The four issues currently facing stablecoins

Author: Lu Huaqiu, Source: Mobile Payment Network

The President of the Hong Kong Monetary Authority, Eddie Yu, recently wrote an article pointing out that stablecoins need to avoid excessive speculation and strictly prevent financial risks. He also believes that the cooling measures for stablecoins still need to be strengthened.

Recently, the latest annual economic report released by the Bank for International Settlements also showed that stablecoins performed poorly in the three key tests of "currency." More importantly, stablecoins also have vulnerabilities in KYC.

In recent discussions about stablecoins, there have been many explanations from regulators and market participants regarding their advantages and positive roles. However, at the same time, the exploration of the development of stablecoin-related businesses also faces many practical issues.

The Challenge from Concept to Implementation

The emergence and application of stablecoins are closely related to the development of technology and are theoretically very powerful. For example, stablecoins serve as a payment tool that is fast, efficient, and cost-effective, especially in the field of cross-border payments, where it seems likely to disrupt traditional models quickly. However, there is still a considerable distance between theoretical discussions and practical implementation.

Yu Weiwen revealed that the institutions currently in contact with the Hong Kong Monetary Authority are still at the conceptual stage, such as improving cross-border payment efficiency, supporting the development of Web 3.0, and enhancing the efficiency of the foreign exchange market. There is a lack of practical application scenarios, and they are unable to propose feasible specific plans and implementation strategies.

The difficulty in the application of stablecoins may stem from unclear regulatory policies and compliance costs, the stability and reliability of blockchain technology, user habits and the acceptance of merchants and enterprises, and the compatibility of current traditional financial infrastructure, among other issues. Of course, market institutions may also have reservations about project proposals due to intellectual property reasons.

In summary, the challenges of implementing stablecoin applications are fundamentally related to various factors such as technology, regulation, and the market. Perhaps it is only through the combined effects of a clearer regulatory framework, improved technology maturity, and widespread user education that we can further break through the current limitations. The next three years will be a critical window period.

Market Cooperation and Division of Labor Issues

In the context where there are not many specific scenarios for stablecoins, some enterprises that can provide application scenarios themselves lack the technology to issue stablecoins and the experience and ability to manage various financial risks. Yu Weiwen believes that there can be multiple models for participating in stablecoins, and for such institutions, a more practical approach is to collaborate with other stablecoin issuers to provide application scenarios, rather than pursuing the role of an issuer.

Participants related to stablecoins play various roles in the ecosystem, collectively supporting numerous aspects such as issuance, operation, compliance, and the expansion of application scenarios. The ecosystem may include stablecoin issuers, payment and clearing service providers, technology service providers, banks and financial institutions, regulatory agencies and policymakers, exchanges and market makers, application ecosystem participants, asset custodians, users, and institutional users, among others.

For example, according to Hong Kong's "Stablecoin Regulation", stablecoin issuers are required to custodian their reserve assets. As a result, the stablecoin custodial business presents potential new opportunities and competition for Hong Kong's banking industry. As a global financial center, Hong Kong has many banks, and established institutions such as Standard Chartered, HSBC, and Deutsche Bank are naturally potential custodians. It is also worth paying attention to whether newer banks like ZhongAn Bank, Tianxing Bank, Lihui Bank, and Ant Bank will participate.

In summary, how all parties coordinate and cooperate will be key to advancing the application of stablecoins. Especially in the market aspect, "who eats meat and who drinks soup; does the meat eater want a mix of meat and vegetables, does the soup drinker want to add some salt, can those originally sitting at the children's table move to the adults' table, and will those at the well-connected table block the door"—these issues may repeatedly arise and need to be coordinated in practice.

The Scarcity of Stablecoin Licenses in Hong Kong

The Hong Kong Monetary Authority previously clarified that only a few stablecoin licenses will be issued in the initial phase. In other words, Hong Kong stablecoin licenses are destined to be a "scarce" resource, which is essentially an inevitable choice for regulatory prudence and risk prevention.

In fact, from the perspective of international regulatory trends, both the EU's Digital Finance Package and the US GENIUS Act set high-standard regulatory frameworks for stablecoins, requiring strict disclosure of reserve assets, anti-money laundering, and anti-terrorism financing compliance. Hong Kong's "light licensing" strategy aligns with these regulations. Hong Kong regulators believe that licensed stablecoin issuers must have specific application scenarios, as well as robust and sustainable business operations, and they also need to establish trust with market participants in order for their stablecoins to gain market recognition.

Due to the "scarcity" of stablecoin licenses in Hong Kong, it has inevitably attracted some market speculation. Yu Weimen believes that with the rising popularity of the stablecoin concept, market sentiment has become overly exuberant. Some listed companies, regardless of whether their core business is related to stablecoins or digital assets, claim to have the intention of expanding into the stablecoin business, which offers them the chance to "turn stone into gold"; at the very least, it can enhance the company's visibility.

Yu Weiwen stated that at least dozens of institutions have contacted the Hong Kong Monetary Authority, expressing interest in applying for a stablecoin license or participating in it. According to public information, companies that previously participated in the Hong Kong Monetary Authority's stablecoin sandbox testing include JD Coin Chain Technology, the joint venture of Standard Chartered Bank + Anxin Group + Hong Kong Telecommunications, Ant International and Ant Digital from the Ant Group, as well as companies like Sansan Media, Lianlian Digital, Duodian Smart, and Delin Holdings, all of which have clearly stated they are applying for or planning to apply for a Hong Kong stablecoin license. The mainland payment company Kuaiqian also recently acknowledged that it has been in communication with the Hong Kong Monetary Authority regarding the application for a stablecoin license.

It is worth noting that there are market news indicating that the application for stablecoin licenses in Hong Kong will be conducted through an invitation-only process. All issuers interested in applying for the license will communicate with the Hong Kong Monetary Authority before the formal application to obtain basic approval before entering the application stage. This shows that the Hong Kong Monetary Authority is very cautious about the first batch of stablecoin licenses issued. It can be confirmed that even if the basic conditions for applying for the license are met, many institutions will still have their hopes of obtaining a license dashed.

Anti-Money Laundering Issues

From a regulatory perspective, the development of stablecoins faces multiple financial risks, among which anti-money laundering is one of the more prominent risks.

The latest annual economic report from the Bank for International Settlements emphasizes the importance of preventing money laundering risks associated with stablecoins. Anti-money laundering regulations require banks and other intermediaries to comply with KYC rules, submit suspicious activity reports, and have the ability to stop payments. However, as a digital bearer instrument, stablecoins can circulate freely across borders, entering different exchanges and self-custody wallets, which makes it easy for them to have loopholes in KYC compliance.

Recently, in an incident involving a so-called investment and financial management platform named "DGCX Xin Kang Jia", criminals required all members to use the stablecoin USDT for "depositing money". With the free circulation and decentralized characteristics of stablecoins, it has become even more difficult for law enforcement agencies to trace the large sums of money defrauded by "DGCX Xin Kang Jia" once they flow overseas.

After the "Stablecoin Regulation" is passed, the Hong Kong Monetary Authority will soon solicit opinions on the relevant anti-money laundering guidelines and rules, and is currently making appropriate adjustments based on market feedback, with an announcement expected by the end of this month. Yu Weiman stated that stricter requirements will be established in terms of anti-money laundering to minimize the risk of stablecoins becoming tools for money laundering, thereby allowing the Hong Kong stablecoin market to develop in an orderly and healthy manner.