Colin: Regarding regulated stablecoins, what advantages do you think they offer over traditional payment methods or fiat currencies? For example, you mentioned the Hong Kong Stock Exchange might adopt a stablecoin in the future. I'm having trouble understanding why they'd do that. Is it really necessary for them? I haven't fully considered this question. What are your thoughts?

Lawyer Wu: Yes, I think from the perspective of traditional cryptocurrency users, like myself, I would definitely prefer USDT over Hong Kong's local stablecoins. This is perfectly normal. For those who have been using digital currencies for the past few years, USDT and USDC are the most familiar and commonly used options.

As for Hong Kong's stablecoins, their development depends on whether they can find their own application scenarios. When they were first introduced, the regulatory authority established a "sandbox" mechanism and organized various pilot programs. This was essentially to explore, through practical experience, what kind of business model would develop if a stablecoin were issued locally in Hong Kong. These are still undecided.

In the foreseeable future, I believe Hong Kong's stablecoin is unlikely to compete head-on with USDT and USDC. This is almost certain. As I said before, it may need to find use and development space in another independent track.

However, this also depends on the overall direction of the cryptocurrency market. While concepts like RWA (tokenized real-world assets) and stablecoins are relatively active, the market seems to have lost its clear direction in the past year or two, compared to the DeFi Summer of 2020 and 2021, the NFT explosion, and the subsequent meme coin craze. This is especially true with the increasing entry of traditional financial (TradFi) institutions, which has led to a more conservative market.

At present, stablecoins are likely to develop primarily in compliant scenarios, such as LGBA (regulated on-chain asset issuance platforms) and STOs (security token offerings). They will form an ecosystem distinct from the traditional cryptocurrency world. My personal view is that these two systems should develop in parallel.

The cryptocurrency industry should continue to maintain its independence and develop in a more decentralized direction. Stablecoins in compliant scenarios, on the other hand, represent a completely different development path. I don't see a convergence of the two in the foreseeable future. Instead, I prefer a "two-pronged approach," with each developing its own ecosystem and business direction.

International Anti-Money Laundering Pressure: Could the FATF Review Influence Tighter Regulation in Hong Kong?

Colin: Lawyer Wu, there's one rumor I haven't fully confirmed, regarding Singapore's recent strict expulsion of unlicensed cryptocurrency institutions. It's said this is because the FATF, the international anti-money laundering organization, is currently conducting an audit of Singapore. This is largely confirmed. However, there's also talk that the FATF may conduct another round of assessments of Hong Kong next year. If this is true, I wonder if this will impact Hong Kong's cryptocurrency policy, particularly the strict anti-money laundering requirements in the new stablecoin regulations. What are your thoughts?

Lawyer Wu: I haven't heard of this yet, but if it is true, I think it will definitely have a certain impact. From another perspective, Hong Kong's various regulatory agencies have actually become more stringent in their scrutiny of companies, projects, and banking partners involved in the crypto sector.

This can be seen in real life. For example, in the past, some companies active in the cryptocurrency industry had relatively relaxed procedures when opening bank accounts or applying for relevant licenses. However, in the past six months, the approval process has become significantly more difficult. This change is real.

I think this tightening is actually reasonable. During the previous phase of relatively lax regulation, many companies and institutions actively entered this sector, taking aggressive action. However, once regulators realized they might have been overly lax, they naturally adjusted to stricter regulations. It's like a cycle—when regulations are relaxed to a certain degree, problems arise, followed by a period of tightening. After prolonged tightening and market suppression, there will be a period of moderate easing.

Therefore, I believe that Hong Kong's regulation is currently in the tightening phase of this "cycle." If the FATF does indeed conduct a new round of assessments of Hong Kong, regulatory oversight will likely place greater emphasis on the robustness of anti-money laundering mechanisms, including stricter requirements for stablecoins, real-name registration, know-your-customer (KYC) mechanisms, and reserve transparency. This could explain the current conservative nature of policy implementation.

Market enthusiasm is picking up: Web2 companies are entering the market, and the atmosphere in Hong Kong is gradually warming up, but many are still in the preparation stage.

Colin: One last question. What do you think of the Web3 scene in Hong Kong this year? There are rumors that some Singaporean institutions have begun moving to Hong Kong. Have you encountered this in your work or personal life?

Lawyer Wu: I haven't seen many Singaporean projects coming to Hong Kong yet. There are some, but overall, not many. On the contrary, I feel that the overall atmosphere in Hong Kong has been much better in the past two or three months than at the beginning of the year.

Between the end of last year and the beginning of this year, the Hong Kong market was relatively quiet, stagnant, and the overall Web3 community wasn't very active. However, in recent months, with the introduction and gradual implementation of stablecoin policies, I think the market has become relatively hot again.

In particular, many companies that originally worked on Web2, such as some client companies, brand owners, and even companies in traditional fields like perfume companies, have begun planning to enter Web3, considering issuing coins, developing digital assets, or other on-chain businesses.

Overall, Hong Kong is indeed experiencing a period of renewed interest, with people discussing and willing to participate. However, it's also important to note that most organizations are still in the "imagination phase," planning, researching, and envisioning projects, but few have actually implemented or started implementing them.

Personally, I prefer to see companies that work quietly, accumulating momentum and then suddenly developing a mature product or establishing a new niche. This is the scenario I'm most excited to see. Only when the hype surrounding Web3 truly shifts from conception to practical implementation can it become a true driving force for the industry.