Author | Jeffery, Chief Analyst at HashKey Group

Stablecoins have always been an indispensable part of the cryptocurrency ecosystem.

Data shows that over the past four years, quarterly stablecoin transfers have increased seventeen-fold, from $17.4 billion in the second quarter to $4 trillion. On July 17, 2024, the total transaction volume of the entire inter-currency market was $94.8 billion, and stablecoins accounted for 91.7% of the total cryptocurrency market transaction volume, reaching $87 billion, and the largest of them was USDT, reaching 83.3%.

However, due to the lack of endorsement from large financial institutions, stablecoins are unlikely to become truly "stable" coins for users. With the advent of the compliance era, governments in Hong Kong, Europe, Singapore, the United States and other places have begun to issue local stablecoins, and the stablecoin market structure may usher in changes. This article will discuss how the Hong Kong stablecoin market structure will be reshaped in the compliance era, as well as the possibilities for future development.

Hong Kong will become the first region in the world to allow banks to issue stablecoins

The Hong Kong government has recently actively promoted the establishment of a stablecoin regulatory system to maintain financial stability and protect consumer rights. Following the virtual asset service provider licensing system that came into effect in June last year, the Treasury and the HKMA consulted the public on the proposed regulatory system for stablecoin issuers in Hong Kong at the end of last year and are about to publish a consultation summary. We can summarize Hong Kong's stablecoin regulatory policy orientation.

At present, Hong Kong has a strict regulatory system for issuers of fiat stablecoins, which mainly includes reserve management and stabilization mechanisms, requiring issuers to ensure that fiat stablecoins are fully backed by high-quality and highly liquid reserve assets; redemption requirements; and regulatory requirements.

In terms of stablecoin suppliers, only licensed fiat stablecoin issuers, authorized institutions, licensed corporations and licensed virtual asset trading platforms can provide stablecoins. The issuer may involve exchanges, banks, and licensed investors such as USDT, USDC, etc.

According to the list of participants in the stablecoin issuer sandbox released by the Hong Kong Monetary Authority today, the institutions participating in the sandbox include: Yuanbi Innovation Technology Co., Ltd., JD CoinChain Technology (Hong Kong) Co., Ltd., Yuanbi Innovation Technology Co., Ltd., Standard Chartered Bank (Hong Kong) Limited, Anni Group Limited, and Hong Kong Telecommunications (HKT) Limited. These institutions can demonstrate their true intention and reasonable plans to develop stablecoin issuance business in Hong Kong during the evaluation process, and that the proposed operations under the sandbox will be carried out within restrictions and with controllable risks.

In February this year, Hashkey Exchange, the largest licensed exchange in Hong Kong, Yuanbi Technology, and Allinpay International issued a cooperation announcement. The three parties relied on their respective business and product advantages to cooperate, including compliant and secure digital currency trading services, a wide and diverse offline physical merchant acceptance network, and advanced stablecoin research and development technology.

However, as for USDT and USDC, which have the highest adoption rates at present, whether they can be traded in Hong Kong in the future depends on whether they can successfully transition. The first problem is that only issuers with physical companies in Hong Kong can apply. Second, if we look at the European MiCA stablecoin regulatory policy, perhaps only issuers that support placing reserves in banks can be recognized by regulators in the changing situation. This part will be discussed in detail later.

On the other hand, Hong Kong may also see a scenario where stablecoins "bloom in many directions". For example, banks have their own stablecoins, and exchanges have their own stablecoins. If banks successfully launch their own stablecoins, Hong Kong will be the first place where banks launch stablecoins, and it can also be a pioneer in other parts of the world. According to media reports, State Street Global, the world's largest ETF SPY issuer, is expressing interest in stablecoins and tokenized deposits.

Although the cryptocurrency ecosystem in Hong Kong is still developing, for example, ordinary citizens cannot directly use bank money to purchase stablecoins, and there are no adequate payment systems and stored-value methods to cover stablecoins. In addition, in terms of accounting, there are no perfect regulations to determine whether crypto assets can become part of a company's assets. In terms of licenses, you must have a physical company in Hong Kong to apply, so USDT and USDC have to consider more, because they have to set up a company in Hong Kong to issue them, which may deter them, and they have not yet cooperated with other jurisdictions, so these issues are also worth considering in the future.

Enlightenment from Hong Kong’s Stablecoin Regulatory Policy and Europe’s MiCA Regulations

The direction of Hong Kong's stablecoin policy may provide some reference for the regulation of European stablecoin policy.

At present, the European MiCA is very similar to Hong Kong's stablecoin regulations, or even more comprehensive, and it is the most comprehensive cryptocurrency regulatory bill in Europe's history.

On April 20, the European Parliament adopted MiCA, which is expected to be fully implemented in early 2025.

Starting in July 2024, the most important legislation has come into effect, including that stablecoin issuers will need to maintain sufficient reserves, such as keeping at least one-third of all funds in banks, to meet large-scale withdrawal requests. In addition, transaction quota limits will also need to be set.

This is a big challenge for stablecoin issuers. As the largest stablecoin provider, Tether, which issues USDT, has no plans to be regulated by MiCA regulations in the near future, because its CEO Paolo Ardoino expressed some concerns about MiCA's requirements. He believes that stablecoins should be able to keep 100% of their reserves in treasury bills, rather than storing large amounts of reserves in uninsured cash deposits, exposing themselves to the risk of bank failures, which is detrimental to their interests. However, Tether said it would continue to communicate with relevant institutions to reach a consensus.

Currently, many exchanges will delist unlicensed stablecoins in Europe, and many cryptocurrency exchanges have also taken adjustment measures. For example, OKX delisted Tether's USDT for EU users in March, but continued to support USDC from Circle, a stablecoin issuer that attaches great importance to regulations. However, some companies such as Kraken will continue to list USDT in Europe. They said they understand that European customers value the use of USDT, so there is no plan to delist for the time being.

The USDC stablecoin issued by Circle may become the biggest beneficiary under the new European digital asset management regulations that will take effect in July. As the first stablecoin under the MiCA regulations, its market share in Europe may soon surpass USDT to become the largest stablecoin provider in Europe.

MiCA regulations may have an impact on transactions for European users in the short term, but in the long run, the successful implementation of MiCA may inspire other jurisdictions such as Hong Kong to adopt similar regulatory measures, promoting higher standards of global market integrity and consumer safety.

This coordination reduces regulatory arbitrage, helps form a more consistent and stable global crypto market, and promotes cross-border transactions and investment. MiCA may enhance international cooperation and standardization of digital asset regulation. Countries observing the benefits of a well-regulated EU stablecoin market may implement similar frameworks, improving the resilience and transparency of the global financial system. This shift to unified regulatory standards attracts institutional investors seeking clarity and stability, further promoting the legitimization and global growth of the crypto industry.