Introduction: Market feedback following the release of the regulations
Following the release of the Hong Kong Stablecoin Regulation, I published four articles, including “The Current Method of Issuing HKD Stablecoins Needs Restructuring” analyzing related issues (see all articles for details). Based on reader feedback, many people confuse “Hong Kong stablecoins” with “Hong Kong dollar stablecoins,” leading to misunderstandings about the scope of regulation and market positioning under the Regulation.
The market’s numerous questions about Hong Kong stablecoins under the Regulations also stem from a lack of clarity regarding their core meaning. However, when using the broad term “Hong Kong stablecoin” for explanation, it is easy for people to develop two misunderstandings:
- The misconception that the Regulation only targets or is equivalent to Hong Kong dollar stablecoins
- Be a unified regulatory framework for all stablecoins (ignoring the attributes of other currencies).
This article aims to clarify these conceptual confusions and offer suggestions to avoid further misunderstandings.
Key distinction: Hong Kong stablecoins are not the same as Hong Kong dollar stablecoins.
The core subject regulated by the Ordinance is “specified stablecoins,” which include various types of stablecoins pegged to fiat currencies, such as US dollar stablecoins, renminbi stablecoins, and Hong Kong dollar stablecoins. This means that the Ordinance is not specifically designed for the Hong Kong dollar but applies to stablecoins in multiple currencies.
However, using the term “Hong Kong stablecoin” for explanation may lead to the misconception that this is a unified regulatory framework for all stablecoins. To avoid confusion, when discussing and interpreting the Regulations, the broad term “Hong Kong stablecoin” should be avoided, and instead, the precise term “specified stablecoin” (referring to the broad category of stablecoins regulated by the Regulations) or specific types based on the pegged currency, such as “Hong Kong dollar stablecoin” or “US dollar stablecoin,” should be used.
“Hong Kong stablecoin” as a synonym for “specified stablecoin” and its risks
“Hong Kong stablecoin” is often used as an abbreviation for “stablecoins issued and regulated in accordance with the Stablecoin Ordinance,” which is equivalent to “specified stablecoins.” However, this generic term is highly prone to conceptual confusion in practical use, such as readers mistakenly applying the issuance requirements for US dollar stablecoins to Hong Kong dollar stablecoins.
Particular caution is warranted regarding certain provisions of the Ordinance (such as those related to reserve management, integration with Hong Kong’s monetary and financial system, and assessments of the impact on local financial stability), which impose higher or more specialized requirements on issuers of “Hong Kong dollar stablecoins.” This reflects the unique significance of Hong Kong dollar stablecoins for the stability of Hong Kong’s local financial system. Market participants must carefully distinguish the specific scope of application of these provisions to avoid broad interpretations.
Improving clarity: Proposed systematic nomenclature for stablecoins
To improve clarity, it is recommended to adopt a standardized naming convention of “national currency + code.” Specific examples include:
- US dollar stablecoins: USDT, USDC
- Chinese yuan stablecoins: CNYT, CNYC
- Hong Kong dollar stablecoins: HKDT, HKDC
This naming convention allows for intuitive differentiation between stablecoins pegged to different currencies, avoiding confusion caused by generalized terminology. The specific naming design is determined by the issuer (issuer).
Clarifying Boundaries: Digital Currency, Cryptocurrency, and Stablecoin
It is essential to clarify the hierarchical relationships among these concepts:
Digital Currency: A broad term referring to currency that exists in electronic form, representing the most general overarching concept.
Cryptocurrency: A subset of digital currency, specifically referring to digital currency created and operated using cryptography and distributed ledger technology (such as blockchain).
Fiat-Pegged Stablecoin: A subcategory of cryptocurrency, whose core design objective is to maintain price stability by pegging to a stable fiat currency. Of course, there are other types of stablecoins as well.
Key distinctions:
Central bank digital currencies (CBDCs) and Alipay are digital currencies, but they are not cryptocurrencies (as their core does not rely on public chain technology or decentralization) and are not stablecoins.
The “stablecoins” regulated under Hong Kong’s Stablecoin Ordinance are essentially cryptocurrencies that are subject to specific regulatory frameworks and pegged to fiat currencies.
Given their monetary tool attributes rather than investment product characteristics, the regulation of stablecoins should not simply apply traditional securities issuance regulations.
Potential Uses and Challenges of Hong Kong Dollar Stablecoins
A well-designed Hong Kong dollar stablecoin could theoretically serve as a potential tool for improving cross-border payment efficiency and enriching payment channels. For example, it could be connected to platforms such as the Cross-border Interbank Payment System (CIPS) to provide a supplement or alternative to SWIFT. However, realizing this potential faces serious challenges:
- Highly dependent on ecosystem development: Its practical value and influence are largely determined by the maturity of Hong Kong’s local cryptocurrency payment, settlement, and custody ecosystem.
- Intense competitive environment: It faces competition from international stablecoin giants (such as USDC), CBDCs from other jurisdictions, and improved traditional payment systems.
- Risk of limited development: If the local ecosystem fails to develop sufficiently, the role of the Hong Kong dollar stablecoin may be constrained, and its development trajectory might resemble that of Ripple—which, despite once having a substantial market capitalization, faced significant challenges in realizing its cross-border payment vision and failed to fully unlock its development potential.
Conclusion: Clarify concepts, seize opportunities, and respond to challenges
The introduction of Hong Kong’s Stablecoin Ordinance is an important step toward embracing financial innovation, and the market has high expectations for it. However, to turn these expectations into successful practice, we must face the challenges of the current path head-on:
- Rules must align with market practices: If implementation details are overly stringent or detached from reality, it may be difficult to attract high-quality issuers, ultimately resulting in products that lack competitiveness in terms of functionality, efficiency, or user experience.
- Enhancing user acceptance: If regulated Hong Kong dollar stablecoins do not offer significant advantages over existing mature options (such as USDC or efficient banking services) or instead create additional burdens, adoption rates among institutional and retail users will be difficult to increase.
- Preventing long-term negative impacts: A stablecoin regulatory framework that fails to meet expectations not only wastes valuable resources and policy windows but may also undermine Hong Kong’s competitiveness and reputation as an international financial center and virtual asset hub.
Achieving this goal requires deeper cooperation between regulatory authorities, industry, and academia to continuously refine the issuance mechanism, application scenarios, and risk management.
By clarifying concepts and optimizing the issuance framework, Hong Kong has the opportunity to build a more competitive stablecoin ecosystem. This article aims to provide reference for relevant discussions and contribute to the better implementation of the regulations.
