A Hong Kong official discussed the potential impacts on stablecoins like USDT and USDC as the city considers launching HKD and USD stablecoins.
An industry expert from Hong Kong has discussed the possible effects on stablecoins like Tether USDT$1.00 and USDC USDC$1.00 as the city’s regulators begin working with the business sector on this initiative.
The first five companies to join the nation’s stablecoin issuer sandbox were revealed by the Hong Kong Monetary Authority (HKMA) on July 18. These companies included Standard Chartered Bank, Animoca Brands, Hong Kong Telecommunications, Jingdong Coinlink Technology, and RD InnoTech.
The participants in the sandbox, which opened in March 2024, are supposed to test their suggested stablecoin business ideas and communicate with HKMA regarding future adherence to the proposed regulatory framework.
Jingdong Coinlink Technology, a participant in the sandbox, later revealed plans to launch a stablecoin with a 1:1 correlation to the Hong Kong dollar (HKD).
According to Davin Wu, chief financial officer of OSL exchange, the local stablecoin ecosystem is expected to undergo a significant transformation in the upcoming years since Hong Kong has been actively working to regulate the stablecoin business and develop its stablecoins.
UDST and USDC are described as “Far from achieving significant mainstream payment status”
Although stablecoins like USDT and USDC can be traded around the clock, mainstream businesses, banks, and governments “remain limited” in their use of them as payment methods, according to Wu.
According to Wu, “they are far from achieving significant mainstream payment status,” the main places where USDT and USDC are used are poor countries, areas with high rates of unbanked population, and internet-focused businesses that “often operate outside traditional tax regimes.”
Wu claims that because governments, banks, and auditors do not readily accept stablecoins, stablecoins have yet to be adopted by mainstream worldwide businesses.
The executive said, “Regulatory uncertainties are the main cause of this limited adoption, as there are legal risks and compliance challenges associated with the absence of clear and consistent frameworks governing stablecoins.”
Wu pointed out that stablecoins are still connected to the unstable digital asset market and that banks and auditors are hesitant to approve stablecoin deals because of worries about their legality and regulatory compliance.
The stablecoin sandbox in Hong Kong is a “positive step forward.”
The HKMA has been promoting stablecoin laws within its issuer sandbox to overcome adoption difficulties and encourage the general public to use stablecoins.
“To ensure solvency and liquidity, Hong Kong’s regulations will likely require full asset reserves, possibly with additional buffer reserves,” Wu said.
“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.”
The executive stated that to guarantee transaction legality and transparency; Hong Kong regulators will also mandate that stablecoin operators adhere to Know Your Customer and Anti-Money Laundering regulations.
Wu stated, “This could have a major long-term impact on the global financial landscape.” He added that the Hong Kong authorities might take 12 to 18 months to produce any definitive findings.
While USD-pegged stablecoins already have restrictions, HKD-based stablecoins might need help finding acceptance worldwide.
One can question if local issuers would wish to produce a stablecoin linked to the US currency (USD), given that certain companies in the stablecoin sandbox in Hong Kong have made plans to issue HKD-pegged stablecoins publicly known.
Wu claims several potential Hong Kong stablecoin issuers have considered releasing both USD and HKD stablecoins.
Wu said that “We expect stablecoins tethered to HKD and USD to be issued and transactable on public blockchain networks like Ethereum.”
Stablecoins for the USD and HKD have the potential to lower associated costs and facilitate cross-border commerce operations. Wu projected that stablecoins will be used in retail, personal remittance, e-commerce, and business-to-consumer payments and investment scenarios as the industry develops.
Wu notes there may be obstacles to adopting both the USD and HKD stablecoins in Hong Kong.
According to Wu, “USD stablecoins currently face more limitations, particularly about retail offerings,” more clarification is needed in this area.
Conversely, a stablecoin based only on Hong Kong dollars would benefit regional transactions, but its acceptance and trade may be restricted worldwide.
Wu says, “The main reason is the US dollar’s dominance in international trade and finance, which increases the acceptance of USD-backed stablecoins like USDC.”
