Written by: Shanghai Mankiw Law Firm

On August 23, 2024, Shanghai Mankiw Law Firm and Shanghai Distributed Consensus Technology Association held the 77th Mankiw Afternoon Tea Event at the TreeGraph Research Institute. The event was themed "The development prospects and internationalization paths of domestic Web3 companies under the background of Hong Kong dollar stablecoins", and brought together many experts in the industry and legal fields to discuss in depth the hot topics in the current crypto asset field.

Event Review

Topic Sharing

Zhang Yuqi, Assistant President of Shanghai Rural Commercial Bank Free Trade Zone Branch

Zhang Yuqi, assistant president of Shanghai Rural Commercial Bank Free Trade Zone Branch, focused on sharing his profound insights on the development of stablecoins. Zhang Yuqi pointed out that although the term "stablecoin" has become more popular in recent years with the popularization of blockchain technology, in fact, the concept of stablecoins has existed as early as the history of human currency. He said that precious metals such as gold and silver can essentially be regarded as early forms of stablecoins. In Zhang Yuqi's view, the development of stablecoins is inseparable from the nature of currency. Whether it is legal tender or cryptocurrency, its core is the reliance on consensus and credit. Compared with the issuance of stablecoins such as USTD by private companies such as Tether, Hong Kong's trial of stablecoins has chosen a top-down compliance path from the beginning, which is an exploration worthy of recognition. However, Hong Kong's overall economic scale and participating entities are limited, and its development must rely on a wider range of mainland assets and financial markets to achieve breakthrough progress.

Distinguished Associate Researcher, School of Economic Law, East China University of Political Science and Law

Kodak, a specially-appointed associate researcher from the School of Economic Law of East China University of Political Science and Law, gave a speech entitled "Stablecoin Regulation and the Future of Digital RMB". Starting from the background and controversy of "prohibition-style regulation" of virtual currencies in my country, Kodak sorted out in detail the process of the formation of my country's crypto asset regulation and the legal logic behind it, and explained the structural transformation of foreign crypto assets. Kodak pointed out that such structural transformation is a new type of financial industry that has emerged as a means of payment for stablecoins. At the same time, Kodak proposed that the structural transformation of foreign virtual currencies has posed many challenges to "prohibition-style" regulation. Prohibition-style regulation may not be able to achieve the minimum infringement effect after the increase of centralized entities and the strengthening of international regulatory cooperation, and a formal regulatory mechanism needs to be established urgently.

Bai Qin, Head of Shanghai Mankiw LLP’s Hong Kong Office

Jen Baizhen, head of the Hong Kong office of Shanghai Mankiw Law Firm, shared the topic of "Interpretation of the Key Points of Stablecoin Regulation in Hong Kong". Among them, Baizhen emphasized that FRS is a stablecoin pegged to a fiat currency, not a pure crypto asset. This type of stablecoin is designed to ensure that its value can remain stable with a specific fiat currency. She pointed out that the Hong Kong Monetary Authority (HKMA) has set a series of strict conditions for the issuance of FRS. According to HKMA regulations, any entity identified as an FRS issuer must apply for and obtain the corresponding license, which is issued by HKMA. At the same time, Baizhen further explained the specific conditions for becoming an FRS issuer, including the qualification review of the issuer, the requirements for reserve assets, the redemption process, localization requirements, and technical requirements.

Roundtable Session

The second stage of the afternoon tea was a roundtable discussion, hosted by Liu Honglin, director of Mankiw LLP. The roundtable guests included Kodak, a specially appointed associate researcher at the School of Economic Law of East China University of Political Science and Law, Bai Zhen, head of Mankiw's Hong Kong office, Mao Jiehao, head of Mankiw's civil and commercial affairs, and Zhang Yuanjie, co-founder of Conflux. They had a full discussion on issues such as "Prospects for future application scenarios of Web3 payments", "Regulatory issues in the Web3 payment field", and "The relationship between stablecoins and digital RMB".

Outlook on the future application scenarios of Web3 payment

Kodak has conducted a detailed analysis of the principles of Web3 payment from a legal perspective. Compared with traditional payment methods, the biggest difference of Web3 payment is that it can realize peer-to-peer payment and settlement without a centralized operating organization. Web3 payment has obvious advantages in terms of ownership protection, because users have more control over the assets stored in blockchain wallets, which also provides better protection for their rights.

In addition, Mao Jiehao also shared his views on Web3 payment application scenarios. Web3 payment has huge potential in the field of cross-border acquiring, especially in countries and regions with underdeveloped banking systems. Web3 payment can significantly simplify the transaction process and reduce the involvement of intermediaries. He reminded that Web3 payment is not just a technical issue, it also involves complex compliance challenges, especially in terms of how to deal with regulatory requirements and ensure the legality of transactions.

Bai Zhen mentioned that the HKMA is open to proposals from FRS issuers to deposit assets in other jurisdictions, which provides greater flexibility for international companies to develop stablecoin businesses in Hong Kong.

Zhang Yuanjie added that legal tender still dominates in most countries and regions, so transaction nodes still play a vital role. Zhang Yuanjie also pointed out that Web3 payment bypasses the banking system to some extent, which means that it no longer relies on the traditional KYC process, which provides new financial service channels for users who are excluded from the traditional financial system (sanctioned, the banking system is not yet sound).

Regulatory issues in the Web3 payment space

The guests discussed in depth the challenges faced in the payment field, especially in terms of fund flows and KYC compliance. Mao Jiehao pointed out that one of the biggest challenges facing Web3 payments is how to effectively prevent risks, especially the flow of black and gray funds related to the RMB, which may trigger criminal risks.

Kodak raised the issue of the legal distinction between stablecoins and traditional bank deposits, and believed that the custody of the underlying assets of stablecoins was also worthy of attention. He also emphasized that in the future, stablecoin issuers may need to refer to the reserve fund custody system used by traditional financial institutions to ensure the security and transparency of funds.

Bai Zhen believes that Web3 payment not only provides new opportunities for entrepreneurs, but may even subvert the existing financial system. With the continuous advancement of innovation, compliance issues will also follow. In the field of financial technology, successful companies are often those that can find a balance between innovation and regulation.

The relationship between stablecoins and digital RMB

Kodak believes that although the digital RMB and the Hong Kong stablecoin are different in application scenarios, the two will form a complementary relationship in the field of cross-border payments. Mao Jiehao added that the relationship between the digital RMB and the Hong Kong dollar stablecoin can be regarded as a "control and being controlled" relationship. As a legal tender, the digital RMB has a relatively higher status, while the Hong Kong dollar stablecoin needs to rely on subsequent supporting policies to achieve wider application.

Bai Zhen expressed her optimism about this complex situation. She believes that although the digital RMB and the Hong Kong dollar stablecoin have different purposes, they will eventually work together to promote a diversified and resilient ecological financial system. Zhang Yuanjie believes that the digital RMB is driven from top to bottom, while the Hong Kong dollar stablecoin relies on the promotion of commercial institutions. In the future, these two forces will develop in a complementary manner and jointly promote the prosperity of the digital economy.