Offshore Renminbi Stablecoin: Opportunities and Challenges Coexist

Recently, various movements indicate that offshore RMB stablecoins are accelerating their debut. According to reports, tech giants like JD.com and Ant Group are actively seeking to be the first to issue stablecoins denominated in offshore RMB (CNH) in Hong Kong. The governor of the People's Bank of China, Pan Gongsheng, has also shown an open attitude towards stablecoins, recognizing their advantages in shortening cross-border payment chains while emphasizing the challenges they pose to financial regulation. Previously, Guotai Junan International was granted approval to upgrade its virtual asset trading license, seen as a signal of the "national team" entering the crypto industry. Under the policy "breakthrough," RMB stablecoins are moving from concept to practice.

1. Event Review

On May 21, the Hong Kong Legislative Council passed the "Stablecoin Regulation Draft," establishing a licensing system for stablecoin issuers. On May 30, the regulation was published in the government gazette, officially becoming law. Subsequently, internet giants responded actively. On June 12, Ant Group announced that it would apply for a stablecoin license in Hong Kong and Singapore, and also planned to seek permission in Luxembourg to enhance its cross-border payment and fund management services. On June 17, JD.com also announced that it would issue a stablecoin pegged 1:1 to the Hong Kong dollar in Hong Kong, planning to expand from B-end payments to C-end payments.

On the same day, the U.S. Senate passed the "Genius Act," which is seen as the first regulatory framework for stablecoins in the United States. The Hong Kong regulators are also moving quickly. The "Stablecoin Regulation" will come into effect on August 1, and the Monetary Authority will begin accepting license applications. It is expected to issue only a single-digit number of licenses, but more than 40 companies are already preparing to apply, leading to fierce competition. Most applicants are top financial institutions and internet giants from China, while some small and medium-sized enterprises have little chance due to high entry barriers.

The Secretary for Financial Services and the Treasury of Hong Kong, Xu Zhengyu, stated that the new regulations will provide appropriate supervision for stablecoins, laying the foundation for the development of Hong Kong's digital asset ecosystem, and is a milestone in promoting Hong Kong's status as an international financial center.

2. Core Discussions and Expert Explanations

Misconceptions and Definitions of Stablecoin

Regarding the nature of stablecoins, regulators, scholars, and market participants have reached a consensus: stablecoins are essentially digital representations of fiat currency and should be integrated into the existing financial regulatory framework. Former Vice President of the Bank of China, Wang Yongli, emphasized that stablecoins, once regulated, are essentially tokens of fiat currency, rather than independent currencies. The recent acceleration of stablecoin legislation in the United States, Hong Kong, and other regions requires licensed operations and 100% reserves, which effectively strengthens the centralized attributes of stablecoins.

Joyde clarified several common misconceptions as the Vice President and Secretary of the Shanghai Development Research Foundation:

1. Stablecoins are not "blockchain versions of Alipay". Alipay is a third-party payment platform and does not have monetary attributes. Stablecoins themselves have the function of value storage.

2. The Hong Kong dollar cannot be compared to a "US dollar stablecoin." The Hong Kong dollar is the legal tender of Hong Kong, regulated by the Monetary Authority. The US dollar stablecoin is issued by private companies, with the income from reserve assets being private.

3. Stablecoins are not fully decentralized. Their underlying features still possess centralization characteristics, such as the issuance mechanism relying on centralized entities to manage reserves and redemptions.

Overall, stablecoins are the on-chain representation of fiat currency and a digital expression of credit. They utilize blockchain technology to connect the virtual and real worlds, taking on functions such as payment and settlement, and have a transitional nature.

Beijing explores the internationalization path of stablecoin and Renminbi through Hong Kong.

For China, offshore RMB stablecoins are seen as a new hope for promoting the internationalization of the RMB. Morgan Stanley pointed out that as the U.S. advances stablecoin legislation, it may further consolidate the dollar's dominance. Against this backdrop, Beijing's attention to stablecoins is increasing, using Hong Kong as a "regulatory sandbox" to explore the feasibility of alternative payment tools while promoting the cross-border use of the RMB.

Former Governor of the People's Bank of China Zhou Xiaochuan warned that US dollar stablecoins may exacerbate the global "dollarization" trend. Morgan Stanley believes that the core role of stablecoins is to enhance the efficiency of cross-border payments and transactions, rather than to replace existing sovereign currencies. Li Yang, Chairman of the National Finance and Development Laboratory, urged China to take an active role in the stablecoin field, promote the internationalization of the digital renminbi, and utilize Hong Kong to develop renminbi stablecoins to elevate the international status of the renminbi.

Morgan Stanley pointed out that the renminbi stablecoin should be seen as a potential component of the cross-border renminbi settlement system, expected to synergize with existing financial infrastructure. The bank also mentioned that the internationalization of the renminbi has seen a retreat in recent years, with its share in global reserve currencies declining from 2.8% at the beginning of 2022 to 2.2% by the end of 2024, reflecting weakened market confidence in the outlook for the Chinese economy.

Renminbi stablecoin model's dual-track parallel

Li Yang pointed out that the United States promotes stablecoin legislation to serve the national interests of the dollar, including modernizing the dollar payment system, consolidating the international dominance of the dollar, and creating new demand for U.S. Treasury bonds. He called on China to adopt a "dual-track approach": accelerate the construction of the transaction settlement system for the central bank digital currency (CBDC), while also exploring the development of a renminbi stablecoin in the offshore system.

Qiao Yide, Vice President of the Shanghai Development Research Foundation, suggested that in the short term, breakthroughs can be made from the offshore market, relying on Hong Kong to pilot the issuance of RMB stablecoins; once conditions are ripe, an assessment for domestic promotion can be made. RMB stablecoins should focus on specific functions such as cross-border payments, forming a "dual-track" coordination with the central bank's digital RMB.

Xiao Feng, the chairman of HashKey Group, proposed to construct a "dual-layer architecture" for central bank digital currency ( CBDC ) and the RMB stablecoin. The specific approach is to allow licensed stablecoin issuers to open digital RMB reserve accounts at the central bank, using the central bank digital currency as wholesale layer funds, and issuing RMB stablecoins for retail and cross-border use in the form of on-chain tokens.

Xiao Feng believes that stablecoins solve the "last mile" problem of inclusive finance, and their core value lies in enhancing the accessibility of financial services. He predicts that in ten years, stablecoins will become mainstream payment and settlement tools, ultimately replacing traditional financial infrastructure. Therefore, Hong Kong must keep up with or even lead the trend of stablecoin development. The introduction of the "Stablecoin Regulation" is seen as an important step in the global construction of stablecoin systems, which will help promote the internationalization of the Renminbi. Hong Kong can serve as a "testbed" for China to develop stablecoins, accumulating experience for broader promotion in the mainland in the future.

III. Hong Kong Regulatory Attitude: Regulatory Details and Licensing System

Hong Kong adopts a combination of "licensing system + sandbox experiment" to establish a high-threshold access and ongoing regulatory system for stablecoins. The Monetary Authority has launched the "stablecoin issuer sandbox" program, inviting institutions to carry out pilot projects in preparation for the formal implementation of the system. According to the regulations and supporting guidelines, engaging in stablecoin-related activities in Hong Kong requires a license from the Monetary Authority. The main requirements include:

1. Adequate reserves and asset security: The circulating stablecoins must be fully backed, and the reserve assets must be consistent with the anchor currency, stored separately from the issuer's own funds.

2. Stability Mechanism and Redemption: The issuer must maintain the stability of the coin's value, and holders have the right to redeem the stablecoin at the pegged price.

3. Scope of business restrictions: Expanding new businesses requires approval from the Monetary Authority.

4. Local Entities and Governance: The applicant must be registered in Hong Kong and have its main management team residing in Hong Kong.

5. Anti-Money Laundering and Cross-Border Compliance: Issuers must have anti-money laundering capabilities and develop a complete cross-border compliance plan.

The regulatory authorities in Hong Kong recognize that stablecoins present both innovative opportunities and hidden risks. Legislative Council member Wu Jiezhuang emphasized that stablecoins are not speculative tools but rather a means of payment. Hong Kong hopes to reserve development space for emerging business models while preventing risks, aiming to make Hong Kong a "global model" for the compliance of stablecoins.

4. The Challenge of Dollar Hegemony: What Are the Chances for the RMB Stablecoin?

Offshore RMB stablecoins face the grand proposition of "challenging the dollar hegemony". Currently, almost all of the top ten stablecoins are pegged to the dollar, with a total market size of about 258 billion USD. Can the RMB shake this pattern? The industry conducts comparisons from aspects such as payment efficiency, institutional credibility, compliance, and cross-border collaboration:

payment efficiency

Stablecoin technology is expected to improve the pain points of cross-border payments. However, as regulatory standards become more formalized, the compliance costs of stablecoins may increase, making it difficult for the renminbi stablecoin to challenge the dollar's hegemony with payment efficiency.

System Credibility

The US dollar has long been regarded as the most reliable store of value and currency for pricing. For the RMB stablecoin to gain similar trust, it must provide sufficient confidence in macro policy stability, currency value stability, and convertibility. Hong Kong's regulatory framework has been carefully designed for the trust mechanism of stablecoins, which is expected to enhance the reserve transparency and fund security of the RMB stablecoin.

Compliance and Global Collaboration

Renminbi stablecoins need to obtain regulatory approval from various countries to be widely used. The Hong Kong license has an international platform nature, which can help Renminbi stablecoins "go global". In comparison, US dollar stablecoins still operate outside of regulation in many regions, which presents both risks and opportunities.

Network Effect and User Base

The US dollar stablecoin has formed a large liquidity network. The Chinese yuan stablecoin started late and needs to quickly expand its own network. China has the largest trade volume and supply chain system in the world; if the yuan stablecoin can be promoted first in areas such as cross-border e-commerce and supply chain finance, it will rapidly accumulate real transaction demand and user groups.

Overall, the Renminbi stablecoin is unlikely to shake the dominance of the US dollar in the short term, but it has already made a key move on the digital finance chessboard. In the long run, whether the Renminbi stablecoin can challenge the dollar depends on China's own pace of financial opening and the international community's confidence in the Renminbi. Regardless, the competition between China and the US for monetary dominance has already begun on this new battleground of stablecoins.

5. Other Potential Challenges of RMB Stablecoin

market trust

The Renminbi stablecoin needs to build multi-faceted credit backing to gain widespread trust:

1. Policy credibility: Eliminate market concerns about "political risk" and maintain policy transparency and consistency.

2. Operate Credibly: Stablecoin issuers need to establish a reputation, such as choosing internationally renowned custodial banks and auditing firms.

The impact of the international political environment

As a challenge to the dollar-dominated innovation, the RMB stablecoin may face suppression from the United States, such as restricting participation from American institutions, lobbying allies to refuse acceptance, and even pressuring traditional financial networks not to cooperate.

In summary, the offshore RMB stablecoin carries the new dream of RMB internationalization and also faces complex challenges. From domestic financial security to international currency games, every step must be taken steadily. The emergence of the RMB stablecoin marks the beginning of a protracted battle. In the coming years, we may see the global monetary system evolve towards a more diversified and balanced direction, gradually forming a pattern of coexistence and competition among multiple fiat stablecoins such as the US dollar, euro, and RMB.