Offshore RMB Stablecoins Coming to Hong Kong
In a breakthrough, China will likely allow the creation of an RMB stablecoin
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Big news in Hong Kong as starting August 1, it will launch its stablecoin licensing program, allowing digital currencies pegged to fiat currencies like the yuan, dollar, euro, and Hong Kong dollar.
While still unresolved, the big question is whether this will allow license holders to create an offshore digital RMB stablecoin that could be used to facilitate RMB-valued payments and potentially challenge the dollar.
I think it will issue an offshore RMB stablecoin and adopt Deng Xiaoping’s famous pragmatism, "it doesn't matter if a cat is black or yellow, as long as it catches mice," along with Hong Kong’s efficient regulation to break its deadlock on stablecoin use.
Regardless of whether or not an offshore RMB stablecoin is launched, the new rules have put Hong Kong firmly on the map as a digital currency powerhouse, which was precisely what the Hong Kong Monetary Authority planned.
Hong Kong has some fifty applicants for an estimated ten licenses, which include power players like Standard Chartered Bank, Circle, and the Hong Kong subsidiaries of Ant Group and JD.com (Jing Dong).
Reading the Tea Leaves
While reading the tea leaves of the People’s Bank of China (PBOC) is never clear and cut, that it asked the Shanghai State-owned Assets Supervision and Administration Commission (SASAC) to research stablecoins is encouraging.
Most China pundits, myself included, see this as a positive sign as the financial and tech firms that sit on Shanghai’s Commission will likely encourage stablecoins given their pro-innovation stance.
Another pro-stablecoin sign was the speech on June 18 by PBOC Governor Pan Gongshen at the Shanghai Liujiazui Forum which flagged the significance of stablecoins as a growing market.
The speech also advocated for a multipolar currency regime which would have greater use of the RMB, allowing the RMB, euro, and other currencies to coexist, compete, and balance each other, reducing reliance on the U.S. dollar.
Is an RMB Stablecoin Good for China and Bad for the Dollar?
Hong Kong is the world’s largest offshore RMB market and with an estimated RMB 18–20 trillion in total volume.
The goal is to use stablecoin’s 24/7/365, low-cost cost and near-instant payments to push foreign trade into RMB, due to its ease of use. Typical SWIFT payments may take days and are typically costly, with estimates ranging between 1-3% in fees.
While the most popular question is whether this will impact the dollar, the more important issue is whether this is good for China.
Clearly, a financial product that speeds trade is beneficial to the world’s largest exporter, but this needs to be balanced by tight regulatory control. China is not a fan of crypto, and Governor Pan is a clear critic of the lax regulation on non-bank intermediaries, claiming that they make finance less stable and transparent.
Hong Kong is unique and will provide China with the three essentials needed to issue stablecoins: a reliable offshore regulator, issuing companies it trusts, and a built-in market of potential stablecoin users.
Will this be bad for the dollar? Not in the least, and any impact would be years away. While some may see Governor Pan’s comments about the “coexistence” of currencies in a multipolar world as a throw-away line, it most assuredly is not.
China and its career politicians have never called for a disruption of the dollar. China has some $3.3 trillion in dollar reserves, so any disruption would cost it dearly.
What it does signal to the US is that it will not be alone in exploring the benefits of stablecoins, and given China’s history of payment innovation, that shouldn’t come as a surprise.
What about the e-CNY?
An off-shore RMB stablecoin does not impact China’s central bank digital currency (CBDC), the e-CNY, or digital yuan. The offshore RMB is just that, an offshore currency, while the e-CNY is for domestic and cross-border use with trades originating or ending in China.
For example, e-commerce companies like JD.com or Alibaba may use stablecoins to boost e-commerce sales offshore. Meanwhile, in China, there is YiWu International Trade City, the world’s largest wholesale Market in Zhejiang. It has an estimated $90-100 billion in estimated sales, and some 90% of the shopkeepers in YiWu have used e-CNY. Each market will have a means of instant cross-border payment.
When is it coming?
No one knows, but my guess is that, as stablecoins are relatively easy to build, a dramatic difference with CBDCs, we may see one within the year. Note that CBDCs require tremendous amounts of infrastructure development to be accepted as national currencies that stablecoins do not.
Building an offshore RMB stablecoin would cement China’s reputation for payment innovations, which started with WeChat and Alipay digital wallets, and progressed to the e-CNY and now stablecoins.
In addition, it would promote Hong Kong as a world power in digital currencies and likely boost China’s use of the RMB in international trade.
What’s not to like about an RMB stablecoin?
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