Hong Kong seizes the digital asset opportunity: stablecoin, RWA, digital renminbi

Abstract

Hong Kong is simultaneously promoting various digital currency experiments such as stablecoins, digital yuan, and RWA. With a century-old financial tradition, Hong Kong stands at the strategic crossroads of ushering in the future digital world.

On the streets of Hong Kong, the logos of "Octopus" and "Token" are often printed side by side on both sides of the road. This vividly outlines the picture of Hong Kong's financial industry: on one side is the century-old accumulation of traditional finance, while on the other side is the upcoming carnival of the digital world.

Nowadays, traditional finance and the digital world are accelerating their integration. As a bridge connecting the offline and online worlds, stablecoins are given great expectations by the market. Following the implementation of the "Stablecoin Regulation", the Hong Kong Monetary Authority (hereinafter referred to as "HKMA") announced that the first batch of stablecoin issuer licenses in Hong Kong will be open for application from August 1 to September 30, 2025.

Currently, many companies are eager to try. A spokesperson for the Hong Kong Monetary Authority revealed that as of August 31, there have been 77 expressions of interest in applying for a stablecoin license, including banks, technology companies, securities/asset management/investment firms, e-commerce, payment institutions, and startups/Web3 companies.

However, in contrast to the growing enthusiasm in the market, Hong Kong regulators have frequently taken steps to cool down the hype surrounding stablecoins. On August 14, the Hong Kong Securities and Futures Commission and the Hong Kong Monetary Authority issued a statement emphasizing the necessity for investors to remain vigilant. The Hong Kong Monetary Authority further stated that only a limited number of licenses for stablecoin issuers will be granted in the initial phase.

In the eyes of market participants, this may be a true reflection of Hong Kong's foray into digital assets. On one hand, they are rapidly advancing the stablecoin legislative agenda, demonstrating a determination to not lag behind and even to lead. On the other hand, to ensure safety, the increasingly stringent regulations may add innovation costs for the pioneers.

Hong Kong Special Administrative Region Legislative Council member Kenneth Lau stated in an interview with Caijing that although the regulation of stablecoins in Hong Kong is tightening, this may actually promote industry development. This is because it will protect the rights and interests of market participants, attract more people to participate, and expand the market size.

In addition to stablecoins, Hong Kong is also conducting various digital currency experiments. The other two projects are the digital currency bridge project co-led by the Hong Kong Monetary Authority and other central banks, and tokenized deposits issued by banks.

Many market participants have indicated that this reflects Hong Kong's various attempts in the digital world, but it may to some extent create a "competitive-cooperative landscape." The projects for implementing central bank digital currencies and the commercial landing scenarios of stablecoins are mostly focused on cross-border payments. In the future, both sides need to collaborate in the areas of large and medium-sized clearing and settlement, as well as retail payments, in order to form a more efficient cross-border payment system.

In addition to cross-border payments, there is greater imaginative potential for the functions of stablecoins in the market. By merging the stability of fiat currencies with the efficiency of blockchain, stablecoins may help in the development of the tokenization of Real World Assets (RWA). This involves bringing real-world currencies ("money") onto the blockchain, thereby facilitating investment in virtual assets.

This is of great significance for Hong Kong. Li Ming, Deputy Researcher of AIoT at Hong Kong Polytechnic University, Chairman of the IEEE Computer Society Blockchain and Distributed Ledger Standards Committee, and Executive President of the Hong Kong WEB3.0 Standards Association, stated to Caijing that the development of the RWA industry in Hong Kong can drive the outflow of assets from mainland China and also attract overseas funds. In the digital world, Hong Kong can still play the role of a "super connector."

At the same time, as the world's largest offshore Renminbi hub, Hong Kong can also thrive in the digital world. If Hong Kong's stablecoin is anchored to the offshore Renminbi in the future, the increase in the market size of the stablecoin will promote the internationalization of the Renminbi.

In this regard, Xiao Feng, Chairman and CEO of Hong Kong HashKey Group, stated in an interview with Caijing that whether in the traditional finance or digital world, to promote the internationalization of the Renminbi, it is essential to expand offshore Renminbi assets and support innovative products, as this will attract foreign investors on a larger scale.

From the perspective of the global monetary system, Li Ming believes that the stablecoin experiment attempted by Hong Kong, China, is more focused on application scenarios and is more of an innovation in the digital finance sector. In comparison, the US government's dollar stablecoin is anchored to the US dollar and US Treasury bonds, hoping to continue to enhance the dollar's influence in the digital world. "If we want the Hong Kong stablecoin to be widely accepted globally, we need to do more design in terms of standardization, financial systems, monetary policy, and other aspects such as technical systems, application scenarios, and industrial ecosystems," he said.

(Hong Kong is trying various digital currency payment methods, Photo/康恺)

The Rise of Stablecoins: A Game of Innovation and Security

"Half is seawater, half is flames." — For many practitioners, this may be a true reflection of Hong Kong's digital asset industry: on one hand, they are rapidly advancing the stablecoin legislation agenda, showing a determination to not fall behind and even to lead. On the other hand, increasingly tight regulations may add to the innovation costs for pioneers.

After the surge in stablecoin enthusiasm, Hong Kong's financial regulators have recently taken steps to cool it down. On August 14, the Hong Kong Securities and Futures Commission and the Hong Kong Monetary Authority issued a joint statement regarding the market volatility related to stablecoins, emphasizing the necessity of remaining vigilant during market euphoria.

Moreover, Hong Kong regulators are also raising the approval thresholds for stablecoins. The President of the Hong Kong Monetary Authority, Eddie Yue, has repeatedly emphasized that the approval criteria for stablecoin issuer licenses in Hong Kong are very high, and only a few will be approved in the initial phase.

KYC (Know Your Customer) and AML (Anti-Money Laundering) are regarded by the Hong Kong Monetary Authority as important factors in the implementation of stablecoins. According to relevant regulations, the identity information of all stablecoin holders must be retained for more than 5 years, and issuers are not only required to verify user identities but are also prohibited from providing services to anonymous wallets.

However, this move has caused a huge stir in the Web3 community. This is because the advantage of decentralized finance lies in its permissionless feature of "using it as soon as you open a wallet," but the real-name system requirement effectively transforms stablecoins into regulated digital tools, which conflicts with the free circulation characteristics of on-chain native assets.

Some companies have even stated that stricter regulations may increase the difficulty for fintech companies to apply for stablecoin licenses. This is because, compared to financial institutions, fintech companies have limited experience in implementing KYC.

However, many market participants believe that relatively stringent regulations in the early stages of industry development may be more beneficial for market growth. "Regulations such as KYC and AML are the lower limit for implementing stablecoin policies, while the actual upper limit of the entire market is determined by the landing of stablecoin application scenarios," Li Ming stated.

Qiu Dagen also believes that stricter regulations will protect the rights of market participants and attract more people to participate. "Currently, the most important thing in the stablecoin market is to attract enough users. The issuance and circulation of stablecoins are not determined by the issuer, but by demand. Stablecoins that are issued but not used must be destroyed. At present, the Hong Kong regulatory authorities provide a clear regulatory and tracking process, which allows people to understand the issuance of stablecoins and the banking account situation of users."

Not just KYC and AML, Martin Rogers, head of the litigation practice in Asia and chairman of the Asia region at Davis Wright Tremaine LLP, stated to Caixin that Hong Kong regulators are also focusing on the risks associated with finance, credit, and data. If stablecoin issuers default, this can protect investors' rights. Additionally, the process of using stablecoins will involve a significant amount of data being put on-chain. The requirements for cybersecurity can prevent the system from being hacked.

"Compared to the United States, the regulatory authorities in Hong Kong, China require more stringent regulations regarding stablecoin legislation. The former emphasizes the information disclosure by stablecoin issuers. On the basis of adequate disclosure, investors must assume their own risks. In contrast, the regulatory agencies in Hong Kong have more provisions to protect investors' rights." He further stated.

Despite the tightening of regulations, many institutions are still eager to try stablecoins. On August 8, as one of the three participants in Hong Kong’s stablecoin sandbox, a joint venture company called Anchorpoint Financial Limited, established by Standard Chartered Bank (Hong Kong), Anika Group, and Hong Kong Telecommunications, disclosed that it has expressed to the Hong Kong Monetary Authority its intention to apply for a stablecoin issuer license. Liu Yu, CEO of Yuan Coin Technology, stated in an interview with Hong Kong's Ming Pao that the company is confident in successfully obtaining the license.

As of August 31, there are a total of 77 expressions of interest for applying for a stablecoin license to the Hong Kong Monetary Authority, which include banks, technology companies, securities/asset management/investment firms, e-commerce, payment institutions, startups/Web3 enterprises, and others.

Many financial institutions are reluctant to miss the development opportunities in the digital world. A banking professional from Hong Kong told Caijing that cross-border payments are seen as the most feasible scenario for stablecoins, and banks have advantages in clearing and settlement services. Most banks in Hong Kong are trade banks, and their market networks overlap with the Belt and Road Initiative, which is another significant advantage. "For some small and medium-sized banks, technological transformation provides an opportunity for them to overtake on a curve," he said.

From the perspective of financial technology companies, Li Ming believes that for enterprises with complex global supply chains, blockchain-based stablecoins can help suppliers receive payments faster, and financing through stablecoins based on on-chain trade data is more convenient and cost-effective. At the same time, this can also enhance the transparency and trust of the supply chain, optimizing the supply chain ecosystem within enterprises.

In addition, commodities are also seen as an important scenario for the implementation of stablecoins. Qiu Dagen believes that the trading volume of commodities is large and involves the global market, which creates a natural demand for cross-border payment settlement.

In addition, the new energy sector can also provide practical scenarios for the use of stablecoins. Tang Bo, Assistant Dean of the Financial Research Institute at the Hong Kong University of Science and Technology, stated to Caijing that, from a subdivision perspective, the supply chains in areas such as batteries and automobiles are relatively long, and Chinese companies have certain comparative advantages globally. In the future, this will also provide many business opportunities in the field of cross-border payments.

Against this backdrop, the market is optimistic about the future prospects of stablecoins. JPMorgan predicts that in the coming years, the stablecoin market size may reach between $500 billion and $750 billion.

Digital Currency Competition: Co-building a Cross-Border Payment System

In addition to stablecoins, Hong Kong is also experimenting with various digital currencies. One is the central bank digital currency (CBDC) project led by the Hong Kong Monetary Authority, and the other is tokenized deposits issued by banks.

Specifically, the CBDC explored by Hong Kong can be divided into two categories. At the wholesale level, the Hong Kong Monetary Authority (HKMA) has jointly initiated the Central Bank Digital Currency Bridge (m-CBDC Bridge) project with institutions such as the People's Bank of China Digital Currency Research Institute, the Bank of Thailand, and the Bank for International Settlements (BIS) Innovation Hub, with its main application being cross-border payment and settlement. In addition, the HKMA has also launched a wholesale central bank digital currency called "Ensemble," which constructs a new financial infrastructure for tokenized deposits, digital Hong Kong dollars, and regulated stablecoins for interbank settlement.

At the retail level, the Hong Kong Monetary Authority has also collaborated with the BIS Innovation Hub, the Bank of Israel, and others to launch the Aurum project and the Sela project, which aim to study the high-level technical design of retail CBDC and test the feasibility of the retail CBDC architecture in facilitating digital payments between intermediaries.

Since mBridge and stablecoins are primarily used in cross-border payment scenarios. In the eyes of many market participants, these two represent the "sovereignty path" and "market path" of currency, or may form a distinct "competitive-cooperative pattern."

However, in Li Ming's view, the two still have a considerable complementarity. mBridge serves the wholesale side for large-value clearing and settlement, such as interbank reserve allocation and national-level cross-border settlement of bulk commodities. Stablecoins can accelerate high-frequency demand on the retail side, such as small payments or financial transactions between commercial institutions. As stablecoins gradually become compliant and the application scenarios of mBridge expand, both sides can jointly form a more efficient cross-border payment system.

Tang Bo believes that mBridge, relying on the CBDC framework, emphasizes regulatory compliance and financial stability. While this reduces systemic risk, it has weaker flexibility. Stablecoins, on the other hand, are based on public chains, smart contracts, and an open financial ecosystem, which makes them more adept at high-frequency and fragmented payment scenarios.

In terms of tokenized deposits, HSBC is one of the pioneers. In May, the bank announced the launch of a corporate treasury management solution focused on tokenized deposits in Hong Kong, marking the first blockchain settlement service provided by a bank in the local market. During the initial launch phase, its corporate clients can make Hong Kong dollar or US dollar transfer payments between wallets held under different companies, without being restricted by transaction hours, and can complete transactions in real-time, which helps companies improve their treasury management efficiency.

Ant International has become the first corporate client to adopt HSBC's solution, successfully completing instant internal fund transfers after tokenizing the deposits in its HSBC account.

McKinsey believes that the three types of trials mentioned above can enhance the efficiency of settlement payments. With the help of technologies such as digital compliance processes and smart contracts, regulations can address issues related to AML and KYC through on-chain analysis services.

However, McKinsey stated that the aforementioned experiments may pose a direct challenge to global payment systems such as Swift. If the current growth rate continues, the transaction volume of stablecoins could surpass traditional payments in less than a decade. As of now, traditional payment infrastructure processes global remittances of $5 trillion to $7 trillion daily (including financial institutions, businesses, and individual consumers).

Zhang Tao, the Chief Representative of BIS in the Asia-Pacific region, previously stated to Caijing that the global payment system is a process of continuous improvement. Any enhancements to this system are pursued on a legal and regulatory basis, aiming to provide better services to consumers at the lowest possible cost. "In other words, it means allowing consumers to transfer money from one place to another in a compliant manner, at a cheaper price, with faster speed, and more stability and security. Current technological advancements have created more possibilities for the enhancement and improvement of the global payment system," he said.

"For cross-border payments, whether using central bank digital currencies or stablecoins, the underlying blockchain technology is already quite mature. The next step for all parties is how to implement its application scenarios. It is important to better integrate financial services with digital finance based on blockchain technology, innovating business towards improving efficiency and increasing transparency," said Li Ming.

RWA: The next windfall for virtual assets

Not just cross-border payments, market participants have even greater imaginative space regarding the functions of stablecoins. In their view, by integrating the stability of fiat currencies with the efficiency genes of blockchain, stablecoins may help in the development of the tokenization of real-world assets (Real World Assets, RWA).

RWA refers to the tokenization of real-world assets through blockchain technology, allowing them to be traded in the cryptocurrency market or used as collateral.

From the perspective of mapping real-world assets to the blockchain, fiat stablecoins are the most fundamental type of asset within RWA, which involves putting real-world currency ("money") on the chain. Compared to other RWAs, the underlying asset of fiat stablecoins is the most fundamental and liquid currency among all assets. Stablecoins are the foundational variety of RWA, and other RWAs ("assets") can use stablecoins as a medium of exchange.

Taking Hong Kong as an example, RWA projects may use stablecoins pegged to the Hong Kong dollar or US dollar as payment or redemption channels, mapping the value of real estate, bonds, stocks, intellectual property, and even carbon assets onto the blockchain for tokenization, thereby enabling global trading or financing. As the volume of stablecoins continues to grow, the demand for their on-chain allocation will also become increasingly robust, thereby promoting the development of RWA.

Li Ming believes that Hong Kong can develop the RWA industry to leverage the advantages of China's manufacturing and supply chain, driving the outflow of assets from mainland China while also attracting overseas funds. In the digital world, Hong Kong can still play the role of a "super connector."

Specifically, the current RWA practices in Hong Kong mainly adopt a cross-border RWA tokenization model of "Mainland China assets + consortium blockchain + Hong Kong regulatory sandbox," focusing on four themes: fixed income and investment funds, liquidity management, green and sustainable finance, and trade and supply chain finance. In the RWA tokenization projects under the Hong Kong Ensemble sandbox program, there are mainly three projects involving domestic assets: Longxin Group's new energy charging pile RWA, Xiexin Nengke's photovoltaic power station RWA, and Xunying Travel's battery swapping asset RWA. The underlying assets primarily consist of future income rights from new energy.

Tang Bo believes that the effectiveness of the aforementioned cycle depends on whether there are high-quality new energy assets available for investment. For example, many new energy companies are currently establishing photovoltaic and wind power equipment overseas. Investors can obtain considerable cash flow returns by purchasing these assets in the RWA world, and naturally, they would be willing to hold corresponding stablecoins. This is equivalent to conducting cross-border energy trade using stablecoins, and subsequently investing in RWA assets related to new energy.

Qiu Dagen also believes that the reason investors hold stablecoins is more to connect with the underlying digital assets. However, he also reminds that stablecoins are just a small part of the larger puzzle in the digital world. Behind this, it is important to connect many hard-to-trade assets, allowing them to be tokenized, thereby solving the liquidity issues caused by weak trading.

In this regard, Li Ming believes that the liquidity dilemma of RWA is largely due to whether the underlying assets can be standardized. "Compared to the financial assets used as the underlying for RWA in the United States, China's underlying assets are mostly physical assets, which are more difficult to standardize. This actually reflects a problem from the side: the U.S. is a financial superpower, while China is a manufacturing and supply chain superpower. However, if in the future these physical assets can be activated in the virtual world, it can greatly empower the 'Belt and Road' initiative and the dual circulation strategy," he said.

(How stablecoins and RWAs connect the real world with the crypto world, chart source: CICC Research Department)

At the same time, as the world's largest offshore RMB hub, Hong Kong can also thrive in the digital world. If Hong Kong's stablecoin is pegged to the offshore RMB in the future, the increasing market size of the stablecoin will drive the process of RMB internationalization.

According to Qiu Dagen, from the perspective of Hong Kong regulatory authorities, offshore RMB may be one of the options for Hong Kong stablecoins to be pegged to fiat currencies. "Currently, the volume of cross-border payments and settlements in RMB is gradually increasing, which is an important entry point for the development of offshore RMB stablecoins. To encourage traders to hold offshore RMB stablecoins, it is necessary to provide holders with more RMB investment channels. For example, holders can deposit RMB in banks for high interest or invest in financial assets such as stocks and bonds. This process is consistent with the internationalization of RMB itself," he said.

Data from the People's Bank of China shows that in 2024, the amount of cross-border payments in RMB is expected to reach approximately 64 trillion yuan, a year-on-year increase of 23%. So far, offshore RMB payments processed through Hong Kong have consistently accounted for over 70% of the global total. Hong Kong has the largest RMB liquidity pool outside of mainland China, with a scale of about 1 trillion yuan.

Xiao Feng believes that Hong Kong is an important "stronghold" for advancing the internationalization of the Renminbi. This is true both in the current financial market and in the future digital world. Currently, countries and regions such as the United States are promoting tokens, and if Hong Kong does not try, it may be difficult to integrate into the digital world in the future. From the perspective of promoting offshore Renminbi stablecoins, China has a significant share in global trade exports and imports. How to combine trade settlement with stablecoins may be an important lever for advancing this process.

From the perspective of the global monetary system, Li Ming believes that Hong Kong's implementation of stablecoins in the future has a long way to go. In comparison, the US government's dollar stablecoin is pegged to the US dollar and US Treasury bonds, hoping to continue to enhance the dollar's influence in the digital world. The stablecoins promoted by Hong Kong focus more on application scenarios, aiming to drive the development of the digital economy through financial innovation. If it is to be widely accepted globally, more design work is needed at the levels of standardization, industrial policy, and monetary system.

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