HKEJ Column

Professor Yang You

30 July 2025

Typically issued by private institutions, stablecoins are digital currencies that are pegged one-to-one to a fiat currency or collateralized by a reference asset. Currently, 99% of the world’s stablecoins are backed by the US dollar and US dollar-denominated assets, with USDT and USDC dominating the global market and accounting for a combined circulating supply worth more than US$220 billion. Circle has completed its listing in the US. Subsequent to the passage of the Stablecoins Bill in Hong Kong on 21 May 2025, the Stablecoin Ordinance will officially come into effect on 1 August 2025. In America, the enactment of the GENIUS Act on 18 July 2025 signifies further progress toward the legalization of stablecoins in the country.

Thanks to public blockchain consensus mechanisms and smart contracts, transactions can now be made on a regulation-free and anonymous basis for the first time. The general ledger and transaction records are completely open and transparent on public blockchains. Users can have addresses without undergoing a real-name registration system and are free to transfer tokens that hold some economic value. In contrast, users of traditional account systems must register with their real names and go through compliance examinations beforehand while transaction records are kept by financial institutions. At present, unlicensed stablecoins are primarily collateralized by US dollar-denominated assets held as reserves in less regulated jurisdictions. Decentralized blockchain networks are then utilized to provide payment services in highly-regulated jurisdictions. For example, stablecoins are used as the base currency in bitcoin and derivative contract transactions to achieve cross-border regulatory arbitrage. Since stablecoins can be freely transferred on public blockchains, they may be used for tax avoidance, anonymous payments, capital-control evasion, or even by fraud syndicates. For instance, on 25 June 2025, a Mainland online investment platform known as Xinkangjia DGCX leveraged USDT to transfer over RMB10 billion overseas.

Another common anonymous payment method of value transfer is through tangible assets, such as cash and gold. Let us compare this with stablecoins. First of all, contrary to cash, which cannot be transported over long distances or across national borders in large amounts, stablecoins harness blockchain technology to achieve high-speed transfer in cash anywhere across the world. Secondly, unlike cash, stablecoins, with their programmability, allow for widespread use in decentralized lending and transactions, completing automated exchanges in accordance with smart contracts. However, since the data of token transfer on blockchains is open and transparent, and addresses can be traced and frozen, stablecoins are inferior to cash in terms of anonymity. The more exchange addresses that are connected to a blockchain address, the more likely the identity of the address owner will be known to their counterparties, thus diminishing the anonymity of transactions. The offline transfer of banknotes and gold, which leaves no records, is much harder to trace than transfers conducted on blockchains. The rapid growth of unlicensed, blockchain-based fiat currencies has made it necessary for regulators to introduce laws for compliant, licensed stablecoins. The regulatory consensus concerns the requirements for stablecoins’ reference assets (for example, the GENIUS Act stipulates only US dollars or US Treasury bonds). Nonetheless, it remains a contentious issue as to who can use stablecoins. Allowing free transfers on public blockchains without identity verification or restrictions makes it difficult to combat criminal activities and regulate arbitrage. Adopting the same KYC processes as banks would contradict the decentralization principle of blockchain, rendering stablecoins a redundant innovation. To address the impact from blockchain, it is imperative for licensed stablecoins to identify a flexible regulatory approach that balances optimized transaction efficiency with prevention of illicit activities.

As early as 2002, Tencent launched QQ Coins, pegged 1:1 to the onshore RMB, providing a pragmatic solution to the challenges of inadequate and inconvenient online payments in China. Users can top up their accounts via QQ Coins and freely transfer and make payments within the Tencent ecosystem. Linked with Tencent’s internal products like QQ membership and Tencent games as the sole payment method, QQ Coins became a general equivalent that serves as a means of exchange for game items. Furthermore, QQ Coins were used by users to buy offline products and pay wages, while Internet cafes began to offer account top-up with QQ Coin-to-RMB exchange services. The development of an RMB stablecoin in the form of Tencent QQ Coins ended on 15 February 2007, when 14 authorities jointly issued the Notice on Further Strengthening Administration of Internet Cafes and Online Games (see Note). This document clearly stated that there was a growing trend of virtual currencies in online games exerting an adverse impact on the national economic and financial order. Therefore, the use of virtual currencies issued by online game operators to purchase tangible goods was prohibited, as was the resale of such virtual currencies. The Notice effectively blocked exchanges between QQ Coins and RMB. In the absence of secondary transactions and an exchange market, QQ Coins failed to become an RMB stablecoin. Yet the emergence of blockchains has made it impossible for stablecoins to be simply banned by any single country.

Actually, the history of QQ Coins’ development exactly mirrors that of USDT and USDC. The stablecoins currently in circulation were originally designed to resolve the thorny issue of capital flows at cryptocurrency exchanges, as banks refused to provide deposit or capital flow channels due to the non-compliant nature of cryptocurrency transactions. In addition, the surge in value and the proliferation of high-leverage contracts for cryptocurrencies like Bitcoin continued to attract new participants to the market. Take Circle’s USDC as an example. It was integrated with Coinbase, while USDT could be freely used on exchanges OKX and Binance. The combination of a robust crypto exchange ecosystem and banks’ limitations in providing compliant mechanisms for capital flows created strong commercial demand for stablecoins. This ever-increasing demand paved the way for the second phase of development for US dollar stablecoins, expanding their use into a variety of areas, from cross-border payments and wage disbursements to the purchase of tangible goods. The peer-to-peer transfer feature of blockchain allows it to bypass regulatory oversight and offer enhanced privacy protection, which in turn affords it broader applications in international settlement and value transfer than QQ Coins. With the Stablecoins Ordinance taking effect on 1 August, issuers of compliant stablecoins must have regulator-approved commercial use cases with buoyant business demand in order to operate their stablecoin projects. In other words, they must demonstrate unique advantages over traditional payment channels while simultaneously meeting regulatory compliance requirements. The development of compliant stablecoins will inevitably be accompanied by the implementation of commercial use cases, leading to a dynamic interplay and ongoing adjustments to regulatory requirements. Over time, this process may create a new equilibrium characterized by limited regulatory flexibility. Looking ahead, there is still a long way to go for compliant stablecoins.

Note: Ministry of Culture, State Administration for Industry and Commerce, Ministry of Public Security, Ministry of Information Industry, Ministry of Education, Ministry of Finance, Ministry of Supervision, Ministry of Health, People’s Bank of China, Legislative Affairs Office of the State Council, General Administration of Press and Publication, Central Civilization Office, Central Committee for Comprehensive Management of Public Security, Communist Youth League of China, etc.