By Jeffery, HashKey Group Chief Analyst

Stablecoins have always been an indispensable part of the cryptocurrency ecosystem.

Data shows that over the past four years, quarterly stablecoin transaction volume has increased seventeenfold, rising from $17.4 billion in the second quarter to $4 trillion. As of July 17, 2024, the total transaction volume of the entire inter-currency market was $94.8 billion, with stablecoins accounting for 91.7% of the total cryptocurrency market volume, reaching $87 billion, with USDT being the largest at 83.3%.

However, due to the lack of endorsement from major financial institutions, stablecoins have struggled to be truly “stable” for users. With the era of compliance upon us, governments in Hong Kong, Europe, Singapore, the United States, and other regions are beginning to issue local stablecoins, which could reshape the stablecoin market landscape. This article will discuss how the stablecoin market landscape in Hong Kong will be reshaped in the era of compliance and the potential future developments.

token terminal_ : Stablecoin transfer volume

token terminal_ : Stablecoin outstanding supply

Hong Kong to Become the First Region in the World to Allow Banks to Issue Stablecoins

The Hong Kong government has recently been actively promoting the establishment of a stablecoin regulatory regime to maintain financial stability and protect consumer rights. Following the licensing regime for virtual asset service providers, which came into effect last June, the Treasury Bureau and the Hong Kong Monetary Authority (HKMA) consulted the public on the proposed regulatory regime for stablecoin issuers at the end of last year and will soon publish a consultation summary. We can broadly understand the direction of Hong Kong’s stablecoin regulatory policy.

Currently, Hong Kong has a strict regulatory regime for fiat-backed stablecoin issuers, mainly including reserve management and stabilization mechanisms, requiring issuers to ensure that fiat-backed stablecoins are fully backed by high-quality and highly liquid reserve assets; redemption requirements; and regulatory requirements.

As for stablecoin suppliers, only licensed fiat-backed stablecoin issuers, recognized institutions, licensed corporations, and licensed virtual asset trading platforms can offer stablecoins. Issuers may include exchanges, banks, and licensed investment parties such as USDT, USDC, etc.

According to the list of sandbox participants released today by the HKMA, the institutions participating in the sandbox include RD InnoTech Limited,JINGDONG Coinlink Technology Hong Kong Limited, and Standard Chartered Bank (Hong Kong) Limited, Animoca Brands Limited, and Hong Kong Telecommunications (HKT) Limited. These institutions are able to demonstrate their genuine intentions and reasonable plans to develop stablecoin issuance business in Hong Kong during the evaluation process, and their proposed operations within the sandbox will be conducted within controlled risks and constraints.

In February this year, Hong Kong’s largest licensed exchange Hashkey Exchange, RD InnoTech Limited, and Allinpay International announced a cooperation agreement, relying on their respective business and product advantages to cooperate, including compliant and secure digital currency trading services, extensive and diverse offline merchant acceptance networks, and advanced stablecoin development technology.

However, as for the currently most widely adopted USDT and USDC, whether they can trade in Hong Kong in the future depends on their ability to transition successfully. The first issue is that only issuers with a physical presence in Hong Kong can apply. The second issue, from the perspective of Europe’s MiCA stablecoin regulatory policy, is that only issuers who support placing reserves in banks may be recognized under the changing regulations. This part will be discussed in detail later.

On the other hand, Hong Kong might witness a scenario where stablecoins “blossom in many forms.” For instance, banks may have their own stablecoins, and exchanges may have their own stablecoins. If banks successfully launch their stablecoins, Hong Kong will be the first place for banks to launch stablecoins, setting an example for other regions. According to media reports, State Street Global, the world’s largest ETF SPY issuer, is currently showing interest in stablecoins and tokenized deposits.

Although Hong Kong’s cryptocurrency ecosystem is still developing, such as the general public not being able to directly use bank money to purchase stablecoins, and the lack of sufficient payment systems and stored value methods to cover stablecoins. Additionally, in terms of accounting, there are no comprehensive regulations to determine whether crypto assets can be part of a company’s assets. Regarding licenses, an entity must have a physical presence in Hong Kong to apply, so USDT and USDC need to consider more since they have to establish a company in Hong Kong to issue, which may deter them. Moreover, there has been no cooperation with other jurisdictions so far, so these issues are worth considering in the future.

Insights from Hong Kong’s Stablecoin Regulatory Policy and Europe’s MiCA Regulations

How Hong Kong’s stablecoin policy will develop might gain some insight from the regulatory policies of European stablecoins.

Currently, Europe’s MiCA is very similar to Hong Kong’s stablecoin regulations, and even more comprehensive, making it the most comprehensive cryptocurrency regulatory act in Europe.

On April 20, the European Parliament passed MiCA, which is expected to be fully implemented by early 2025.

From July 2024, the most important regulations have already begun to be implemented, including that stablecoin issuers will need to maintain adequate reserves, such as keeping at least one-third of all funds in banks to meet large withdrawal requests. In addition, they will need to set transaction limit restrictions.

This is a significant challenge for stablecoin issuers. Tether, the largest stablecoin supplier, has no plans to accept MiCA regulations in the near term, as its CEO Paolo Ardoino has expressed concerns about MiCA’s requirements. He believes that stablecoins should be able to keep 100% of their reserves in treasury bills, rather than placing large reserves in uninsured cash deposits, which exposes them to the risk of bank failures and harms their interests. However, Tether stated that it will continue to communicate with relevant agencies to reach a consensus.

Many exchanges are delisting unlicensed stablecoins in Europe, with several cryptocurrency exchanges taking measures. For example, OKX delisted Tether’s USDT for EU users in March but continues to support Circle’s USDC, which values regulation. Some companies, such as Kraken, continue to list USDT in Europe, understanding the importance of USDT to European customers, so they have no plans to delist it for now.

Circle’s USDC might become the biggest beneficiary under the new European digital asset management regulations effective from July. As the first stablecoin under the MiCA regulations, its market share in Europe could soon surpass USDT, becoming the largest stablecoin supplier in Europe.

MiCA regulations may impact European users’ transactions in the short term, but in the long run, successful implementation of MiCA could encourage other jurisdictions to adopt similar regulatory measures, such as Hong Kong, promoting higher standards of market integrity and consumer safety globally.

This coordination reduces regulatory arbitrage, helps form a more consistent and stable global cryptocurrency market, and promotes cross-border transactions and investments. MiCA may enhance international cooperation and standardization of digital asset regulation. Observing the benefits of a well-regulated stablecoin market in the EU, other countries may implement similar frameworks, enhancing the resilience and transparency of the global financial system. This shift towards unified regulatory standards attracts institutional investors seeking clarity and stability, further legitimizing the crypto industry and fostering global growth.

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