The conceptual confusion arising from the Hong Kong stablecoin regulations and its clarification

Written by: Zhu Weisha

Introduction: Market feedback after the release of the regulations

After the release of the Hong Kong stablecoin regulations, I published four articles, including "The Current Methods of Issuing Hong Kong Dollar Stablecoins Need Reconstruction," analyzing related issues (see details on the Wulian website). From reader feedback, many people confuse "Hong Kong Stablecoin" with "Hong Kong Dollar Stablecoin," leading to a misunderstanding of the regulatory scope and market positioning of the "Regulations." Many of the questions from the market regarding Hong Kong stablecoins under the "Regulations" also stem from a lack of clarity about its core meaning. However, using the vague term "Hong Kong Stablecoin" for explanations easily leads to two misunderstandings:

Mistakenly believed that the regulations only targeted or were equivalent to Hong Kong dollar stablecoins,

It is a unified regulatory framework for all stablecoins (ignoring the attributes of other currencies). This article aims to clarify these conceptual confusions and offers suggestions to avoid further misunderstandings.

Core distinction: Hong Kong stablecoin is not equal to Hong Kong dollar stablecoin

The core object regulated by the "Regulations" is "*designated stablecoins," which includes various types linked to fiat currencies such as US dollar stablecoins, Chinese yuan stablecoins, and Hong Kong dollar stablecoins. This means that the "Regulations" are not specifically designed for Hong Kong dollar stablecoins, but rather apply to multi-currency stablecoins. However, using the term "Hong Kong stablecoins" for explanation can easily lead to the misunderstanding that this is a unified regulatory framework for all stablecoins. To avoid confusion, when discussing and explaining the "Regulations," the vague term "Hong Kong stablecoins" should be abandoned in favor of the precise term "designated stablecoins" (referring to the category of stablecoins regulated by the "Regulations") or specifically to the type pegged to the currency, such as "Hong Kong dollar stablecoins," "US dollar stablecoins," etc.

"Hong Kong stablecoin" as a term for "designated stablecoin" and its risks

The term "Hong Kong stablecoin" is often used as a shorthand for "stablecoins issued and regulated under the Stablecoin Ordinance," which is equivalent to "*designated stablecoins." However, this general term can easily lead to conceptual confusion in practical use. For instance, readers may mistakenly apply the issuance requirements of USD stablecoins to HKD stablecoins. It is particularly important to be cautious, as certain provisions in the Ordinance (such as those related to reserve management, integration with the Hong Kong monetary and financial system, and assessments of impacts on local financial stability) impose higher or more specific requirements on issuers of "HKD stablecoins." This reflects the special significance of HKD stablecoins for local financial stability in Hong Kong. Market participants must carefully discern the applicable subjects of specific provisions to avoid generalized understanding.

Enhancing Clarity: A Proposed Nomenclature for Stablecoin Systems

To enhance clarity, it is recommended to adopt the standardized naming convention of "national fiat currency + code." Specific examples include:

Dollar Stablecoins: USDT, USDC

Renminbi stablecoins: CNYT, CNYC

Hong Kong Dollar Stablecoin: HKDT, HKDC

This naming convention allows for an intuitive distinction between stablecoins pegged to different currencies, avoiding the confusion that generalized expressions can bring. The specific naming design is determined by the issuer.

Clarifying the Boundaries: Digital Currency, Cryptocurrency, and Stablecoins

The hierarchical relationship of related concepts needs to be clarified:

Digital Currency (: Refers to currency that exists in electronic form, which is the broadest overarching concept.

Cryptocurrency ): is a subset of digital currency that specifically refers to digital currencies created and operated based on cryptography and distributed ledger technology (such as blockchain).

Fiat-backed stablecoin (Stablecoin): is a subclass of cryptocurrency whose core design goal is to maintain price stability by pegging to stable fiat currencies. Of course, there are other types of stablecoins.

Key distinguishing point:

Central Bank Digital Currency (CBDC) and Alipay belong to digital currencies, but they are not cryptocurrencies (as their core does not rely on public chain technology or decentralization), and they are even less related to stablecoins.

The "stablecoins" regulated by the Hong Kong "Stablecoin Regulation" are essentially cryptocurrencies pegged to fiat currency and bound by a specific regulatory framework.

Given its monetary instrument properties rather than characteristics of an investment product, the regulation of stablecoins should not simply apply traditional securities issuance regulations.

Potential Uses and Challenges of Hong Kong Dollar Stablecoins

A well-designed Hong Kong Dollar stablecoin can theoretically serve as one of the potential tools to *enhance cross-border payment efficiency and enrich payment channels, for example, by connecting with platforms such as the Cross-Border Interbank Payment System (CIPS) to provide supplementary or alternative options to SWIFT. However, realizing this potential faces significant challenges:

Highly dependent on ecological development: Its practical value and influence largely depend on the maturity of the local cryptocurrency payment, settlement, and custody ecosystem in Hong Kong.

Intense competitive environment: facing competition from international stablecoin giants (such as USDC), CBDCs from other jurisdictions, and improved traditional payment systems.

Risk of Limited Development: If the local ecosystem fails to develop adequately, the role of the HKD stablecoin may be constrained, and its development trajectory might resemble that of Ripple — the latter, despite having a considerable market value, faces significant challenges in achieving its cross-border payment vision, and its development potential has not been fully realized.

Conclusion: Clarify concepts, seize opportunities, and respond to challenges.

The introduction of the Hong Kong "Stablecoin Regulation" is an important move to embrace financial innovation, and the market has high expectations for it. However, to convert these expectations into successful practice, it is necessary to face the challenges of the current path:

The rules must align with market practices: If the implementation details are too strict or detached from reality, it may be difficult to attract quality issuers to participate, ultimately leading to a lack of competitiveness in terms of functionality, efficiency, or user experience.

Enhancing user acceptance: If the regulated Hong Kong dollar stablecoin does not have significant advantages over existing mature options (such as USDC, efficient banking services) or adds more trouble, the adoption rate among institutions and retail users will be difficult to increase.

Preventing Long-term Negative Impacts: A *regulatory framework for stablecoins that fails to meet expectations not only wastes valuable resources and policy windows but may also undermine Hong Kong's competitiveness and reputation as an international financial center and virtual asset hub.

To achieve this goal, regulators, industry, and academia need to collaborate more deeply, continuously refining the issuance mechanism, application scenarios, and risks.

By clarifying concepts and optimizing the issuance framework, Hong Kong has the opportunity to create a more competitive stablecoin ecosystem. This article aims to provide a reference for related discussions and assist in the better implementation of regulations.