What is stablecoin?

Stablecoins are a type of virtual asset. But unlike other types of virtual assets whose prices are often volatile, stablecoins aim to maintain a stable value. A stablecoin is not an investment or speculative instrument, it is positioned as a type of blockchain-based payment tool. By nature, a stablecoin has no room for appreciation.

Stablecoins are issued by private institutions and they are “pegged” or linked to certain assets (such as currencies or gold) to maintain price stability. For example, a stablecoin may be “pegged” to the Hong Kong dollar to ensure the value of one stablecoin is equivalent to one Hong Kong dollar. The common practice is to support the value of stablecoins by holding assets equal to the circulating supply of stablecoins as collateral. For instance, if one hundred million Hong Kong dollar stablecoins are issued, there must be at least one hundred million Hong Kong dollars' worth of high-quality and highly liquid assets held in reserve. Currently, most stablecoins in the market are “pegged” to fiat currencies, and these types of stablecoins are referred to as "fiat-referenced stablecoins (FRS)."

Due to the stable price, stablecoins play a role similar to cash in the virtual asset space, serving as a medium of exchange and a tool for value storage. In the real world, combining price stability with blockchain technology, stablecoins can operate around the clock and enable near-instant settlement. This has the potential to enhance the efficiency of traditional financial operations and reduce transaction costs, such as reducing the time and fees associated with cross-border remittances and trade payments. If the society generally accept stablecoins in the future, they may become one of the payment methods used in daily life.

The primary risk associated with stablecoins lies in whether they have sufficient reserve assets to support their value and meet redemption obligations. Key considerations include whether the reserve assets are properly safeguarded, whether they might be misappropriated, the accuracy of disclosed financial information, and the operational and financial stability of the issuers. Since stablecoin reserve assets often include tangible financial instruments (such as government bonds), large-scale redemptions may compel issuers to sell off significant amounts of reserve assets to meet redemption demands, potentially impacting the traditional financial markets.

Additionally, stablecoins may face other risks related to virtual assets, such as hacking, theft, fraud, digital wallet device infections or private key losses, and their possible use by criminals for money laundering purposes. Technological advancements may also bring unforeseen risks; for instance, if encryption algorithms used in virtual assets are compromised in the future, it could create uncertainty regarding the security of the entire virtual asset ecosystem.

In the past, some stablecoins have been questioned for issues such as insufficient reserve assets, lack of transparency in financial information, and the absence of professional third-party audits. There had been cases that stablecoins depegged and even collapse. Therefore, establishing a proper regulatory framework to address risks associated with stablecoins is crucial for safeguarding user interests and ensuring financial stability.

Hong Kong's Stablecoin Ordinance takes effect on August 1, 2025. The Hong Kong Monetary Authority (HKMA) set out regulatory guidelines for FRS issuers based on the principle of "same activity, same risk, same regulation." Under the regulations, any entity issuing an FRS in Hong Kong, issuing stablecoins in a place outside Hong Kong purports to maintain a stable value with reference to the value of the Hong Kong dollar, or actively market their issuance of FRS to the public of Hong Kong must apply for a license from the HKMA and subject to its supervision. Only FRS issued by licensed issuers can be offered to the public in Hong Kong, and FRS can only be offered by specified licensed entities in Hong Kong.