Hong Kong has a “huge opportunity” to become a global finance hub for multicurrency stablecoins but being a “first mover” in the market would be key to success, according to PwC.
“From an ecosystem perspective, having stablecoin issuers is just the first part of the puzzle,” said Peter Brewin, partner at PwC Hong Kong. He predicted a world with “multiple stablecoins in different currencies and with differing global footprints in terms of usage and acceptability”.
For example, a supplier in Latin America or Southeast Asia may not want to be paid in stablecoins pegged to Hong Kong dollars, but companies in Hong Kong may not want to hold inventories of multiple foreign stablecoins on their balance sheets, he said.
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As such, the world needs a stablecoin finance hub where associated forex, derivatives, borrowing and lending in the assets are centralised and where liquidity pools could develop to service the needs of international trade, according to Brewin.
“This is a huge opportunity for Hong Kong and is one where being a first mover could be key,” he said.
A pedestrian walks past a display of banknotes outside a currency exchange shop in Hong Kong, October 21, 2022. Photo: Yik Yeung -man alt=A pedestrian walks past a display of banknotes outside a currency exchange shop in Hong Kong, October 21, 2022. Photo: Yik Yeung -man>
Hong Kong’s niche in stablecoins was in a multicurrency approach, Hong Kong Financial Secretary Paul Chan Mo-po wrote in his official blog in June. The Hong Kong government has adopted an open model of allowing licensed issuers to peg their stablecoins to different fiat currencies. This would attract a diverse array of worldwide institutions to issue stablecoins in Hong Kong, enhancing liquidity and the competitiveness of the local market.
Stablecoins usage in the city has “always been seen [as] multicurrencies, in the same way that we have multicurrency clearing in the Hong Kong banking system”, said Brewin.
Multicurrency stablecoins are designed to maintain their value by being backed by a basket of fiat currencies on a blockchain, not only in US dollars but also in Hong Kong dollars and other currencies. Such tokens could hedge against exchange rate volatility in cross-border transactions, according to a research paper published on ScienceDirect.
The city’s stablecoin issuers, expected to release the first batch as early as next year, face strict requirements under new regulations that came into effect on August 1. These include having high liquid reserve assets, obtaining a locally-issued license, and complying with anti‑money‑laundering and customer identification rules.
Bank notes are seen in this picture illustration take January 21, 2016. Photo: Reuters alt=Bank notes are seen in this picture illustration take January 21, 2016. Photo: Reuters>
Brewin said Hong Kong’s rules for stablecoins provide a clear regulatory path for businesses, banks and asset managers. They are expected to move stablecoins from the “fringes” of commercial activities to the centre stage of the financial system, challenging the role of cash in international trade.
Mainland Chinese businesses focused on selling products overseas, while using Hong Kong as their international treasury centre, would benefit, particularly for payments to and from the Global South, Brewin said. “The banking rails between the Global South and China, and between the Global South and Hong Kong, don’t always work so well. Stablecoins are a very convenient way to do that.”
The Global South includes most developing and emerging economies in the world, such as the Middle East, Latin America, the Caribbean and Africa.
Exports between mainland China and the Global South have surged 65 per cent over the past five years, more than three times the growth pace of the previous five years, according to an August S&P report.
“Today, most trade settlements rely on the US dollar, creating inefficiencies, foreign exchange risks, and dependence on US-centric financial systems,” said Ken Ip, an associate director of the Innovative Incubation Centre at Saint Francis University in Hong Kong. “Multi-currency stablecoins from Hong Kong could provide more flexible, low-friction options for cross-border payments, reduce costs, and speed up transactions.”
Hong Kong could become “a regional hub for digital payments and trade settlement across Asia-Pacific”, Ip said. This would offer an alternative to the dollar-centric system and give businesses “more options in a complex global landscape”, he added.
