Author: Liu Li Investment Report

Renowned economist Hong Hao recently shared his latest views on the topic "Stablecoins: Just a Fad or a True Game Changer?" during an online dialogue.

Hong Hao mentioned that it is not surprising that major internet platforms like Tencent and Alibaba have obtained licenses for stablecoin issuance.

However, many participants are still in the planning stage, trying to propose a more comprehensive way to operate this system.

He believes that most stablecoins issued in Hong Kong will be based on the Hong Kong dollar rather than U.S. Treasury bonds.

Additionally, the Hong Kong Monetary Authority has a very large foreign exchange reserve, so stablecoins in Hong Kong may be more stable than those in the U.S..

Currently, the stablecoin market is still very small, only $250 billion.

He expects that as more participants join, it will soon exceed $1 trillion.

Theoretically, the issuance of stablecoins will indeed increase the demand for U.S. Treasury bonds, as there are now multiple participants in the market that can issue stablecoins based on U.S. Treasury bonds.

However, Hong Hao predicts that the true demand for U.S. Treasury bonds in the future will depend on the fiscal stability of the U.S. government.

Moreover, he pointed out that to enable foreign participants to engage more in trade with China, stablecoins are one of the better ways to address the costs and speed of cross-border transactions.

But for China's regulatory authorities, stablecoins also mean the decentralization of payment systems, which may pose challenges to the existing regulatory framework.

Regardless, he said: "The craze for stablecoins has already begun, and the role of stablecoin technology in daily life will become increasingly prominent; this will be a trend."

Investment Report (liulishidian) has compiled the highlights of Hong Hao's sharing as follows:

Major Internet Companies Obtaining Licenses Stablecoins in Hong Kong Will Be More Stable Than Those in the U.S.

Question: It is very clear that according to regulations, anyone who wants to issue stablecoins in Hong Kong must obtain approval from the Hong Kong Monetary Authority. How do you think this regulation compares to the so-called "Genius Act" in the U.S.?

Hong Hao: The Hong Kong government has a set of standards in the approval process, clearly targeting the list of companies that obtain licenses for stablecoin issuance.

We can see that there are some very large internet platforms with a lot of resources, and they have a long history of stable operations in Hong Kong.

The names you mentioned, such as JD.com, Tencent, and Alibaba, are all household names in China.

It is not surprising that they have obtained licenses for stablecoin issuance.

Question: How do you understand the current business competition, the so-called U.S. approach versus the Hong Kong approach?

Hong Hao: I agree that the U.S. is like the "Wild West."

If you look at history, there have been several significant and major stablecoin collapse events, the most recent being at the end of 2022 when the USDC issued by Circle plummeted in value by 20%.

So, this system has historical instability.

Moreover, in the past few years, USDC has experienced many other smaller collapses, not just the one in May 2022.

From a historical perspective, we can see that this system has a lot of room for improvement; I do not believe this system is perfected or very safe to use.

Now, looking at the situation in Hong Kong,

even if these participants have obtained licenses, they are still in the planning stage, trying to propose a more comprehensive way to operate this system.

Additionally, I believe that most stablecoins issued in Hong Kong will be based on the Hong Kong dollar rather than U.S. Treasury bonds, and the Hong Kong dollar is pegged to the U.S. dollar.

Furthermore, the Hong Kong Monetary Authority has a very large foreign exchange reserve, so we can roughly conclude that stablecoins here may be more stable than those in the U.S..

Stablecoin Scale Expected to Soon Exceed $1 Trillion

Question: Let me read a quote from Scott Bessenet, the U.S. Treasury Secretary. He said: "The development of the stablecoin ecosystem will drive private sector demand for U.S. Treasury bonds that support stablecoins.

This new demand can lower government borrowing costs and help control the national debt. It can also allow millions of new users worldwide to join the dollar-based digital asset economy."

Please elaborate on your views regarding the development of dollar-pegged stablecoins and the future of U.S. Treasury bonds. What does this mean for you as an investor?

Hong Hao: I believe that, theoretically, this will indeed increase the demand for U.S. Treasury bonds because there are now multiple participants in the market that can issue stablecoins based on U.S. Treasury bonds.

Fundamentally, the velocity of money in the economy will increase; and the money multiplier will be larger than before, so as liquidity in the system improves, the demand for safe assets will also rise.

So I think Scott Bessenet's hypothesis is reasonable.

However, the current stablecoin market is still very small, only $250 billion.

We expect that as more participants join, it will soon exceed $1 trillion.

I want to say that this is a new source of demand for U.S. Treasury bonds, especially given the severe fiscal situation in the U.S., which needs all this help from stablecoins.

Question: Since China remains very cautious regarding cryptocurrencies, what does the rapid development of stablecoins, especially those pegged to the dollar, mean for China? Considering the broader context of U.S.-China relations?

Hong Hao: I believe China should utilize stablecoin technology.

In terms of transaction speed and very low transaction costs, stablecoins outperform everything else, especially in cross-border transactions.

So I think, for China, nearly 50% of cross-border trade is settled in RMB.

Therefore, to enable foreign participants to engage more in trade with China, stablecoins are one of the better ways to address the costs and speed of cross-border transactions.

Issuing Stablecoins Domestically Challenges the Existing Regulatory Framework

Question: From China's perspective or from the viewpoint of industry insiders, does this mean more opportunities for unrestricted cross-border flow?

Hong Hao: In a sense, this is a beneficial technology for China in terms of trade costs, as it offers very low transaction costs and very fast transaction speeds.

I think the real challenge for China is that, generally speaking, the capital account is still controlled, so if you want to exchange stablecoins for RMB, it is actually a bit tricky.

Because currently, the RMB cannot be freely exchanged.

Secondly, I think that because the U.S. dollar is still the dominant currency in the system, using stablecoins may mean you are bypassing the SWIFT system and the U.S. dollar payment system.

And China already has CIPS (Cross-Border Interbank Payment System), which is another way to conduct cross-border payments.

We have been developing CIPS for many years, and now, utilizing stablecoin technology can also achieve this.

For China's regulatory authorities, stablecoins also mean the decentralization of payment systems.

Allowing non-government participants to issue their own stablecoins may pose challenges to the existing regulatory framework.

The True Demand for U.S. Treasury Bonds Depends on the Fiscal Stability of the U.S.

Question: By the way, due to the latest developments in stablecoins, many stablecoins are pegged to the dollar and U.S. Treasury bonds. According to estimates from U.S. banks, for every $1 deposit transferred to stablecoins, $0.90 flows into U.S. Treasury bonds. What does this mean?

Hong Hao: Initially, this will help the demand for U.S. Treasury bonds because you are printing more money to buy U.S. Treasury bonds, so I think to some extent, this will lower U.S. Treasury bond yields and help the U.S. government with its fiscal situation this year.

But I believe that in the future, the true demand for U.S. Treasury bonds will depend on whether the U.S. government can finance its budget deficit and whether the fiscal situation in the U.S. is healthy enough to attract buyers for its Treasury bonds.

So, whether you purchase with stablecoins or RMB, it ultimately depends on the fiscal stability of the U.S. government.

The Craze for Stablecoins Has Begun It Will Become a Trend in the Future

Question: But the fact is that most stablecoin issuers use the dollar rather than the RMB as support. Given that the RMB is still not the most dominant currency, what does this indicate? Will this bring a new trend and heat to the dollar, rather than following the rules and logic you have outlined?

Hong Hao: Well, I think the dollar still accounts for 50% of the global reserve system, so initially pegging stablecoins to the dollar is an obvious choice; we are not too surprised, especially in the early stages of stablecoin development, right? The dollar is a very obvious choice.

But I believe that in the future, people can peg it to gold, Swiss francs, pounds, etc., which really depends on the reserve status of that currency in the system.

However, currently, over 50% of global reserves are still denominated in dollars.

Looking at it now, stablecoins have already become a craze; just look at the stocks in Hong Kong, any that are associated with the stablecoin concept have skyrocketed, right?

The craze has begun, but looking ahead, the role of stablecoin technology in daily life will become increasingly prominent; this will be a trend.

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