Hong Kong Targets Multicurrency Stablecoin Hub, First-Mover Advantage Crucial

Hong Kong has a significant opportunity to become a global finance hub for multicurrency stablecoins, with being a "first mover" in the market crucial for success, according to PwC. These stablecoins are designed to maintain their value by being backed by a basket of fiat currencies on a blockchain.

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Peter Brewin, partner at PwC Hong Kong, said stablecoin issuers are only the initial part of the puzzle. He predicted a world with "multiple stablecoins in different currencies and with differing global footprints in terms of usage and acceptability."

A stablecoin finance hub is needed where associated forex, derivatives, borrowing, and lending in these assets are centralised, Brewin explained. Such a hub would allow liquidity pools to develop, servicing the needs of international trade.

Hong Kong Financial Secretary Paul Chan Mo-po wrote in his official blog in June that the city's niche in stablecoins was a multicurrency approach. The Hong Kong government has adopted an open model.

This model allows licensed issuers to peg their stablecoins to various fiat currencies. This strategy aims to attract a diverse array of worldwide institutions to issue stablecoins in Hong Kong, enhancing liquidity and local market competitiveness.

Brewin noted that Hong Kong's stablecoin usage has "always been seen [as] multicurrencies." This mirrors the multicurrency clearing present in the Hong Kong banking system.

Multicurrency stablecoins are designed to maintain their value by being backed by a basket of fiat currencies on a blockchain, not solely US dollars, but also 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 are expected to release the first batch as early as next year. They face strict requirements under new regulations that came into effect on Aug. 1.

These regulations mandate high liquid reserve assets, obtaining a locally-issued license, and complying with anti-money-laundering and customer identification rules. Brewin stated that Hong Kong's rules provide a clear regulatory path for businesses, banks, and asset managers.

Stablecoins are expected to move from the "fringes" of commercial activities to the centre stage of the financial system. This shift challenges 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 Global South includes most developing and emerging economies globally, such as the Middle East, Latin America, the Caribbean, and Africa. Exports between mainland China and the Global South surged 65% over the past five years, more than triple the growth pace of the previous five years, according to an Aug. S&P report.

Ken Ip, associate director of the Innovative Incubation Centre at Saint Francis University in Hong Kong, highlighted that most trade settlements today rely on the US dollar. This reliance creates inefficiencies, foreign exchange risks, and dependence on US-centric financial systems.

Multicurrency stablecoins from Hong Kong could provide more flexible, low-friction options for cross-border payments. Ip added that they would also reduce costs and speed up transactions.

Ip suggested that Hong Kong could become "a regional hub for digital payments and trade settlement across Asia-Pacific." This would offer an alternative to the dollar-centric system and give businesses more options in a complex global landscape.

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• Hong Kong has a significant opportunity to become a global finance hub for multicurrency stablecoins.

• A "first-mover" advantage and clear regulatory path are considered key to the city's success.

• Hong Kong's strategy allows licensed issuers to peg stablecoins to various fiat currencies, fostering diverse participation.

Source: SCMP