Stablecoins Enter the Era of Regulation
Since May, developments in the stablecoin sector have been frequent, ranging from regulatory actions to institutional moves, making it a hot topic in the financial community.
Circle, the issuer of USDC, the second-largest USD-pegged stablecoin globally, plans to list on the New York Stock Exchange on June 5, potentially becoming the first initial public offering (IPO) in the stablecoin sector. On May 30, the Government of the Hong Kong Special Administrative Region published the Stablecoins Ordinance in the Gazette, marking the formal entry into force of this regulatory framework, which had been under preparation for nearly three years, and establishing it as the world’s first comprehensive regulatory regime for fiat-backed stablecoins. Earlier, the United States passed the GENIUS Act, and the United Kingdom released proposals for stablecoin regulation.
The market response was swift and enthusiastic, with capital beginning to bet on stablecoins with real money. “Stablecoin concept stocks” surged rapidly, only to experience a sharp decline in the short term. Amidst this significant volatility, the speculative bubble surrounding stablecoins has begun to emerge. As global regulation of stablecoins becomes inevitable, questions arise: What are stablecoins? How can they shed the inherent risks of the virtual currency industry? In which areas will they play a role? Can users in mainland China participate?
What Are Stablecoins?
In recent years, amidst the wave of global digital finance development, emerging concepts such as Web3, non-fungible tokens (NFTs), and the metaverse have accelerated their implementation. Hong Kong, as an international financial center, has become new fertile ground for the development of virtual assets. On May 21, the Legislative Council of the Hong Kong Special Administrative Region formally passed the Stablecoins Bill. On May 30, the Government of the Hong Kong Special Administrative Region published the Stablecoins Ordinance in the Gazette, declaring the new regulations officially effective.
Returning to stablecoins themselves, they have a long history within the virtual asset sector. So-called stablecoins refer to crypto assets that utilize technologies such as distributed ledgers or blockchain to anchor their value to various fiat currencies, thereby ensuring relative stability in their value. Examples include USDT, which is pegged to the US dollar, and HKDR, which is pegged to the Hong Kong dollar.
The Stablecoins Ordinance also clarifies the concept of stablecoins: they are instruments that can serve or are intended to serve as a medium of exchange accepted by the public, used for paying for goods or services, settling debts, or making investments, and which can be transferred, stored, or traded electronically.
More than a decade ago, the birth of Bitcoin marked a significant step for virtual currencies onto the historical stage. However, the high volatility inherent in virtual currencies, including Bitcoin, made it difficult for investors to participate directly. To simplify the exchange process between fiat currencies and virtual currencies, stablecoins, possessing attributes of stability and convenience, emerged. Stablecoins are also referred to as the “bridge” connecting the digital world with traditional finance.
In fact, for a long period after their inception, stablecoins operated in a regulatory gray area. As risks such as concentrated runs, de-pegging, and insufficient liquidity successively materialized, and as stablecoins began to play a role in traditional financial sectors such as payments as a new tool, global financial regulators gradually recognized the importance of regulating stablecoins, leading to a shift in regulatory attitudes.
Yu Jianing, Co-Chairman of the Blockchain Professional Committee of the China Communications Industry Association and Director of the Hong Kong Registered Digital Asset Analyst Society, stated that Hong Kong has established a basic stance on stablecoin regulation, clearly viewing them as key financial infrastructure within the digital finance system, rather than merely as a single medium of exchange or asset class. Within the frameworks of anti-money laundering, capital flow supervision, and financial security, Hong Kong stablecoins possess potential distinct from traditional financial instruments. Their technical structure and regulatory logic are naturally suited to embedding risk control mechanisms in a programmable manner, holding promise to become important nodes in the compliance system for blockchain-based digital assets.
How to Shed Inherent Risks?
New regulatory developments and movements by industry participants have also heated up the stablecoin market. Over the past half month, stocks associated with the “stablecoin concept” have experienced frequent unusual trading activity, attracting widespread market attention. In particular, some companies listed on the Hong Kong Stock Exchange saw single-day gains exceed 80%. Taking Yeahka Limited as an example, over three trading sessions since June: on June 2, Yeahka’s shares closed up nearly 40%; during trading on June 3, the stock’s intraday amplitude exceeded 10%, ultimately closing down 6.1%; and on June 4, Yeahka closed down 1.95%, with the share price at HKD 12.08.
Regarding the reasons for the company’s unusual stock price movements and its business plans related to stablecoins, a reporter from Beijing Business Today attempted to interview companies including Yeahka. As of press time, no response had been received from the companies.
However, based on interviews conducted by the Beijing Business Today reporter with multiple sources, many industry practitioners believe that the stock price increases triggered by the “stablecoin concept” are largely driven by speculative factors. Some practitioners pointed out that stablecoins are not a new concept, and the significant stock price volatility was not anticipated by the companies. Furthermore, the rise attributed to the “stablecoin concept” lacks long-term sustainability and does not truly reflect the companies’ actual value.
Stablecoins were initially designed to facilitate virtual currency transactions, which inherently created room for speculation. Yu Jianing pointed out that the sharp volatility observed in stablecoin-related stocks after the entry into force of the Stablecoin Regulations primarily reflects the capital market’s excessive sensitivity to and incomplete understanding of policy signals. In the absence of in-depth analysis of the regulatory details, industry maturity, and commercial monetization pathways, the market prematurely interpreted favorable policies as signals of imminent performance realization, causing price reactions to far exceed changes in corporate fundamentals, a phenomenon characterized as a “regulatory theme-driven bubble.”
Yu Jianing believes that the market should view the functional positioning of stablecoins as a new type of digital financial infrastructure rationally and objectively. Whether a company is involved in the stablecoin concept should not be the primary criterion for investment decisions. Instead, evaluation should focus on whether the company can perform genuine functions in underlying layers such as clearing and custody, cross-border payments, risk control modeling, and on-chain account systems.
On another front, in response to market concerns about the risks of illegal financial activities involving stablecoins, Hong Kong has established a systematic and comprehensive regulatory framework. Unlike the regulatory approaches previously adopted by other economies, the Stablecoins Ordinance innovatively adopts the principle of “value-anchor regulation.” Under the requirements, any person who issues fiat-referenced stablecoins in Hong Kong in the course of business, or issues fiat-referenced stablecoins anchored to the Hong Kong dollar in other regions, must obtain a license from the Monetary Authority. The paid-up registered capital must be at least HKD 25 million.
In terms of reserve management, licensed issuers must establish and maintain robust reserve stabilization mechanisms. Reserve assets must be of high quality and high liquidity, carry minimal investment risk, and be segregated from other reserve asset portfolios held by the licensee. The value of reserve assets must always be at least equal to the face value of the stablecoins in circulation. Holders of Hong Kong dollar stablecoins have the right to redeem them at face value within a reasonable time, and issuers must not impose unreasonable fees.
Regarding how to mitigate the inherent risks of the virtual assets industry, Yu Jianing believes that the design and regulation of stablecoin systems should emphasize firewalls across three dimensions: First, the authenticity of the asset base and redemption capability, requiring stablecoin issuers to disclose reserve conditions with high transparency and strict audit mechanisms to prevent shadow banking-like risks; second, the regulatory visibility of circulation paths, ensuring that stablecoin transactions are traceable, freezeable, and reversible on-chain to prevent criminal activities such as money laundering; and third, structural segregation from speculative assets, ensuring that stablecoins do not become funding channels for contract leverage, anonymous trading, or illegal arbitrage.
“The core value of stablecoins lies in their security, transparency, and stability as digital financial infrastructure. Issuers must possess sufficient high-liquidity reserve assets, undergo strict audits and supervision, and maintain transparency for investors. They must also consider governance structures, technical security, and daily operational transparency. If the underlying logic of stablecoins is not solid, no amount of conceptual packaging will suffice; it will merely remain short-term speculation and cannot truly support the sustainable development of the industry,” pointed out Liu Honglin, founder and lawyer at Mankun Law Firm.
In which areas will they play a role?
From the perspective of main business operations, the institutions experiencing significant unusual stock price movements are not direct participants in the stablecoin market. In March 2024, the Hong Kong Monetary Authority launched a “sandbox” mechanism, allowing institutions intending to issue stablecoins in Hong Kong to test their operational plans. In July of the same year, JD Coinchain Technology (Hong Kong) Co., Ltd., Circle Innovation Technology Co., Ltd., Standard Chartered Bank, Animoca Group, and HKT were approved to participate in the stablecoin issuer “sandbox.”
However, as of now, none of the aforementioned stablecoin issuers participating in the “sandbox” have produced results or “exited the box.” According to expectations, compliant Hong Kong dollar stablecoins are expected to be launched by the end of 2025.
Regarding the latest progress and outcomes of the “sandbox” testing for its proprietary stablecoin, Liu Peng, CEO of JD Coin Chain Technology, stated in an interview with a reporter from Beijing Business Today that JD’s stablecoin has not yet been officially issued. It has currently entered the second phase of sandbox testing and will offer mobile and PC application products to retail and institutional users. The first phase of JD’s stablecoin issuance is tentatively planned to include stablecoins pegged to the Hong Kong dollar and the US dollar, with specific arrangements subject to adjustment based on regulatory requirements and market demand. The testing scenarios primarily include cross-border payments, investment trading, and retail payments.
According to Liu Peng, in cross-border payment scenarios, JD’s stablecoin features high speed, low cost, and a superior user experience. In investment trading scenarios, JD’s stablecoin is collaborating with leading compliant exchanges. In retail payment scenarios, it is being integrated and tested with acquiring services such as those provided by JD’s Hong Kong and Macau platforms.
Payments represent a critical entry point for stablecoins into the traditional financial sector. Compared with payment methods commonly used in the cross-border trade market, stablecoins operate on blockchain-based peer-to-peer payments where payment equals settlement, offering significant advantages in payment efficiency and cost. Their characteristic of being pegged to relatively stable assets also helps mitigate the impact of exchange rate fluctuations.
A research report by Soochow Securities, citing data from the CEX.IO exchange, indicated that the total global stablecoin transfer volume in 2024 exceeded USD 27.6 trillion, surpassing the combined annual transaction volumes of traditional payment giants Visa and Mastercard.
Overall, stablecoins are profoundly transforming the delivery of financial services across multiple sectors, with Hong Kong’s regulatory stance increasingly positioning them as financial infrastructure. Yu Jianing points out that if stablecoins subsequently achieve network effects in cross-border clearing, digital asset trading, and enterprise-grade payments, Hong Kong will be able to manage digital capital flows and monetary policy spillovers through endogenous stabilization mechanisms while maintaining local financial sovereignty. Under this framework, stablecoins will no longer be mere financial products, but will truly become a cornerstone for Hong Kong to sustain its status as an international financial center, establish governance standards for digital assets, and mitigate systemic risks.
Liu Honglin further emphasized that the Hong Kong regulators’ stringent requirements for reserves directly prevent the liquidity crises and redemption risks common in the virtual currency market, making stablecoins closer to “digital Hong Kong dollars” that can serve as a bridge in scenarios such as cross-border payments and financial settlements. This positioning holds positive significance for the future construction of the digital financial system.
Furthermore, in response to demands in the traditional financial sector such as anti-money laundering (AML) and source-of-funds identification, stablecoins possess the dual advantage of “on-chain visibility and off-chain verification.” Yu Jianing explained that Hong Kong’s licensing regime requires stablecoin issuers to establish comprehensive know-your-customer (KYC) mechanisms, auditable reserve systems, and redemption obligations. Technically, Hong Kong stablecoins can achieve systematic binding of user identities with fund pathways, thereby effectively suppressing regulatory gaps arising from anonymous accounts and unauthorized circulation. This provides structural advantages for AML enforcement, monitoring of cross-border capital flows, and on-chain risk identification.
Can mainland Chinese users participate?
From explicitly bringing initial coin offerings (ICOs) under regulatory oversight to implementing a “sandbox” regulatory mechanism, and further to enforcing a licensing regime for Virtual Asset Service Providers (VASPs), Hong Kong, China, has demonstrated an open and inclusive attitude toward the regulation of virtual assets even before the formal implementation of the Stablecoin Ordinance. As Hong Kong establishes its stablecoin regulatory framework, major global financial centers are simultaneously advancing related legislation.
Unlike Hong Kong, China, mainland Chinese financial regulators have imposed a comprehensive ban since 2017 on processes involving the issuance, exchange, intermediation, and trading of virtual currencies. It has been explicitly clarified that virtual currencies do not hold legal status equivalent to legal tender, and activities involving the trading and speculation of virtual currencies are deemed illegal financial activities. Overseas virtual currency exchanges providing services to residents within mainland China via the internet also constitute illegal financial activities.
At key historical nodes marking the orderly opening of virtual assets in Hong Kong, China, participants in the cryptocurrency community have often promoted the value of virtual currencies, sparking heated debate over whether mainland Chinese users could participate. Following the implementation of the Stablecoin Ordinance, viewpoints such as “mainland users should seize the opportunity” and “trading cryptocurrencies will become easier after the issuance of HKD-pegged stablecoins” have occasionally appeared on public social media platforms.
“After the issuance of HKD-pegged stablecoins, participation in virtual currency trading is theoretically possible, and compliant exchanges in Hong Kong may integrate them. However, considering liquidity issues, the number of ‘trading pairs’ for HKD-pegged stablecoins is unlikely to be substantial,” a researcher in the field of virtual assets told a reporter from Beijing Business Today.
Can users in mainland China participate in virtual asset transactions through HKD stablecoins? The answer is no. “Stablecoins are merely a tool; their emergence does not automatically circumvent regulatory red lines,” stated Liu Honglin. While the Stablecoin Ordinance has, to some extent, clarified the legality and regulatory requirements for HKD stablecoins, this does not mean that participants in mainland China can directly leverage this framework to engage in virtual asset transactions.
Liu Honglin pointed out that, from a legal perspective, mainland China maintains relatively strict overall regulation of virtual assets. Related transactions are considered high-risk activities, and restrictions under foreign exchange administration and other policies remain in effect. Even if HKD stablecoins can be issued and used in compliance with regulations in Hong Kong, investors in mainland China must still adhere to mainland regulatory requirements regarding virtual asset transactions when engaging in cross-border use or conversion.
Yu Jianing stated that the legal and policy frameworks of Hong Kong and mainland China differ with respect to digital assets. Therefore, the establishment of a compliance pathway in Hong Kong does not automatically extend to participation channels for users in mainland China. Overall, while the Stablecoin Ordinance provides a solid foundation for the digital transformation of Hong Kong’s financial system, its impact on the mainland market should be assessed based on the scope of legal application, regulatory coordination mechanisms, and the actual structure of capital flows, rather than on speculative deductions grounded solely in technical feasibility.
By Liao Meng, Beijing Business Today Reporter
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