Hongkongers are getting closer to experiencing the many applications of stablecoins, from domestic payments and cross-border trade settlements, as a bill covering the digital currency winds its way through the Legislative Council.
The Hong Kong government’s proposed Stablecoins Bill is coming closer to becoming law, as the city moves 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 relative to a government-issued fiat currency or other reference rate. Traditionally, they serve as a bridge for transactions involving digital assets on blockchains, which cannot directly interact with fiat currencies.
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While they are primarily known as a tool to trade cryptocurrency assets in the Web3 world, stablecoins have the ability to expand their usage in the real financial economy, according to industry experts.
One of the potential uses could be automating incentives, rebates or loyalty points in digital wallets, like the Octopus programme, by using stablecoins’ programmability, or the ability to input rules and data in the blockchain.
For example, if a consumer has a loyalty rewards system, their spending could automatically be credited to their loyalty programme and incentives could be applied at the checkout without the customer disclosing their membership details.
Stablecoins can provide access to new investment avenues like tokenised funds – which use the blockchain for sales and redemptions – where assets under management are expected to climb to about US$600 billion in seven years from US$2 billion at the end of this year, according to a report from Aptos Labs, Boston Consulting Group and Invesco.
People sat before a screen displaying a Hong Kong flag 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 before a screen displaying a Hong Kong flag 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 can be for payments, settlements, payrolls, financing and related to investments. New products will spring up, and transactions will be faster, instant, 24/7 – and at a lower cost.”
“As of today, we think that stablecoins are the best available tool for connecting traditional finance and Web3 markets and have proven use cases and business models to support that belief,” said Dominic Maffei, head of digital asset and fintech for Hong Kong at Standard Chartered.
“We now see additional use cases for payments and tokenised assets and believe that this is just the beginning,” Maffei said. His bank participates in the stablecoin sandbox overseen 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: Hong Kong FinTech Week>
The market capitalisation of stablecoins has grown to more than US$200 billion over the past decade with trading volume of US125 billion, according to CoinGecko, a data provider. In 2023, stablecoins settled US$2.3 trillion worth of transactions in activities like payments and cross-border remittances, a 17 per cent increase from a year earlier, a Coinbase report showed.
Currently, the most prominent stablecoins on the market are Tether and USDC from Circle, which are both pegged to the US dollar. But using other currencies for domestic and international payments requires more stablecoins that are not connected to the US dollar. And Hong Kong can take advantage of being the world’s seventh-largest trading hub by merchandise trade value and fourth-largest foreign exchange market.
“For cross-border payments, stablecoins are used to facilitate remittances within seconds and at lower costs compared to traditional banking methods,” said David Chan, managing director and partner at BCG.
Hong Kong’s Chief Executive John Lee Ka-chiu (left) met with the United Arab Emirates’ Vice-President and Prime Minister 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 United Arab Emirates’ Vice-President and Prime Minister 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 around US$15 billion to US$20 billion in bilateral trade annually, can use stablecoins pegged to the Hong Kong dollar and UAE dirham to trade directly without converting into US dollars and going through 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 pegs can help position Hong Kong as a “future international financial centre” with Web3 capabilities.
One question that stablecoin issuers often get asked is about competition from other digital assets like central bank digital currencies (CBDCs) and tokenised deposits, which can live on the blockchain and have many similar characteristics.
A side explaining the mBridge multi-CBDC platform easing cross-border digital currency transactions among taking part central banks, shown during a presentation by the People’s Bank of China’s digital currency chief Mu Changchun in a panel discussion at Hong Kong FinTech Week on January 11, 2022. Photo: Matt Haldane alt=A side explaining the mBridge multi-CBDC platform easing cross-border digital currency transactions among taking part central banks, shown during a presentation by the People’s Bank of China’s digital currency chief Mu Changchun in a panel discussion at 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 different players in the ecosystem than CBDC, which can only be controlled by a central bank, he added.
“We do believe that stablecoins will be key for this next phase of growth in the digital asset markets, with immediate impact,” said Maffei.
BCG’s Chan said stablecoins primarily target early adopters like cryptocurrency traders and investors, while tokenised deposits and CBDCs need to target institutions and other traditional uses like 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,” said IDA’s Lee. “People are ensuring it is open, secure, and compliant enough that many people will use it.”
