Author: Liu Xiaochun
On May 21, the Hong Kong Special Administrative Region Legislative Council passed the "Stablecoin Regulation Bill" (hereinafter referred to as the "Bill"). On May 20, US time, the US Senate passed the "Stablecoin Uniform Standard Guarantee Act" (hereinafter referred to as the "Act"). The crypto community was stirred up, with various comments flying around, but most did not conduct a specific study of the two legal documents. Some people even confused the concepts of stablecoins, cryptocurrencies, and crypto assets for various purposes, causing some misunderstanding about stablecoins.
Different Regulatory Frameworks in the US and Hong Kong
... (The rest of the translation follows the same pattern, maintaining the original structure and translating all text except for the content within <> tags.)The basic rules of bank promissory notes are as follows: customers exchange an equal amount of currency with the bank for a note of the same value. The note holder can use the note to pay for goods or services, repay debts, or exchange it for cash at other banks. When the final note holder requests redemption from the issuing bank, the bank pays the equivalent amount in currency upon presentation. In fact, the earliest paper money was created this way, and bank notes followed the same rule. It can be said that legal stablecoins are quasi-currencies under legal tender conditions.
The emergence of promissory notes, paper money, and bank notes stems from the same reason: physical cash is heavy and unsafe to carry long distances. With the prevalence of electronic payment, the usage environment for bank promissory notes has essentially disappeared, making them rare. The invention and popularization of paper were prerequisites, but the inconvenience and insecurity of carrying physical currency long distances were the fundamental need. Cryptographic technology is the technical premise for stablecoins and crypto assets. So, what are the specific application needs of stablecoins as a payment tool and quasi-currency?
Years ago, JPMorgan Chase Bank issued JPM Coin, with issuance rules similar to stablecoins and bank promissory notes. As the most important US dollar clearing bank, it intended to consolidate its leading position in cross-border US dollar clearing. However, for years, it has not found suitable scenarios in cross-border bank clearing. In recent years, JPMorgan Chase Bank has begun exploring alternative application scenarios in collaboration with other institutions, seemingly making some progress. However, whether commercial application can ultimately be realized remains to be seen.
Additionally, Western Union's model is similar to promissory notes. Customers deposit currency at any Western Union location, which provides a remittance voucher. Customers can keep the voucher or transfer it to others. The voucher holder can claim the remittance at any Western Union location worldwide. A stablecoin is a voucher that can be redeemed for an equivalent amount of legal tender.
These are all historical payment tools. As payment tools, they share common characteristics. On one hand, the reasons and processes for their emergence are similar, requiring a clear value measure and stable value, whether for face-to-face or cross-spatial, instant or deferred payments, they must be safe, convenient, and quick. On the other hand, issuers always have the impulse to over-issue, easily creating risks of mixed authenticity. These risks are not imagined and not exclusive to traditional paper currency. Unfortunately, technology, including blockchain and encryption technologies, cannot solve human or capital greed. For the US, the bank run risk of stablecoins is real and has occurred. In May 2022, the Terra USD stablecoin collapsed due to a severe bank run, raising alarm for regulators. Consequently, recent legislation in Hong Kong and the US has imposed strict and clear requirements on stablecoins' reserve asset quantity, quality, and management.
Stakeholder Demands for Stablecoins
[The translation continues in this manner for the remaining paragraphs, maintaining the same professional and accurate translation style.]Whether the demands of the relevant parties can be satisfactorily met is the fundamental factor for the success of stablecoins, with the technical advantages in payment being secondary. The result of the game between different parties may be widespread use of various stablecoins, or specialized stablecoins in limited fields, or potentially being replaced by central bank digital currencies. Unless the current national form changes, stablecoins will never completely replace legal tender, and can only serve as an auxiliary payment tool. Currently, stablecoins mainly play a role in specific digital economic domains, with their application scope continuously expanding. As digital economy is the future development direction and the scale of stablecoin applications has grown large enough to impact financial system stability, it has reached a stage requiring standardized management from both innovation inclusiveness and financial stability perspectives.
Stablecoins Influencing Monetary Policy
As a payment tool, stablecoins pegged to legal tender are quasi-monetary and essentially circulating currency. If issuers use all legally obtained funds for lending, it equals injecting an equivalent amount of currency into the market. If partially used to purchase high-quality assets like government bonds as required by Hong Kong and US regulations, it means partially increasing market currency supply. If all legally obtained funds are kept as reserve assets without investment, no currency will be added.
If stablecoin reserve assets must be third-party custodied, it depends on regulatory requirements for custodian institutions. If 100% reserve asset liquidity is guaranteed, no currency will be injected; otherwise, currency supply may increase. Stablecoin reserve currency investments in government bonds will impact bond markets due to redemption volatility. An effective payment tool brings economic vitality and significantly influences money supply and market interest rates, so stablecoin issuance scale and regulatory models must become factors in monetary policy formulation.
Based on distributed ledger systems, stablecoins represent a disintermediated payment method potentially having completely different circulation patterns from traditional cash. In today's electronically banked environment, cash is mostly used for small, infrequent offline personal payments. Stablecoins primarily apply in virtual economic domains like WEB3 and DeFi, with institutional and retail users, featuring large transaction amounts, high frequency, and mostly exchange or platform trades. As stablecoin issuers, anti-money laundering, counter-terrorism financing, and KYC obligations remain uncertain regarding implementation on transaction behaviors. Current Hong Kong and US regulations lack clear explanations.
Cross-border payments are a current stablecoin exploration hotspot. Direct payment between parties is more direct and efficient than bank intermediary remittances. However, payment is just one market entity operational phase, ultimately aimed at obtaining legal tender-denominated returns. Stablecoins must eventually be converted to legal tender and deposited in bank accounts to earn interest. Moreover, cross-border currency exchanges cannot be resolved by stablecoins and ultimately require bank clearing systems. Stablecoin success doesn't mean separating from banking systems but efficiently integrating with them. Stablecoin issuers must use bank accounts for receiving legal tender, investing in reserve assets, and redeeming stablecoins. This is a key concern for monetary circulation management and stablecoin regulation, currently unaddressed in Hong Kong and US regulations.
Seven Recommendations for China
First, maintain technological neutrality, encouraging innovative financial technology applications.Blockchain and cryptographic technologies have successful financial applications, like Hong Kong's green bonds. In virtual asset trading and DeFi, cryptocurrencies demonstrate excellent payment settlement capabilities. Although many transactions are legally unrecognized gray or illegal transactions, this doesn't negate cryptocurrency technology's payment settlement feasibility in legal transactions.
Second, stablecoins are products of real demands.Current demands come from two categories: emerging economic domains like virtual asset and chain transactions where legal tender payment methods cannot satisfy settlement needs, and gray or illegal transactions aimed at regulatory evasion. Emerging domains may contain legal, gray, and illegal transactions. Effective illegal transaction identification can establish corresponding regulatory approaches.
Third, stablecoin legislation is necessary for innovation and financial security.Hong Kong and US "regulations" follow and prevent innovation risks. Stablecoin payment tool innovation aims to promote emerging economic forms, with issuance not being the primary goal. Legislation addresses potential risks, notably including offshore stablecoins pegged to local currencies to prevent potential currency system risks. As RMB internationalization progresses, offshore RMB-pegged stablecoins may emerge, necessitating preventive regulations. As equivalents, stablecoins have no offshore/onshore distinction, but regulators can limit issuer and usage scope.
Fourth, RMB stablecoin issuance faces no substantial regulatory obstacles.Stripping technical layers, stablecoin rules resemble bank notes. Physical cash can be digitized, bills electronically transformed, and bank notes can be chain-based. Two potential approaches exist: integrating RMB stablecoins into existing bank note management systems or creating separate regulations considering stablecoin application domains' specificity. Cautiously, initial application scope should be limited. Considering issuers' potential over-issuance and market impact, stablecoin issuance should be included in institutional capital adequacy regulatory frameworks.
Fifth, the issuance of RMB stablecoins can help develop more suitable application scenarios for digital RMB.Technically, stablecoins and central bank digital currencies are the same, so why would stablecoins still exist? Part of this is to circumvent regulation, but more critically, the mechanisms and motivations for exploring and innovating application scenarios are different. Central bank digital currencies are issued and primarily driven by the central bank in expanding application scenarios, but the central bank is limited in developing these scenarios. Stablecoins are issued by commercial institutions with commercial interests, and they are highly motivated to explore application scenarios. At the same time, due to the high compatibility between application scenarios and stablecoin characteristics, transaction frequencies can increase, and system maintenance becomes easier and less costly. Central bank digital currencies attempt to connect all possible application scenarios, some of which have low transaction frequencies. From a technical and theoretical perspective, scenarios where stablecoins can be successfully applied may also be suitable for central bank digital currencies. Therefore, the issuance of RMB stablecoins actually helps promote the application of digital RMB.
Sixth, innovatively building a seamless RMB stablecoin payment system that interfaces with the banking account system.The tech community often isolatedly views payment convenience, overlooking the economic operations behind payments, which creates a separation between the virtual and real worlds. The emergence of stablecoins itself hopes to build a bridge between the virtual and real worlds, with the purpose of issuing stablecoins still being to obtain returns in legal tender form. If RMB stablecoins can solve the connection with the banking account system from the beginning of institutional arrangements, they will not only be more competitive but also easier to regulate.
Seventh, international monetary competition is a competition of national comprehensive strength and credibility.A certain payment settlement method or technical application of a currency might facilitate its use, but will not play a decisive role in its competition. Once the US dollar's credibility collapses, US dollar stablecoins cannot save it. However, while the US dollar remains the primary international reserve and trading currency, it is normal to widely use US dollar stablecoins for payment and settlement in an emerging international economic field. If China issues RMB stablecoins, its primary purpose should not be to compete with US dollar stablecoins, but to serve emerging economic development and support RMB internationalization.
