TLDR
- China seeks to use stablecoins to boost the global use of the renminbi.
- Hong Kong to issue regulated stablecoins in response to global crypto trends.
- China’s regulators cautious of capital outflows and money laundering risks.
- US dollar-backed stablecoins drive China’s move to explore digital currency alternatives.
China is advancing its efforts to introduce stablecoins in a bid to reduce the dominance of the U.S. dollar in global finance. While Hong Kong serves as the test hub for these digital currencies, the Chinese government is cautious about the risks associated with capital flight and financial stability.
Hong Kong’s Role in Testing Stablecoins
Recently, Hong Kong passed legislation that allows licensed businesses to issue stablecoins backed by any fiat currency. This move comes as China experiments with stablecoin technology, despite having banned cryptocurrency transactions on the mainland since 2021.
The Hong Kong Monetary Authority (HKMA) plans to issue only a limited number of licenses to businesses involved in stablecoin projects, reflecting the cautious approach of both the city and Beijing.
Officials from the HKMA have emphasized that only a few stablecoin initiatives will be allowed initially, focusing on business-to-business applications. Hong Kong’s test program is designed to establish proper reserves for these tokens and to manage potential legal and financial risks, particularly around money laundering.
“We have been quite concerned about market speculation and exuberance,” said HKMA officials during a press conference on the new regime.
China Strategy to Compete with the US Dollar
As stablecoins, particularly those backed by the U.S. dollar, have grown in popularity, Chinese regulators have expressed concern over the growing influence of the U.S. dollar in international transactions. China aims to develop its own digital currency, supported by the stablecoin model, to promote the use of the renminbi globally. However, experts point out that competing with the U.S. dollar-backed tokens will be a significant challenge.
China’s central bank governor, Pan Gongsheng, mentioned in a speech in June that stablecoins have reshaped global payment systems.
“The success of dollar-backed tokens has led to an inevitable shift toward the dominance of the U.S. dollar,” said Gongsheng. Policymakers see an opportunity to expand the renminbi’s global use, particularly in cross-border payments.
Risks of Capital Outflows and Financial Control
Despite these aspirations, concerns over capital flight remain a major issue for China authorities. Experts and officials have raised alarms that the introduction of stablecoins could lead to uncontrolled capital outflows. “This is not technology that can be centrally controlled,” warned Rebecca Liao, CEO of Saga, a blockchain infrastructure company.
She stressed that decentralized financial tools like stablecoins could lead to money being moved out of China, undermining the government’s ability to manage its economy.
The risk of money laundering and financial instability also makes China wary. The HKMA has been particularly concerned about how stablecoins could be misused for illegal activities. Financial regulators have repeatedly mentioned the importance of ensuring that any stablecoin projects launched in Hong Kong or mainland China would adhere to strict regulatory frameworks.
State-Owned Enterprises Explore Stablecoins for Payment Systems
Interest in stablecoins is growing among China state-owned enterprises, especially in relation to cross-border transactions and settlements. Financial experts have noted that several state-owned companies with Hong Kong operations are actively seeking licenses to issue stablecoins.
These companies see potential in using digital currencies to facilitate smoother and faster international payments.
Despite this growing interest, only one of China’s major state-owned banks is expected to receive a stablecoin license from the HKMA initially. Some analysts suggest that China may eventually approve stablecoins backed by the offshore renminbi (CNH), as it continues to push for wider adoption of its currency in global trade.
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