Hong Kongers are moving closer to experiencing the many applications of stablecoins, from domestic payments to cross-border trade deals, as a bill on the digital currency makes its way through the Legislative Council.
The Hong Kong government’s proposed Stablecoins Bill is moving closer to becoming law, as the city works to balance financial stability and consumer protection while advancing its virtual assets agenda.
Stablecoins are digital assets issued by private entities that maintain a fixed value against a government-issued fiat currency or other reference rate. Traditionally, they serve as a bridge for transactions involving digital assets on blockchains, which cannot interact directly with fiat currencies.
Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyzes and infographics, brought to you by our award-winning team.
Although best known as a tool to trade cryptocurrency assets in the Web3 world, stablecoins have the ability to expand their use in the real financial economy, according to industry experts.
One of the possible applications could be automating incentives, discounts or loyalty points in digital wallets, such as the Octopus program, by taking advantage of the programmability of stablecoins, or the ability to enter rules and data into the blockchain.
For example, if a consumer has a loyalty rewards system, their spend can be automatically credited to their loyalty program and incentives can be applied at checkout without the customer disclosing their membership information.
Stablecoins could provide access to new investment opportunities, such as tokenized funds – which use the blockchain for sales and redemptions – with assets under management expected to rise from around $2 billion at the end of this year to around $600 billion in seven years. a report by Aptos Labs, Boston Consulting Group and Invesco.
People sat in front of a screen displaying the flag of Hong Kong, ahead of the 25th anniversary of the city’s July 1 handover from Britain to China, on June 27, 2022. Photo: Agence France-Presse alt=People sat in front of a screen with the flag of Hong Kong ahead of the 25th anniversary of the city’s July 1 handover from Britain to China, on June 27, 2022. Photo: Agence France-Presse>
“The applications of stablecoin will be numerous,” said Sean Lee, co-founder of IDA, a Hong Kong-based Web3 digital asset company. “It could involve payments, settlements, payroll, financing and related investments. New products will emerge and transactions will happen faster, instantly, 24/7 – and at lower costs.”
“As of today, we believe stablecoins are the best available tool to connect traditional financial and Web3 markets and have proven use cases and business models to support that belief,” said Dominic Maffei, head of digital assets and fintech for Hong Kong at Standard. Chartered.
“We are now seeing additional use cases for payments and tokenized assets and believe this is just the beginning,” said Maffei. His bank participates in the stablecoin sandbox supervised by the Hong Kong Monetary Authority.
Circle’s CEO Jeremy Allaire discussed the potential of stablecoins during Hong Kong FinTech Week on October 28, 2024. Photo: Hong Kong FinTech Week alt=Circle’s CEO Jeremy Allaire discussed the potential of stablecoins during Hong Kong FinTech Week on October 28, 2024. Photo: FinTech- week of Hong Kong>
According to data provider CoinGecko, the market capitalization of stablecoins has grown to more than $200 billion over the past decade, with a trading volume of $125 billion. In 2023, stablecoins processed $2.3 trillion in transactions in activities such as payments and cross-border money transfers, a 17 percent increase from a year earlier, a report from Coinbase shows.
Currently, the most prominent stablecoins on the market are Circle’s Tether and USDC, both of which are pegged to the US dollar. But using other currencies for domestic and international payments requires more stablecoins that are not tied to the US dollar. And Hong Kong can benefit from being the world’s seventh largest trading center by trade value and the fourth largest foreign exchange market.
“For cross-border payments, stablecoins are used to facilitate fund transfers in seconds and at lower costs compared to traditional banking methods,” said David Chan, managing director and partner at BCG.
Hong Kong CEO John Lee Ka-chiu (left) met with Vice President and Prime Minister of the United Arab Emirates Sheikh Mohammed bin Rashid Al Maktoum (right) in Dubai on February 9, 2023. Photo: Handout alt=Hong Kong’s Chief Executive John Lee Ka-chiu (left) met with the Vice President and Prime Minister of the United Arab Emirates, Sheikh Mohammed bin Rashid Al Maktoum (right) in Dubai on February 9, 2023. Photo: Handout>
Hong Kong and the United Arab Emirates (UAE), which have about $15 to $20 billion in bilateral trade annually, can use stablecoins pegged to the Hong Kong dollar and UAE dirham to trade directly without having to trade in U.S. convert dollars and undergo settlement. banks. Both the Hong Kong dollar and the UAE dirham are pegged to the US dollar.
Yue Hong Zhang, another BCG partner, said stablecoins and the pins could help position Hong Kong as a “future international financial center” with Web3 capabilities.
A question that stablecoin issuers are often asked is about competition from other digital assets, such as central bank digital currencies (CBDCs) and tokenized deposits, which can live on the blockchain and have many similar characteristics.
A side explaining the mBridge multi-CBDC platform that simplifies cross-border digital currency transactions between participating central banks, shown during a presentation by Mu Changchun, head of digital currency at the People’s Bank of China, in a panel discussion at the Hong Kong FinTech Week on January 11, 2022. Photo: Matt Haldane alt=A side explaining the mBridge multi-CBDC platform that enables cross-border digital currency transactions between participating central banks simplifies, shown during a presentation by the Mu Changchun, head of digital currency at the People’s Bank of China, in a panel discussion during Hong Kong FinTech Week on January 11, 2022. Photo: Matt Haldane>
“Users will and should have choices,” Lee said. The programmability of stablecoins can be “much more diverse” and come from other players in the ecosystem than CBDC, which can only be controlled by a central bank, he added.
“We believe stablecoins will be key to this next phase of growth in digital asset markets, with immediate impact,” Maffei said.
BCG’s Chan said stablecoins are primarily aimed at early adopters such as cryptocurrency traders and investors, while tokenised deposits and CBDCs should target institutions and other traditional applications such as wholesale payments. However, wider adoption of the latter two digital assets can be expected, with more differentiated financial products being developed.
“Stablecoin, operating under a regulatory regime, is a way to innovate while being compliant,” says IDA’s Lee. “People are making sure it’s open, secure and compliant enough that a lot of people will use it.”
