Here's why banks in Hong Kong are taking the fight to crypto bros

By Andy Mukherjee

  Standard Chartered Plc’s plan to offer a Hong Kong dollar digital clone is the strongest signal yet that stablecoins are about to get gentrified. 

These tokens, which convert 1:1 into dollar, euro or other fiat currencies, have emerged as a haven for gangsters, drug traffickers and sanctions evaders to move illicit funds over public blockchains. Entry of regulated financial institutions will hopefully chase away the unseemly squatters.

 

As part of the cleanup, banks will be taking the fight to the current landlords of this sparsely policed neighbourhood. The crypto bros who dominate token issuance aren’t ready to be challenged on their turf. They hope that US President Donald Trump will leave them largely unsupervised. The mood in Europe and Asia is very different, however.

 

 

Developments in Hong Kong, which has finalised a regulatory regime for stablecoins, will be watched keenly in the US where such rules are still being debated, albeit in a newly favourable climate. Hong Kong’s proposed law prohibits interest payments to users of fiat-referenced tokens. Meanwhile, the Securities and Exchange Commission gave a nod last week to the first yield-bearing stablecoin to be registered as a security. 

 

The stakes are high. As I wrote in January, traditional finance is looking to bring respectability and mass adoption to the $234 billion stablecoin market. A reordering is already afoot in Europe, where strict new rules that kicked in Dec. 30 have led to the exit of USDT, Tether Holdings Ltd.’s market-leading coin, and some others, from exchanges. 

 

More upheaval is on its way. From next year, lending institutions will have to disclose their cryptocurrency holdings, according to a mandate from the Basel Committee on Banking Supervision. Preferential regulatory treatment for exposure to bank-issued stablecoins, such as the JPM Coin that runs on JPMorgan Chase & Co.’s private blockchain — along with more stringent capital requirements for exposure to USDT and Circle Financial Ltd.’s USDC — might give traditional finance a leg up over the crypto upstarts. 

 

Unlike the JPM Coin, which is for institutional use, the HKD token proposed by StanChart will be for the broader public. Although that increases the complexity of the product, StanChart appears to be confident of pulling it off.

 

Together with partners Animoca Brands, which makes games and other consumer products for the blockchain, and HKT, a telco controlled by tycoon Richard Li, the bank has participated in the Hong Kong Monetary Authority’s regulatory sandbox for stablecoins since last July. It’s a controlled environment for learning the ropes without holding public funds. The lender’s ability to redeem tokens, back liabilities with high-quality reserves, and run money-laundering and terror-financing checks, has been tested.

 

StanChart must be encouraged by the results: It has signaled its intent without waiting for Hong Kong’s stablecoin bill to pass. Should its license application succeed, the lender promises to bring in “bank-grade infrastructure and rigorous governance.” A bank’s backing may hold the key to improving the public image of crypto payment systems. It may also be important to proving the utility of these tokens — not just for facilitating trades in risky online assets like Bitcoin and Ether, but also for local merchant payments and cross-border remittances.

 

Even the city’s physical banknotes are akin to non-digital stablecoins. They have been pegged to the US dollar since 1983, and issued privately since 1846. The predecessor of StanChart began doling them out in 1862. Coming from one of the island-economy’s three note-issuing banks,a copycat Hong Kong dollar on the blockchain ought to enjoy considerable trust among its users.

 

Retaining that confidence will be crucial, not just to StanChart’s reputation but also to the integrity of Hong Kong as a financial center. The same concerns will apply elsewhere, too. Robinhood Markets Inc. is planning crypto offerings this year in Singapore, which has come up with its own stablecoin regulations. The Menlo Park, California-based retail brokerage, popular with young investors, has partnered with Kraken and Galaxy Digital for a stablecoin called the “Global Dollar,” or USDG. Introduced by Paxos, the coin claims to be “substantially compliant” with the upcoming rules in the Southeast Asian city-state. 

 

It’s unclear yet as to who will ultimately win — innovative tech players, storied banks, or a combination of the two. Stablecoins will obviously have to hold their value against fiat currencies to be trusted. But trust alone won’t guarantee adoption. For instance Hong Kong consumers, who already enjoy a plethora of digital-money options (except when it comes to paying the city’s notoriously cash-loving taxi drivers), will need compelling reasons to own, spend and receive stablecoin tokens. Will StanChart and its partners be able to come up with killer use cases?

 

Financial institutions globally will be watching the developments. Success for the UK lender in Hong Kong will mean that they, too, will want to put in the effort to kick out unsavory characters and make stablecoins safe and useful for the average customer.  

---

Disclaimer: This is a Bloomberg Opinion piece, and these are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper