The article comes from Caijing Magazine, author Jiao Jian

“Stablecoins are not a tool or means to make money or speculate. I hope the market will return to the original intention of launching stablecoins in Hong Kong, China, which is to use this financial tool to help the real economy and improve the efficiency of capital circulation.”

After announcing a series of favorable policies for the development of digital assets such as stablecoins, as market enthusiasm continues to soar, a number of relevant regulatory departments in the Hong Kong Special Administrative Region of China have recently frequently expressed the above views, with the main purpose of emphasizing that the issuance and application of stablecoins are still in the exploratory stage, with high entry barriers and involving institutional construction or connection at multiple levels, and therefore need to be advanced cautiously.

In short, Hong Kong, China hopes to fully align the issuance and supervision of stablecoins with the "traditional financial level" compliance framework.

The so-called "stablecoins" are digital assets that are designed to maintain a relatively stable value with certain assets (usually currencies). Stablecoins used in related scenarios such as payment tools are also considered to be an interface or connection mechanism linking traditional finance and digital assets.

From a global perspective, as all parties expect stablecoins to be more widely used, how to properly manage the various inherent and spillover risks associated with this process is gradually becoming the focus of international supervision. At this year's Summer Davos Forum, IMF (International Monetary Fund) Deputy Managing Director Li Bo said that stablecoins have the potential to become a very efficient means of payment and value storage, but the premise is that they are used moderately and how to be effectively regulated.

In recent years, several relevant institutions in Hong Kong, including the Hong Kong Monetary Authority (hereinafter referred to as the "HKMA"), have been actively participating in the work of international regulatory organizations, including the "Global Regulatory Framework for Crypto-Asset Activities" issued by the Financial Stability Board (FSB) in 2023. The framework provides a set of guiding international guidelines on how to regulate stablecoins, and the "underlying logic" of the relevant regulatory system in Hong Kong, China, is believed to be based on this to a large extent.

On this basis, as one of the regions in the world that is preparing to take the lead in releasing legal stablecoins, Hong Kong, China, is considered to have certain reference value in terms of its relevant system preparation and pace of release. Combined with a series of views and attitudes recently revealed by relevant local regulatory authorities, the following points may be worth paying attention to:

First, in terms of entry barriers, legal stablecoins “did not flourish” in the early days of their legalization in the Hong Kong Special Administrative Region of China.

In May this year, the Legislative Council of Hong Kong passed the Stablecoin Ordinance (hereinafter referred to as the Ordinance), which introduced a licensing system for stablecoin issuers anchored to legal tender in Hong Kong. According to the implementation steps, the Ordinance will take effect on August 1, when the Hong Kong Monetary Authority will begin accepting license applications. This also marks the implementation of the world's first comprehensive regulatory framework for legal tender stablecoins.

"As a key tool connecting traditional finance and the Web3 ecosystem, stablecoins have great potential, but they are also accompanied by potential systemic risks. The introduction of the Regulations is precisely to provide a clear and predictable institutional environment for innovation under the premise of maintaining financial stability and consumer rights." Faith, a partner at the Hong Kong office of King & Wood Mallesons and a lecturer at the Faculty of Law of the University of Hong Kong, whose practice scope covers digital assets and financial supervision, explained to Caixin that "the core of stablecoin regulation is 'stability'. Through a clear licensing system, strict compliance requirements and comprehensive prudential supervision, trust and transparency are injected into the market. This institutional trust is an important guarantee for the digital asset ecosystem in Hong Kong, China to attract global capital and serve global users."

On June 23, Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, clearly mentioned in an article about the stability and sustainable development of stablecoins that stablecoins are not investment or speculation tools, but one of the payment tools using blockchain technology, and there is no room for appreciation. In addition, the anonymity and cross-border use of stablecoins also bring challenges in risk management, especially anti-money laundering.

Regarding the number of licenses that the market is paying close attention to, Yu Weiwen also clearly pointed out that "considering that stablecoins are relatively new products, the risks involved in the issuance business, the protection of users, and the market's carrying capacity and long-term development, the threshold for licensing is quite high. We expect that at most only a few licenses will be granted in the initial stage."

This prediction of numbers is considered to be "expectation management" for the local public opinion and a series of institutions' eager discussions on licensing. In fact, the Hong Kong Monetary Authority launched the "Stablecoin Issuer Sandbox" in early 2024, but entering the sandbox is not a prerequisite for applying for a stablecoin issuer license, and participating institutions in the sandbox do not necessarily obtain a license.

 The Hong Kong Monetary Authority will launch the "Stablecoin Issuer Sandbox" in early 2024, but participating institutions do not necessarily obtain a license. The standards set by the regulator are relatively high, almost on par with e-wallet and bank supervision. Photo by Jiao Jian

According to incomplete statistics from Caijing, there are currently at least nine institutions in the Hong Kong market that have expressed their intention to apply for or are rumored to be exploring the application for licenses. Among them are three groups of institutions participating in the HKMA's stablecoin sandbox, all of which plan to issue Hong Kong dollar stablecoins.

"We will carefully consider all license applications in accordance with consistent and strict standards." Yu Weiwen pointed out that Hong Kong has set relatively strict standards for stablecoin issuers, with a high entry threshold, almost in line with e-wallet and banking supervision.

"Hong Kong is comprehensively benchmarking the regulation of stablecoin issuance against the 'traditional financial level' compliance framework, especially in terms of anti-money laundering, transaction monitoring, risk identification, etc., and is taking a steady and solid approach. For stablecoin issuers that intend to enter the Hong Kong market, in addition to building the underlying security infrastructure, establishing a compliance system covering the entire chain has become a key prerequisite for obtaining a license and achieving long-term compliant operations." Wade Wang, CEO of Safeheron, an enterprise-level self-custody service provider that serves many compliant digital asset institutions, explained to Caixin, "The overall threshold is not low, and it is not easy for ordinary players to enter the market."

Secondly, in terms of timing, the Hong Kong Special Administrative Region Government’s stablecoin licensing is expected to be issued within this year.

On July 7, the Secretary for Financial Services and the Treasury of the Hong Kong Special Administrative Region Government, Paul Chan, said in an interview with local media that relevant departments of the Hong Kong Special Administrative Region Government hope to receive applications after the Ordinance comes into effect, but they will strive to issue licenses within this year.

Just a week ago, Xu Zhengyu also emphasized that stablecoins should not be seen as a tool for making money or speculation. A market like "Western cowboys" or "guerrilla warfare" is not attractive in the long run. "To be a market that everyone trusts, Hong Kong's reputation comes from our high-quality financial supervision."

Liu Honglin, founder of Shanghai Mankiw Law Firm, which focuses on serving the Web 3.0 new economy, explained to Caixin that "single-digit license issuance" and "the first batch of licenses will be issued this year" are actually a reaffirmation of the entire Hong Kong stablecoin regulatory approach, that is, not full opening, but prudent pilot and quantitative issuance. "This logic is actually the same as the previous licensing of virtual asset exchanges. Hong Kong currently values compliance models and controllable risks more than the number of licenses."

According to Caixin, there are still many factors that affect the timeliness of licensing. For example, the Monetary Authority of Singapore is still consulting market stakeholders on how to implement the Regulations, and will subsequently announce guiding policies, which will involve anti-money laundering (AML) and a series of other related requirements.

Taking the anti-money laundering regulatory system related to stablecoins as an example, its key links include KYC (Know Your Customer) and KYT (Know Your Transaction). The former is to prevent high-risk users from entering the market, and the latter is to monitor on-chain transactions in real time.

Wade Wang revealed some of the key nodes. For example, in order to comply with the regulatory requirements of Hong Kong, China, companies interested in engaging in related businesses need to establish a complete KYC/KYT process, implement sanctions list screening, submit suspicious reports, and improve internal compliance and data management.

On this basis, digital asset service providers, such as custodians and compliance service providers, should have advanced AML and KYT functions, provide real-time and proactive early warning systems, dynamically track capital flows, and identify suspicious transaction patterns, thereby helping companies to more accurately detect and prevent illegal activities such as money laundering.

The establishment of this series of systems actually takes some time. "What really determines whether digital assets can be implemented on a large scale and for a long time is not only the improvement of the regulatory environment, but also the maturity and security of the underlying infrastructure. The widespread application of stablecoins, especially in key scenarios such as payment and settlement, must be based on a technical architecture with high security, high availability and strong compliance. It is this 'invisible support system' that determines the sustainability and mainstreaming of the development of the digital asset industry." Wade Wang pointed out.

Third, in terms of application scenarios, after the relevant institutions are issued licenses, there is currently relatively high uncertainty regarding the focus of their specific usage scenarios and whether they can be linked to other legal currencies.

Taking application scenarios such as cross-border payments as an example, as a difficult and painful problem in the real economy, according to the general view of academic research, if there is a stablecoin based on legal currency, it can serve as an effective payment tool to facilitate cross-border transactions and reduce transaction costs.

Relevant public data shows that in 2024, the total transaction volume of various types supported by stablecoins has reached 27.6 trillion US dollars, exceeding the total transaction volume of global payment giants Visa and Mastercard.

But stablecoins are not the only option. Other new payment tools that can solve similar problems include the CBDC (central bank digital currency) network established by some central banks, tokenized deposits planned to be issued by some international banks, cross-border connections of fast payment systems, etc. These related payment tools have their own characteristics and varying degrees of maturity, and their development prospects are mainly determined by the market.

In addition, there is a very strong demand for stablecoins in practice around the world, which is "asset preservation". Especially in some countries where the local currency is highly depreciated or the financial system is unstable, such as some African countries, the penetration rate of stablecoins in the local area is relatively high. It is not just a payment tool, but also a "dollar substitute" that ordinary people can reach. This case has been used by some local public opinions in Hong Kong, China to illustrate that the use of stablecoins in multiple scenarios should be accelerated.

Lawyer Liu Honglin believes that the Hong Kong SAR government's statement actually conveys a relatively clear attitude to cool down the market. "In the past period of time, the expectations of all parties on the stablecoin track have indeed been a bit overheated. Everyone wants to issue it and everyone says they can do it. However, the regulators have clearly pointed out several practical problems. In addition to the fierce competition and the fact that there will not be many licensed institutions in the early stage, they are also worried that no one will use it after it is issued. Stablecoins without real scenarios are actually meaningless. In order to avoid hyping such products as "pseudo-financial tools" to mislead ordinary investors, stablecoins with interest or incentives are not allowed."

"Overall, Hong Kong's regulators hope that the industry will be more calm and not rush to issue coins. Instead, they hope to truly implement the actual needs of the real economy, such as payment, clearing, and cross-border circulation. This is Hong Kong's original intention to promote stablecoins," Liu Honglin pointed out.

Xu Zhengyu pointed out that when stablecoins are used in cross-border transactions and other scenarios, different financial systems will be involved. For example, if the locals in a region do not have much confidence in their own currency, once there is severe inflation or a sharp drop in the exchange rate, there will be a demand for other currencies as a means of payment. If the financial system in the region is also unable to support other foreign currencies, stablecoins based on blockchain can serve as an alternative to local currencies. "In these cases, the benefits of stablecoins in cross-border transactions and payments can be clearly reflected."

The background of his statement is that some applicants in the Hong Kong market have recently publicly stated that in addition to planning to issue Hong Kong dollar stablecoins after obtaining licenses, they also hope to issue stablecoins pegged to the RMB.

In fact, Huang Yiping, dean of the National School of Development at Peking University and member of the Monetary Policy Committee of the People's Bank of China, recently stated in an interview with relevant media in mainland China that there is an offshore RMB market in Hong Kong, China. "If the offshore market develops, it is possible to make a stable currency pegged to the offshore RMB in Hong Kong in the future."

"There may not be any legal obstacles to issuing stablecoins pegged to offshore RMB in Hong Kong. From the strategic perspective of RMB internationalization, it is also of positive significance." Lawyer Liu Honglin believes, "But in reality, we have also found that some entrepreneurial teams have encountered some legal and compliance issues during their attempts. This shows that the current policies have not been fully straightened out, and there is still a gap between market enthusiasm and regulatory coordination. If the central bank can make a clearer statement in the future to support companies to legally and compliantly issue stablecoins based on offshore RMB overseas, it should be more helpful to promote the improvement of the entire mechanism."