Stablecoin Regulations: A Comparative Analysis of Hong Kong and the United States with Development Suggestions for China

On May 21, the Hong Kong Legislative Council passed the "Stablecoin Regulation Bill". Almost simultaneously, the U.S. Senate also passed the "Stablecoin Uniform Standards Protection Act" (GENIUS). These two legal documents have sparked widespread discussion, but many commentators have not conducted an in-depth study of them. It is necessary to analyze these two documents specifically and explore the demands of all relevant parties.

I. Analysis of the Hong Kong Stablecoin Regulation Draft

The "draft" clearly defines stablecoins in five aspects:

1. Presentation format: expressed in terms of valuation unit or economic value storage format.

2. Scope of application: used for payment, debt settlement, investment, and trading.

3. Storage and transfer method: Can be done electronically.

4. Operating Platform: Operate on a distributed ledger or similar information storage repository.

5. Value anchoring basis: a single asset or a group/basket of assets.

The "draft" also made specific provisions regarding the regulation of stablecoins:

• The issuing entity must be a company, with a minimum capital of 25 million Hong Kong dollars.
• The reserve asset requirements are strict and must be separated from other company funds.
• Issuers must meet requirements for risk management, information disclosure, and so on.
• Licensees may only operate stablecoin businesses and are prohibited from paying interest.

Overall, Hong Kong aims to provide innovative payment tools for the new economy while mitigating risks.

2. Analysis of the U.S. Stablecoin Unified Standards Protection Act

The regulatory logic of the "bill" in the United States and the "draft" in Hong Kong is generally similar, but they also have their own characteristics:

Similarities:

• Pegged to fiat currency, used for payment settlement
• 100% reserve requirement
• Regular disclosure of reserve asset reports
• Anti-money laundering and KYC requirements
• Prohibit interest payments

Differences:

• The United States adopts a two-tier regulatory framework
• More specific requirements for reserve asset types

Overall, both regions have legalized local currency stablecoins and brought them under regulation, promoting innovation while preventing risks.

3. Comparison of Stablecoins and Bank Notes

From a legal perspective, the issuance and management rules of stablecoins are basically the same as those of bank notes.

• Customers exchange equivalent currency for the same amount of promissory note/stablecoin
• Can be used for payments, debt repayment, and cash exchange
• Issuing institution pays the face value in equivalent currency

Stablecoins can be regarded as a type of currency under the conditions of fiat currency, similar in nature to early paper money and promissory notes.

4. Demands of Stablecoin Stakeholders

The success of stablecoins depends on whether they can meet the demands of all stakeholders:

Payer:

• More convenient and secure than fiat currency
• 1:1 exchange, no additional cost
• Lower payment costs

Recipient:

• Facilitates transaction completion
• Can be exchanged 1:1 for fiat currency
• Can be used for other payment scenarios

Issuer:

• Seek reasonable returns
• Possible sources: exchange fees, reserve asset investment income

Technical Support Party:

• Benefit from stablecoin operations

Regulatory authorities:

• Promote economic growth
• Maintain the stability of the fiat currency
• Ensure the safety of financial operations

5. The Impact of Stablecoins on Monetary Policy and Circulation Management

Stablecoins, as a type of currency, will have an impact on the money supply.

• If all is used for issuing loans, it is equivalent to increasing the same amount of currency supply.
• If some investment in national bonds, etc., it will increase the issuance of some currency.
• If all is held as reserves without investment, it will not increase the currency issuance.

The issuance scale and regulatory model of stablecoins need to be included in the considerations of monetary policy. Based on the characteristics of distributed ledger technology, they may have circulation patterns different from traditional cash.

In terms of cross-border payments, stablecoins need to efficiently connect with the banking system to truly succeed.

6. Seven Suggestions for China

1. Adhere to technological neutrality and encourage financial innovation applications.

2. Understanding the Real Demand for Stablecoins

3. Legislate for stablecoins, promote innovation and prevent risks

4. Consider issuing a人民币 stablecoin

5. Use stablecoins to explore application scenarios for digital renminbi

6. Innovation of the connection between the RMB stablecoin and bank accounts

7. The development of the RMB stablecoin should prioritize serving emerging economies and the internationalization of the RMB.

In summary, the development of stablecoins requires a balance between innovation and risk. China can actively explore based on existing foundations to provide new payment tools for the development of the digital economy.