Author: Jiang Zhaosheng, senior researcher at OKLink Research Institute, authorized by Wu Shuo to publish
Recently, the Hong Kong Treasury Department and the Hong Kong Monetary Authority jointly issued a consultation summary on the legislative proposals for stablecoin regulation, stating that they will finalize the legislative proposals to implement the regulatory system based on market opinions and suggestions, and submit the draft bill to the Legislative Council as soon as possible. Hong Kong will thus become one of the first regions in the world to impose supervision on stablecoin issuers.
Stablecoins are not only an important branch of the virtual asset and Web3 markets, but also gradually become a widely accepted payment method and the most important "bridge" connecting traditional finance and the crypto market due to their value stability and transaction convenience. As the Web3 compliance process accelerates, countries are also actively promoting the regulation and development of local stablecoins, and the stablecoin market landscape may usher in changes. Against this background, this article will focus on the characteristics and advantages of Hong Kong's latest stablecoin regulatory framework, as well as the potential challenges and opportunities for future development.
Hong Kong’s stablecoin regulation is relatively friendly to international issuers
In the consultation summary recently released, the HKMA responded to some controversial or vague issues, and provided more appropriate guidance on core issues such as stablecoin stabilization mechanism, reserve asset composition and investment restrictions, redemption requirements and business activity restrictions. Compared with the EU, Japan and Singapore, although the regulatory framework revealed in the consultation summary has stricter requirements in some aspects (such as financial resource requirements), it still maintains greater flexibility and openness while ensuring regulatory effectiveness and leadership, in order to strike a balance between effective investor protection and providing greater innovation space for potential issuers.
Under the proposed framework, Hong Kong's friendliness towards international issuers such as USDT/USDC has become a hot topic. The global stablecoin market value has continued to rise in recent years, breaking through the $160 billion mark a few days ago, of which USDT/USDC accounts for more than 90% of the market value. The vast majority of crypto transactions are completed through these two stablecoins, which shows their importance. If regulation blocks these international issuers from Hong Kong, the impact on the local virtual asset industry may be huge.
However, judging from the consultation summary document, the author believes that the stablecoin regulatory framework that Hong Kong is about to implement is generally relatively friendly to international issuers. It has proposed more open and flexible measures than before, and the potential burden on international issuers should be alleviated. For example, the regulatory framework does not restrict the anchor currency type of fiat stablecoins, and is open to the storage of fiat stablecoin reserve assets in other regions. These show that Hong Kong has fully considered the global nature of stablecoins and is willing to attract more relatively mature international issuers to apply for licenses in Hong Kong within a certain range. Considering the policy friendliness and continuity of Hong Kong towards virtual assets, as well as the importance of Hong Kong in the global financial market, the author believes that Hong Kong's stablecoin issuer license is attractive to many international issuers.
It may be difficult for small and medium-sized institutions to directly participate in the issuance of stablecoins
In addition to relatively mature international issuers such as USDT/USDC, Hong Kong needs more local institutions to participate in the issuance of stablecoins. Judging from the requirements for issuers' funds, technology and operational capabilities in the consultation summary, the main participants in Hong Kong's stablecoin market will be banks and large technology/financial institutions, and it is unlikely that small and medium-sized institutions will directly participate in the issuance of stablecoins. The list of participants in the "sandbox" for stablecoin issuers recently announced by the HKMA has proved this to a certain extent.
Although the consultation summary adjusted the financial resource requirements for issuers, adjusting the minimum paid-up share capital requirement from the original "2% of the stablecoin circulation or HK$25 million" to "1% of the stablecoin circulation or HK$25 million", there is still great financial pressure for many small and medium-sized institutions. In addition, stablecoin issuers need to maintain full reserves at all times, which also puts higher requirements on the company's fund management and liquidity.
In order to comply with strict licensing conditions and ongoing compliance requirements, companies may also need to make extensive adjustments to existing systems and risk control processes to ensure that their technical capabilities are sufficient to prevent and respond to potential technical and security risks in the issuance and operation of stablecoins. It is foreseeable that despite the high attention paid to fiat stablecoins and the large number of institutions that have participated in the proposal, not many institutions will eventually apply for a license and issue them.
Among the possible stablecoin issuers, commercial banks are the most noteworthy. Unlike the current stablecoin applications led by non-bank institutions, which are concentrated in the field of virtual assets, the stablecoins launched by commercial banks may explore more integrated application scenarios and expand the use of stablecoins to a larger digital ecosystem, which is crucial for the entire stablecoin system. For commercial banks themselves, compared with other virtual assets and Web3 directions, stablecoins are the most consistent with the essence of banking business and have a clear entry path.
The deposit and withdrawal channel is one of the most worthy and easiest scenarios to accumulate value in the crypto ecosystem, and stablecoins are currently an essential infrastructure for building deposit and withdrawal channels. Stablecoins issued by commercial banks can not only provide transaction settlement services for more compliant virtual asset institutions, but also gradually provide stablecoin services for individual customers. Even if commercial banks are unable to conduct large-scale business in the short term due to compliance costs, the issuance of stablecoins by commercial banks can bring huge brand publicity effects and opportunities to gradually improve customer structure. What's more, the issuance of stablecoins itself has been proven to have huge profit margins.
Scenario is the biggest challenge for Hong Kong to establish stable currency advantages
In addition to compliance costs and technical challenges, how to find suitable application scenarios for legal currency stablecoins after successful application and issuance may become the biggest challenge for issuers. Stablecoins can only play their value and become the infrastructure of Hong Kong's virtual assets and Web3 industries if they are liquid. If there is not enough support for application scenarios, and if the existing business model of US dollar stablecoins is simply copied, Hong Kong's stablecoins may find it difficult to establish a competitive advantage. Looking at the current development direction of Hong Kong's virtual assets and Web3 markets, RWA tokenization will be an important area for Hong Kong's stablecoins to develop, and cross-border trade and payment businesses in the Greater Bay Area and even wider regions will also become a track that Hong Kong's stablecoins must strive for.
In addition, although the consultation summary does not restrict the types of fiat currencies that need to be anchored when issuing stablecoins in Hong Kong, there is little practical significance in issuing US dollar stablecoins in Hong Kong. The author believes that local issuers should issue stablecoins with Hong Kong dollars/offshore RMB as the main denominated currencies, thereby promoting the development of payment and settlement industries in Hong Kong dollars and offshore RMB, and truly keeping the funds, traffic and talents brought by Web3 innovation in Hong Kong.
