This article is reprinted with permission from Mankun Blockchain Legal Services, author: Lawyer Deron Lu, copyright belongs to the original author.

In recent months, stablecoins have undoubtedly become the hottest topic in the financial and cryptocurrency circles! The United States and Hong Kong have successively passed legislation supporting stablecoins, while internet giants and established financial institutions are getting involved, either hoarding coins or applying for licenses, as if a spring breeze has suddenly arrived, causing thousands of pear trees to bloom. In contrast, mainland China still seems to be holding steady with no signs of policy relaxation, giving off a feeling of being firmly seated on a fishing platform. Among this, a piece of news about the large-scale use of stablecoins in Yiwu has spread widely online, citing two main sources: a research report from Huatai Securities indicating that stablecoins have become an important tool for cross-border payments in Yiwu, and blockchain analysis company Chainalysis estimating that the on-chain stablecoin flow in the Yiwu market will exceed $10 billion in 2023.

Interestingly, when reporters conducted on-site investigations, most merchants stated they had not heard of stablecoins and did not understand them. A few merchants expressed doubts about the compliance and costs of stablecoins, and only a very small number of merchants explicitly stated they had used stablecoins for payments. The scene resembled an old man downstairs answering Charlotte with "What Mei?" "What Dong?" in a mystical manner. What is the real situation? Let's dig into the two sources of information.

Based on publicly available information, I could not find any media that provided the specific name and source of Huatai Securities' research report. However, with the help of friends, I found a macro securities research report published by Huatai Securities on June 25, titled "How Will Stablecoins Affect the Global Monetary System?" In this 31-page report, Huatai Securities systematically elaborates on the development prospects and risks of stablecoins globally through eight chapters. On page 8 of the report, there is a statement regarding the use scenarios of stablecoins:

"Aside from direct transactions involving crypto assets, the share of stablecoins in global commodity and service transactions, their role as a means of value storage, and the penetration rate among residents are rapidly developing. Specifically, in Yiwu, the world’s small commodity center, stablecoins have become an important tool for cross-border payments. Blockchain analysis company Chainalysis estimates that the on-chain stablecoin flow in the Yiwu market will exceed $10 billion in 2023."

However, unlike other viewpoints in the report that are supported by data and charts, this viewpoint does not have accompanying data support.

Overall, the report is quite readable, and here are some selected viewpoints:

1. Countries represented by the United States (dollar hegemony), the European Union (unified market), and China (potential market) have a large monetary supply and stronger legislative push for stablecoins, leading to a huge market scale; countries like South Korea, which have developed digital and virtual economies, and Singapore, which is highly open and dependent on foreign trade, will see a high penetration rate of stablecoins; emerging market economies like Turkey, Argentina, and Nigeria, characterized by low currency stability, underdeveloped banking systems, significant underground economies, and restricted or sanctioned capital flows, will also have a high penetration rate of stablecoins.

2. In response to the challenges posed by the development of stablecoins, major economies typically adopt two strategies: issuing digital currencies or strengthening regulation of stablecoins. For mainland China, research on digital currencies began as early as 2014, with pilot programs launched in 2019. With the rapid development of stablecoins, especially the stablecoin legislation in Hong Kong set to take effect this August, it may mark China's shift towards a "dual-track" development path. The statement made by the head of the central bank at the Lujiazui Forum on June 18 also clearly indicated that emerging technologies like blockchain and distributed ledgers are driving the vigorous development of central bank digital technologies and stablecoins, showing that the Chinese central bank's attention to stablecoins has significantly increased.

3. The stablecoin legislation in Hong Kong is expected to accelerate the development of the Hong Kong dollar, offshore renminbi, and even renminbi stablecoins, providing further impetus for the appreciation of the renminbi. Expanding the "funding pool" for the Hong Kong dollar and offshore renminbi, enriching the high liquidity assets available for investment, vigorously developing cross-border business, digital economy, and virtual economy, and increasing the use scenarios for stablecoins are key measures for the success of Hong Kong's stablecoins, which will also reactivate the process of renminbi internationalization.

4. Stablecoins pose challenges to cross-border financial regulation and face certain levels of redemption risk. When the value of reserve assets fluctuates, the credit of the issuer is challenged, or even if the issuer goes bankrupt, fiat-backed stablecoins may also experience a decoupling of value. As the scale of stablecoins expands and their impact on the traditional financial system deepens, it may ultimately require accepting stricter regulations, or even partial nationalization, in exchange for true stability.

Unfortunately, through my search of both domestic and international sources, I did not find any statements or data supporting the use of stablecoins by Yiwu merchants in the Chainalysis reports for 2023 and 2024.

I also selected some data and viewpoints from Chainalysis reports regarding mainland China and Hong Kong:

1. For a long time, the proportion of stablecoins in the value of crypto assets received by users in Hong Kong has remained above 40%, and with the stablecoin legislation in Hong Kong set to officially take effect this August, this proportion is expected to rise further.

2. Data indicates that Chinese users utilize crypto assets to preserve and increase their wealth.

In my view, whether stablecoins are being used on a large scale in Yiwu may lack accurate data verification, but the combination of foreign trade and stablecoins indeed has inherent advantages. The characteristics of stablecoin payments, such as instant settlement, value stability, and low fees, address many pain points for small and medium-sized foreign trade merchants.

On the other hand, considering the regulatory policies regarding stablecoins and other crypto assets in mainland China, if mainland foreign trade merchants directly use stablecoins in transactions, there are significant compliance issues, and there may even be potential criminal risks.

Moreover, considering that the implementation of China's current export tax rebate policy often requires providing a bank's foreign exchange settlement receipt, using stablecoins would mean that this proof cannot be provided, thus missing out on export tax rebates, which could be fatal for merchants' profits. Additionally, qualifications for participating in exhibitions like the Canton Fair typically regard the bank transaction records of exporting companies as an important reference standard, and commercial banks' loan review standards also place importance on the bank transaction records of exporting companies. These factors determine that, for now, the scale of stablecoin use among Yiwu exporters will not be very large.

So, how can mainland foreign trade merchants compliantly utilize stablecoins to reduce costs and increase efficiency? Currently, a relatively compliant way is to connect through a Hong Kong company with a mainland company, leveraging Hong Kong's trade facilitation and open policies towards crypto assets to achieve a compliant integration of traditional foreign trade and crypto payments.

On August 1, Hong Kong's "Stablecoin Ordinance" will officially take effect, and the Hong Kong government will begin accepting applications for licenses to issue stablecoins in Hong Kong. This means that stablecoins recognized by the Hong Kong government will officially launch, and Hong Kong dollar stablecoins will be regarded as legal payment methods, with exchanges between Hong Kong dollar stablecoins and fiat currencies becoming more convenient and compliant.

1. The mandatory requirement for 100% redemption of Hong Kong dollar stablecoins

The Hong Kong "Stablecoin Ordinance" stipulates that issuers of stablecoins must ensure that the stablecoins they issue are backed by sufficient reserve assets, ensuring that the market value of the reserve assets is not less than the face value of the issued and circulating stablecoins.

Stablecoin issuers must guarantee that holders of stablecoins have the right to redeem them and must not obstruct or restrict the redemption of stablecoins, nor charge any fees other than reasonable transaction fees during the redemption process.

2. Hong Kong dollar stablecoins must meet anti-money laundering and anti-terrorist financing compliance requirements

The Hong Kong "Stablecoin Ordinance" stipulates that issuers of Hong Kong dollar stablecoins must adhere to strict anti-money laundering and anti-terrorist financing requirements.

In a consultation document released by the Hong Kong Monetary Authority on May 26, the authority outlined the relevant anti-money laundering and anti-terrorist financing requirements, with core requirements including:

• Customer due diligence. For transactions involving purchases or redemptions that meet or exceed the benchmark of 8,000 HKD, customer due diligence must be conducted, including verifying wallet ownership;

• Strict regulation of non-custodial wallets. Implementing strict monitoring and transaction limits on non-custodial wallet transactions to reduce the risk of wallets being exploited by criminals;

• Ongoing monitoring. Utilizing blockchain analysis to track transaction history and detect illegal activities, reporting suspicious transactions;

• Conducting due diligence on custodial wallet providers;

• Blacklisting illegal wallet addresses.

1. Key points for mainland foreign trade merchants to compliantly utilize Hong Kong dollar stablecoins

Considering the current policy differences regarding stablecoins between mainland China and Hong Kong, I believe that mainland foreign trade merchants can avoid most compliance risks by focusing on the following three key points when utilizing Hong Kong dollar stablecoins:

• Use Hong Kong or other overseas company entities to receive and pay stablecoins;

• Complete the compliant exchange of stablecoins for fiat currencies in Hong Kong;

• Compliantly settle fiat currencies back to the mainland parent company;

Related reading: Hong Kong releases the strictest stablecoin regulations, the first RWA industry white paper has been published.

Original text: “Is Large-Scale, Compliant Use of Stablecoins Feasible for Yiwu Foreign Trade Merchants?”

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