As Hong Kong regulators launch a collaborative effort with the private sector focused on stablecoins, a local industry executive has discussed the potential implications for stablecoins such as Tether’s USDT and Circle’s USD Coin.
On July 18, the Hong Kong Monetary Authority (HKMA) announced the first five participants in the country’s stablecoin issuer sandbox, including firms like Standard Chartered Bank, Animoca Brands, Hong Kong Telecommunications, Jingdong Coinlink Technology and RD InnoTech.
As part of the sandbox — which launched in March 2024 — the participants are expected to test their proposed stablecoin business models and engage with HKMA on future compliance with the proposed regulatory regime.
One of the sandbox participants, Jingdong Coinlink Technology, subsequently announced plans to issue a stablecoin pegged to the Hong Kong dollar on a 1:1 ratio.
As Hong Kong has been actively moving to regulate the stablecoin industry and possibly create its own stablecoins, the local stablecoin ecosystem will likely transform significantly in the coming years, according to Davin Wu, chief financial officer of digital assets exchange OSL.
UDST and USDC are “far from achieving significant mainstream payment status”
Stablecoins like USDT (USDT) and USD Coin (USDC) offer the advantage of 24/7 trading worldwide, but their adoption as payment tools by mainstream commerce, banks and governments “remains limited,” Wu said in an interview with Cointelegraph.
“They are far from achieving significant mainstream payment status,” Wu argued, adding that the usage of USDT and USDC is primarily seen in developing nations, large unbanked populations and online-centric industries that “often operate outside traditional tax regimes.”
OSL chief financial officer Davin Wu at the FireNow Asian Web3 Institutional Summit 2024. Source: OSL
According to Wu, global mainstream firms have not yet embraced stablecoins because such assets are not readily accepted by auditors, banks and governments.
“This limited adoption stems primarily from regulatory uncertainties, as the lack of clear and consistent frameworks governing stablecoins leads to legal risks and compliance challenges,” the executive stated.
Stablecoins are also still associated with the volatile digital asset ecosystem, Wu noted, adding that auditors and banks hesitate to support stablecoin transactions due to concerns about legitimacy and regulatory scrutiny.
Hong Kong’s stablecoin sandbox is a “positive step forward”
To address stablecoin adoption challenges and promote mainstream stablecoin use, the HKMA has been pushing stablecoin regulations within its stablecoin issuer sandbox.
“Hong Kong’s regulations will probably require full asset reserves, possibly with additional buffer reserves, ensuring solvency and liquidity,” Wu suggested, adding:
“Issuers must maintain reserves in highly liquid, low-risk assets, such as cash and short-term government securities, ensuring adequate reserves for redemption demands under different market conditions.”
Hong Kong regulators will also require stablecoin operators to comply with Anti-Money Laundering and Know Your Customer requirements to ensure the transparency and legality of transactions, the executive noted.
“Over time, this could significantly impact the global financial landscape,” Wu said. He also mentioned that it could take 12 to 18 months for Hong Kong regulators to yield some conclusive results.
HKD-based stablecoins may face global adoption issues, while USD-pegged stablecoins currently face limitations
As some companies in the Hong Kong stablecoin sandbox have publicly disclosed plans to issue Hong Kong dollar-pegged stablecoins, one may wonder whether local issuers would want to create a stablecoin pegged to the US dollar.
According to Wu, certain prospective stablecoin issuers in Hong Kong have been considering both Hong Kong dollar and US dollar stablecoins in their plans.
“Initially, we anticipate stablecoins pegged to HKD and USD will be issued and transactable on public blockchain networks like Ethereum,” Wu told Cointelegraph.
Source: Digital Euro Association
Hong Kong dollar and US dollar stablecoins may facilitate cross-border trade transactions and reduce associated costs. As the market matures, stablecoins will extend to business-to-consumer payments and investment scenarios, including e-commerce, retail and personal remittances, Wu predicted.
Related: Hong Kong to enhance digital asset regulation in 18 months
However, both Hong Kong dollar and US dollar stablecoin issuers might face certain challenges on their way to adoption in Hong Kong, according to Wu.
“USD stablecoins currently face more limitations, particularly in relation to retail offerings,” Wu said, adding that this area requires further clarity.
On the other hand, a pure Hong Kong dollar-based stablecoin could offer benefits for local transactions, but it might face limitations in global commerce and adoption.
“The primary reason is the dominance of the US dollar in international trade and finance, which makes USD-backed stablecoins like USDC more widely accepted,” Wu stated.
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