Hong Kong moves forward with stablecoin plan despite Chinese government’s reservations

Hong Kong’s central bank is moving ahead with plans to issue the first batch of stablecoin licenses in March, despite China’s longstanding opposition to crypto activity. But experts see Hong Kong’s stablecoin plan as more of a hedge than a reversal of Beijing’s position.

“We hope to make a decision by March,” Eddie Yue, head of the Hong Kong Monetary Authority, said at a Feb. 2 Legislative Council meeting, according to an official interpreter, adding that the authority was considering the first part of applications from 36 stablecoin issuers.

Yue’s update comes after plans to allow the issuance of stablecoins within Hong Kong were reportedly blocked by the Chinese government.

Stablecoins are cryptocurrencies designed to maintain a relatively stable value by being pegged to assets such as fiat currency or gold, reducing price fluctuations compared to other digital tokens.

Hong Kong passed the Stablecoin Ordinance in May, requiring licenses for entities issuing stablecoins in the territory or pegging them to the Hong Kong dollar. The law came into effect in August, and the HKMA began accepting applications shortly thereafter.

Chainalysis policy advisory leader Jordan Wayne said stablecoins now account for more than half of the transaction value recorded directly on blockchains, making them “the centerpiece of the cryptocurrency ecosystem.”

In the memo, the HKMA cited cross-border payments and tokenized deposit systems for international banks as potential use cases for stablecoins in the region. A tokenized deposit system refers to a digital representation of a customer’s deposits on a blockchain network that is regulated within the traditional banking system.

Prospective issuers, including payment technology company Payment Cards Group, claim that the Hong Kong dollar-backed stablecoin will enable “faster refunds, faster cross-border payments, and more transparent foreign exchange rates.”

Wayne said more regulators and financial institutions are exploring stablecoin growth opportunities, citing Japan and Europe as examples, which have already established regulatory frameworks for adoption.

Interest in Hong Kong’s licensing scheme reportedly includes tech giants such as Alibaba-backed Ant Group and Chinese e-commerce companies. JD.com.

However, the Financial Times reported, citing sources, that Chinese regulators, including the People’s Bank of China, recommended against the plan in October, effectively halting all progress.

Although Hong Kong formally maintains a degree of autonomy from the Chinese government under the “one country, two systems” principle, the Chinese government maintains significant influence over major policy decisions.

However, unlike Hong Kong, the Chinese government has taken a conservative stance towards cryptocurrencies. China was once at the forefront of cryptocurrency trading and mining activity, but regulators began tightening regulations in 2013.

These restrictions led to a complete ban on crypto trading in 2021, citing concerns about volatility and illegal activity.

A recent report found that stablecoins are the main tool used by organized crime in China to move illicit funds, with as much as $44 million being transferred through sophisticated networks every day.

Monique Taylor, an academic at the University of Helsinki, said that beyond crime risks, the Chinese government’s concerns center on financial regulations.

Taylor said the Chinese government is likely concerned that financial products linked to the yuan could flow unregulated across its borders.

“Stablecoins challenge (Beijing’s) state control over funds, payments, and capital flows, and are therefore uneasy about China’s state-centric model of financial governance that prioritizes oversight and domestic financial stability,” Taylor told CNBC.

The Chinese government’s concerns also extend to the “dollarization of the digital asset economy,” such as stablecoins backed by fiat currencies. USDT and USDC Fixed to US dollar.

“China’s monetary establishment recognizes that dollar-backed stablecoins run the risk of reinforcing the dollar’s dominance,” Taylor said.

A similar sensibility is emerging in Washington. U.S. Treasury Secretary Scott Bessent told the Senate Banking Committee on Thursday that he would not be “surprised” if Hong Kong’s foray into digital assets was seen as an attempt to create an “alternative to U.S. financial leadership.”

Taylor said Hong Kong’s planned licensing regime appears to have been designed as a limited experiment to allow Beijing to keep its options open, rather than a direct counter to US influence in cryptocurrencies.

“There is little evidence that China intends to lift its crypto ban,” Taylor said, describing Hong Kong’s approach as a “limited and cautious development” and saying Beijing remains skeptical.

China toughened its stance on Friday, with eight state regulators issuing a joint statement reaffirming a ban on virtual currency activities, including the unauthorized issuance of renminbi-backed stablecoins.

Wayne said Hong Kong’s first license is also to “leverage the city’s autonomy to demonstrate that stablecoins can be properly supervised while still playing a central role in payments, tokenization, and the city’s broader Web3 ambitions.”

Taylor said that while Hong Kong is unlikely to allow a “liberalized crypto environment” to flourish, this regulatory clarity is likely to be attractive to overseas investors looking to profit from Hong Kong’s eventual stablecoin plans.