1. Basic concepts and types of stablecoins
1. What is a stablecoin?
Stablecoins are cryptocurrencies or digital assets designed to maintain a relatively stable value, usually pegged to the value of a stable asset or basket of assets, such as fiat currency (such as the US dollar, euro), gold or other cryptocurrencies. The main purpose of stablecoins is to provide price stability in the cryptocurrency market so that they can be used more effectively as a medium of exchange, a store of value or a unit of account, while reducing the risks posed by market volatility.
2. Main types of stablecoins
Fiat-backed: These stablecoins are usually backed by fiat currencies as reserve assets, such as Tether (USDT) and USD Coin (USDC). The value of these stablecoins is directly linked to their reserve assets and is usually exchanged for fiat currencies at a 1:1 ratio.
Crypto-backed: These stablecoins are backed by other cryptocurrencies. This model usually involves over-collateralization to cope with price fluctuations of the backed assets.
Algorithmic: These stablecoins do not rely on any collateral assets, but instead use algorithms to adjust market supply and demand to maintain their price stability.
2. Current Status of Stablecoin Market
1. Application and development of stablecoins
Stablecoins are not only used for transactions and payments, but are also widely used in areas such as cross-border transfers and capital management.
● Trading and Payments: Stablecoins play an important role on cryptocurrency exchanges, providing a convenient way to hedge against market volatility and being used for quick conversions between different trading pairs.
● Cross-border transfers: Due to the global liquidity and low transfer fees of stablecoins, they are widely used in cross-border payments, especially when fast funds transfer is required.
● Capital management: Many financial institutions and investors in Hong Kong have begun to use stablecoins as a liquidity management tool to optimize asset allocation and manage risks.
2. Progress of stablecoin regulation in Hong Kong
The Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) have maintained a proactive approach to the regulation of stablecoins and cryptocurrencies. In order to ensure the healthy development of the stablecoin market, Hong Kong regulators have taken a series of measures to manage and supervise the issuance and use of stablecoins.
● Licensing system: Hong Kong has implemented a strict licensing management system for companies engaged in virtual asset transactions, which also applies to the issuance and trading platforms of stablecoins. Stablecoin issuers in Hong Kong must hold a license issued by the HKMA, and only stablecoins issued by stablecoin issuers licensed by the HKMA can be sold to retail investors.
● Anti-money laundering and counter-terrorist financing: Hong Kong's regulatory framework requires all financial institutions and service providers involved in stablecoins to comply with strict anti-money laundering and counter-terrorist financing regulations. However, the Hong Kong government plans to introduce new legislation, rather than simply revising the current "Payments Ordinance", "Anti-Money Laundering Ordinance" and other existing legislation to regulate stablecoins.
3. Security of Stablecoins and Anti-Money Laundering Challenges
1. Security issues of stablecoins
Although stablecoins provide a relatively stable value storage and transaction medium for the cryptocurrency market, they still face multiple security challenges:
(1) Smart contract security issues
● Contract design flaws: Some stablecoins may rely on smart contracts to maintain their value stability. If the contract has an imperfect design, it may result in the assets being unable to deliver on the value promise of the stablecoin.
● Risk of vulnerability attacks: Smart contracts themselves may become the target of hacker attacks. If attackers successfully exploit vulnerabilities, it may lead to large-scale financial losses.
(2) Centralization risk issues
● Deposit and collateral issues: For fiat-backed stablecoins, their security is highly dependent on the security and management of the collateral assets. If the bank or custodian that holds the collateral assets faces problems, it may affect the stability and convertibility of the stablecoin.
● Management and operational risks: The centralized management model makes the operators of stablecoins face management risks, such as improper fund management and internal operational risks.
(3) Regulatory risks
● Regulatory compliance: The operation and issuance of stablecoins may be subject to supervision by regulators in various countries. If relevant laws and regulations are not complied with, legal risks and closure risks may occur.
(4) Market liquidity risk
● Insufficient market liquidity: Stablecoins need to have sufficient market liquidity so that users can easily exchange and trade them. If the market liquidity is insufficient, it may cause price fluctuations or be unable to be quickly exchanged for other assets.
(5) Challenges of algorithmic stablecoins
● Risk of algorithm failure: Certain algorithmic or market-driven stablecoins may rely on complex economic models and market mechanisms to maintain value stability. These models and mechanisms may fail under extreme market conditions, causing the value of the stablecoins to fluctuate significantly or collapse. Currently, algorithmic stablecoins are temporarily unable to obtain licenses in Hong Kong.
2. Anti-money laundering challenges of stablecoins
Due to their global liquidity and relative anonymity, stablecoins also face unique challenges in terms of anti-money laundering:
● Anonymity and traceability: While most stablecoin transactions are public on the blockchain, anonymity and the use of mixers can make it difficult to track illegal activities.
● Cross-border regulatory challenges: Since stablecoins can be easily traded across national borders, coordination and cooperation among countries on anti-money laundering supervision is crucial.
● High-risk activities: Stablecoins are sometimes used to evade capital controls and engage in high-risk activities such as dark web transactions, which poses additional challenges to anti-money laundering efforts.
4. Application of Beosin KYT in Stablecoin Security and Anti-Money Laundering
1. Core functions of Beosin KYT
Beosin KYT (Know Your Transaction) is a platform designed specifically to address anti-money laundering and compliance needs for virtual assets. It uses blockchain big data and advanced AI technology to provide comprehensive transaction monitoring and risk analysis. The main features of the platform include:
Malicious address query: quickly identify and mark suspicious addresses through a huge blacklist address database.
Address transaction risk score: Risk scores are assigned to addresses based on transaction behaviors to help the platform understand customers’ transaction habits and risk levels.
STR report output: Supports the generation of detailed suspicious transaction reports (STRs), providing strong support for compliance investigations.
On-chain fund tracking and tracing: Using big data technology to track the flow of funds in designated accounts, revealing complex transaction networks and fund flows.
2. Application of Beosin KYT in the Hong Kong market
As the global application and regulation of stablecoins continue to develop, Hong Kong, as Asia's financial center, will surely play an important role in this process. In the future, the security and compliance of stablecoins will continue to be the focus of industry attention. Through the combination of advanced technology and effective supervision, Hong Kong is expected to maintain its leading position in the stablecoin market and provide a safe, transparent and efficient trading environment for the global digital asset ecosystem.
At present, Beosin's KYT solution has been adopted by many institutions, including exchanges, payment service providers, wallet service providers, DeFi project parties, OTC merchants, etc. For example, Hong Kong's star compliant exchange Hashkey Exchange, Hong Kong's leading OTC merchants Coin Hero and Crypto HK all highly recognize Beosin-KYT's stablecoin anti-money laundering capabilities.
