Author: FinTax

This article is organized from the Space AMA "Discussion on Stablecoins and Stock Tokenization: Development Prospects and Compliance Challenges," hosted by Odaily Planet Daily and co-hosted by OKX Chinese. The guests present included: William: FinTax COO; Kiwi: OKX Ventures Research; Zixi: CEO of Stablestock; Yue Xiaoyu: Web3 Product Manager.

1. Competition and Regulation in the Stablecoin Sector

1.1 Stablecoins: Growing Together in Regulatory Games

In recent years, the stablecoin sector has developed rapidly, with increasing market attention. The industry is highly focused on whether stablecoins have entered a "arms race" stage and which sub-markets will stand out in the future. In terms of market size, the total market capitalization of global stablecoins is approximately $260 billion, with non-USD stablecoins accounting for only about $20 billion. Although the scale of non-USD stablecoins is relatively small, competition among non-USD stablecoins has quietly emerged globally. Several countries and regions have introduced or are formulating relevant laws and regulations, such as the MiCA (The Markets in Crypto Assets regulation bill) issued by the European Central Bank in mid-2023, and the recently effective "Stablecoin Regulation" in Hong Kong. Both regulations reflect defensive characteristics, emphasizing the prevention of financial risks in response to the ongoing expansion of USD stablecoins like USDT and USDC, highlighting the global regulatory focus on the development of stablecoins. However, from an overall regulatory perspective, the stablecoin market is still in its early stages, and the relationships among various stablecoins tend to favor collaborative growth rather than zero-sum games.

In terms of specific regulatory systems, the freezing mechanisms and blacklist management in different jurisdictions are key factors affecting the prospects of stablecoins. Currently, stablecoins are mainly used for purchasing crypto assets and large transactions in "gray" or "gray-white" areas. In the regulatory frameworks of various countries, how to balance the scale of freezing directly determines the survival capability of stablecoins. Stablecoins should fully leverage their functions as a medium of exchange and a unit of value measurement, especially in areas like cross-border payments, where they can fully utilize their advantages of high freedom and ease of transaction. If stablecoins can form actual trading pairs with Bitcoin or specific physical goods, it will facilitate more real-world demand, thus gaining an advantage in competition. Conversely, overly stringent regulations may cut off their application scenarios, leading to weakened competitiveness. Therefore, regulatory agencies need to clearly define the scope of frozen funds and establish frameworks to ensure that compliant funds can circulate freely in their original scenarios. This is not only a regulatory challenge but also a crucial factor in determining which types of stablecoins can succeed under compliance conditions.

The stablecoin licensing/permit system is also critical. The US GENIUS Act stipulates that only institutions qualified as "Payment Stablecoin Issuers (PPSI)" can issue stablecoins, and they must be approved through federal or state regulatory pathways. Stablecoins must be fully backed by high-quality liquid assets (such as USD or US Treasury bonds) at a 1:1 ratio, and reserves must be disclosed and subject to regular audits. The EU's MiCA categorizes stablecoins into single fiat-backed and multi-asset-backed types, explicitly requiring fiat stablecoins to be 1:1 backed by reserves and prohibiting the issuance of algorithmic stablecoins, while all issuing institutions must obtain authorization from regulatory authorities in member states to operate throughout the EU after approval. Singapore has established a flexible and innovation-oriented system through the Payment Services Act (PSA) and its subsequent stablecoin framework. This regulation requires that if a non-bank issued stablecoin exceeds 5 million Singapore dollars, it must apply for a "Major Payment Institution" (MPI) license to operate; issuers below this threshold may be temporarily exempt. Banks issuing stablecoins do not need to apply for a separate license but must comply with the same reserve and compliance requirements. In Hong Kong, the stablecoin regulatory framework is stricter than that of the US and Singapore, with higher issuance thresholds and KYC requirements, which may make it difficult for HKD stablecoins to integrate into the DeFi ecosystem, thus limiting their application in traditional trading and gray market scenarios. Therefore, stablecoin issuance in Hong Kong needs to be deeply integrated with enterprises that have inherent payment scenarios, and stablecoin licenses are expected to be prioritized for enterprises with native payment scenarios, such as e-commerce platforms.

1.2 USD Stablecoins: Dominance and Future Challenges

In the stablecoin market, USD stablecoins have become the core pillar of the global crypto financial system due to the long-standing dominance of the USD and their first-mover advantage. For residents in many countries and regions, the threshold and cost of obtaining USD are relatively high, especially in areas with underdeveloped financial infrastructure or strict foreign exchange controls. The emergence of USD stablecoins has significantly lowered this barrier, allowing users to access a digital equivalent pegged to the USD at a 1:1 ratio simply by connecting to the internet, thereby greatly simplifying the processes of cross-border payments and trade, bringing unprecedented convenience to global business activities. This convenience not only enhances the efficiency of international trade but also provides significant support for financial inclusion, especially in regions where traditional financial services are lacking.

From a market structure perspective, the stablecoin market can be metaphorically likened to an iceberg: above the waterline are compliant USD stablecoins represented by USDC, which occupy a major market share due to their transparent reserve mechanisms and strict regulatory compliance; below the waterline are a large number of non-compliant offshore stablecoins, such as USDT, whose wide application scenarios and lower entry barriers make them popular globally. Nevertheless, countries are actively launching localized stablecoins based on local regulatory policies, optimizing for specific scenarios and regional markets. For example, some enterprises are attempting to deeply integrate stablecoins with e-commerce or payment ecosystems to enhance penetration in niche markets. However, while these localized initiatives can enhance the applicability of stablecoins in specific areas, USD stablecoins, with the unique status of the USD as a global reserve currency and their wide acceptance in cross-border transactions and value storage, are likely to maintain their global dominance in the foreseeable future. This dominance stems not only from the monetary credit of the USD but also from the comprehensive advantages of USD stablecoins in technical scalability, ecological compatibility, and market liquidity.

1.3 Emerging Stablecoins: Wealth Effect and Competitive Advantage

In addition to the classification of USD and non-USD stablecoins, there are two types of stablecoins with significant growth potential that will play important roles in the global crypto financial market. On one hand, although many countries' regulations prohibit stablecoins from paying interest to holders to avoid direct competition with traditional bank deposits, there remains space for developing "yield-bearing stablecoins" in the regulatory gray areas of DeFi and Web3. These stablecoins can provide users with stable and secure interest returns through deep integration with decentralized finance (DeFi) or centralized finance (CeFi) platforms, making them highly attractive to institutional investors and large funds. Currently, various yield-bearing stablecoins employing neutral strategies have emerged in the market, injecting new vitality into the market by seeking a balance between compliance and yield through innovative mechanisms.

On the other hand, scenario-based stablecoins issued by Web2 giants can effectively reach user groups that USD stablecoins find difficult to cover, relying on their mature payment or business ecosystems. By focusing on specific application scenarios, such as e-commerce, payments, or social platforms, these stablecoins can significantly enhance market liquidity, increase user stickiness, and provide customized solutions for regions with underdeveloped financial services. Particularly in the cross-border e-commerce sector, stablecoins are gradually challenging the position of traditional third-party payment platforms, demonstrating unique competitive advantages.

In developed country markets, due to intense competition, payment projects generally attract users by lowering transaction fees, resulting in a relatively stable market structure. However, in emerging markets like Latin America, where high payment fees and inadequate financial infrastructure are prevalent, stablecoins have greater development space. For example, in Mexico, the market share of stablecoins has declined due to the continuous improvement of the banking system; while in Brazil, due to severe exchange rate fluctuations and a relatively imperfect banking system, the demand for stablecoins is strong, with transaction fees reaching around 1%, offering a cost advantage over traditional payment methods. Traditional Web2 companies are more cautious about compliance, tending to strictly adhere to regulatory requirements, while USD stablecoin projects enjoy advantages in the flexibility and popularity of payment scenarios.

2. Opportunities and Challenges of Stock Tokenization

2.1 From Off-Chain to On-Chain: Liberation of Liquidity

Stock tokenization, as a new hotspot for RWA, is profoundly reshaping the intersection of traditional finance and crypto finance. By converting physical stocks into digital tokens on the blockchain, stock tokenization redefines asset management and trading mechanisms through innovative models. Its core value lies in bringing the liquidity of off-chain assets onto the chain, effectively alleviating the liquidity bottlenecks caused by trading time restrictions, geographical barriers, and the complexity of clearing processes in traditional stock markets. From a broader perspective, the current innovations in the blockchain field are focused on enhancing on-chain liquidity: stablecoins provide stable value anchoring for the on-chain economy by introducing USD liquidity; while stock tokenization addresses the liquidity pain points of off-chain stocks, offering efficient solutions. Together, they construct a diversified liquidity framework that significantly enhances the liquidity and accessibility of assets, promoting the deep integration of traditional finance and decentralized finance (DeFi), injecting new momentum into the modernization of the global financial system.

2.2 Leading a New Narrative: Optimistic yet Cautious

Whether stock tokenization can become the core narrative of the next market boom is a matter of great concern, closely related to market enthusiasm and regulatory trends. In fact, there were similar early attempts in 2018: some platforms allowed retail investors to purchase stocks through on-chain holding, with real shares held by brokerages behind the scenes. On the surface, this model connected blockchain with the traditional securities market, but the core legal attributes remained unchanged, as pointed out by the SEC—packaging securities as tokens does not change their identity as securities. Moreover, due to differences in trading times, participant demographics, and liquidity in the on-chain market compared to traditional markets, liquidity is low and price volatility is frequent, with extreme deviations where prices exceed real stocks by 300%. The lack of uniform regulation across different jurisdictions also puts investors in a difficult position to protect their rights when platforms face risks or collapse. These factors collectively led to the gradual exit of this model.

Security Token Offerings (STOs) are seen as a "compliance upgrade" of ICOs, hoping to issue on-chain securities in accordance with securities regulations. However, the high compliance costs of STOs have become the biggest obstacle, involving comprehensive KYC/AML reviews, ongoing information disclosure, and legal compliance costs, which deter project parties. Even if successfully issued, most STO tokens cannot enter mainstream exchanges and can only trade on small platforms or OTC markets, resulting in extremely limited secondary market liquidity. Coupled with investors' lack of confidence in unfamiliar token structures and uncertain return expectations, market sentiment remains low, while cross-border regulatory and tax differences further complicate internationalization. Ultimately, while STOs retain the "compliance" halo, they have failed to form a scaled market application. These attempts have not been able to create a market synergy, adding competitiveness to the stock tokenization sector.

However, stock tokenization still faces numerous challenges. First, users may question whether tokenized stocks genuinely correspond to the underlying stocks when purchasing them. Second, in the absence of a continuous influx of new assets, on-chain liquidity is difficult to maintain, and there are still obstacles in the asset entry and exit mechanisms. To address these two issues, the industry is actively exploring solutions. Some projects have adopted a "Proof of Reserve" mechanism, establishing a fund pool and regularly disclosing reserve conditions to ensure that on-chain transactions are pegged 1:1 to actual stocks, thereby enhancing the credibility of asset authenticity and liquidity. However, doubts about the authenticity of tokenized stocks still exist, and liquidity is highly dependent on the operational capabilities of the project parties, which also poses certain risks. Third, and more importantly, tokenized stocks currently struggle to fully reflect the equity attributes of traditional stocks, such as voting rights and dividend rights, which limits their appeal as true equity substitutes. Fourth, regulatory differences also hinder further development in the field of stock tokenization. When tokenized stocks are traded globally, they must contend with the regulatory rules and complex tax policies of different jurisdictions. In particular, significant tax differences among countries, which are closely related to investors' returns, can have direct and far-reaching impacts on investment behavior. Currently, the returns from tokenized stocks may involve tax administration rules from different jurisdictions, making the understanding and application of tax rules challenging. At the same time, the high degree of composability of tokenized stocks brings more challenges in tax accounting, requiring the assistance of professional software tools. For example, two tokens can form a decentralized trading pair, generating transaction fee income on-chain; in the future, two stock tokens may also form a trading pair, bringing fee revenue. At this point, how to account for liquidity provider (LP) income and how to handle the lack of dividend offsets for token holders will require regulatory agencies to establish matching rules based on this new technological carrier, Token, which may pose a significant challenge and necessitate more collaboration between Web3 industry builders and regulatory authorities to jointly promote the formation of reasonable regulatory rules.

3. Conclusion

Stablecoins and stock tokenization are profoundly reshaping the global financial landscape. This transformation stems from technological innovation and is promoting the deep integration of crypto finance with traditional systems. Stablecoins drive financial inclusion and efficiency improvements by injecting on-chain liquidity and optimizing payment scenarios. Meanwhile, stock tokenization breaks the liquidity bottlenecks of traditional markets, bringing off-chain assets onto the blockchain, expanding the accessibility of asset circulation, and together with stablecoins, constructing a diversified liquidity framework that promotes the collaborative development of DeFi and traditional finance.

However, these opportunities are accompanied by numerous challenges. For instance, freezing mechanisms, licensing systems, and blacklist management directly affect the survival and competitiveness of stablecoins, while legislative dynamics in various countries reflect their vigilance regarding the expansion of USD stablecoins. Additionally, stock tokenization faces issues of authenticity, incomplete rights, and tax complexities, with high compliance costs and cross-border regulatory differences further hindering its scalable application. The fields of stablecoins and stock tokenization undeniably have a bright future, but whether they can truly lead a new round of crypto narratives remains to be seen over time.

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