Digital currency has long posed a challenge for the government of China. Beijing has strict rules on how money flows, but digital currencies can help people move money instantly outside of the traditional banking system.
Yet China is also one of the most digital countries on the planet. Almost all payment transactions take place on apps that the government can keep close tabs on.
Now, Beijing’s relationship with digital currency is being further complicated by the growing global popularity of stablecoins, a digital currency designed to maintain a constant value of a traditional currency. Their backers believe stablecoins will replace credit cards and bank accounts.
Adding to the urgency for China is the newfound legitimacy for stablecoins conferred by a law President Trump signed in July. For the first time, the federal government will regulate how stablecoins are marketed and how much money stablecoin companies must hold in reserve.
Stablecoins could shift a significant share of global payments away from traditional banks and toward a new breed of corporate interests, including Mr. Trump’s own family businesses.
The vast majority of them are tied to the U.S. dollar. Some economists in China have warned that wider use of stablecoins could deepen the dollar’s dominance. China’s leaders do not want to miss an opportunity to influence the next generation of global payments.
“For China, dollar-backed stablecoins are more than an economic challenge — they are also a political threat,” said Zongyuan Zoe Liu, a fellow at the Council on Foreign Relations. The Chinese Communist Party’s control over how money moves “has been at the center of China’s economic and financial activities,” she said.
Regulators in China are split over how to approach stablecoins, Ms. Liu said. But the government is allowing a test to go forward in Hong Kong, where a law that took effect last month set out rules for companies and institutions to issue stablecoins in the city.
“Hong Kong is China’s financial laboratory,” Ms. Liu said. “It is a controlled environment to test this while still maintaining capital controls.” While regulators in China have not explicitly endorsed Hong Kong’s new law, it is implausible that it could have taken effect without Beijing’s approval, she said.
China debates the threat and risk of stablecoins.
Hong Kong’s new law could pave the way for stablecoins tied to currencies other than the U.S. dollar, like the Hong Kong dollar or the renminbi, China’s currency.
This summer, public debate about the pros and cons of stablecoins flourished in China. Some local governments warned that the technology could be used for illegal gambling, money laundering and fraud. State media commentaries by Chinese academics said the technology presented new possibilities for China’s economy.
China was one of the poorest countries in the world when the infrastructure that underpins international banking and finance, known as SWIFT, a consortium of banks, was established in 1973. Today, China wants to wield its influence as the second-largest economy to promote the renminbi as an alternative to the dollar, which dominates global trade and financial reserves.
The Chinese government has pushed for years for the renminbi to catch up to the euro and the Japanese yen as a commonly used currency. Some countries that count China as an active trading partner, like Brazil, or that have been shut out of the global financial system, like Russia, have started to add the renminbi to their reserves.
Stablecoins tied to the dollar could snuff out the slow progress Beijing has made to boost the appeal of the renminbi, some Chinese economists have warned. In June, Zhou Xiaochuan, a former Chinese central bank governor, warned that the growing global popularity of stablecoins risked promoting wider use of the dollar.
The Chinese government has been experimenting with its own digital currency for years. China began testing a digital version of the renminbi in 2020. The thinking was that it would be easy for people in the habit of making digital payments on apps like WeChat and Alipay to switch to the digital currency, which could be tracked and monitored by the central bank. But adoption has been slow. Most people have stuck to the apps.
The limited interest in the digital renminbi is one factor raising questions about how much interest a stablecoin tied to the Chinese currency would draw.
And in Hong Kong, regulators will be looking for applicants to show that their stablecoin has the potential for widespread use as part of a sustainable business plan, said Andrew Fei, a partner at the law firm King & Wood Mallesons who has advised companies about the new stablecoin rules in the United States and Hong Kong.
“With stablecoins, success largely depends on their scale,” Mr. Fei said.
China’s tech giants are getting in on the action.
The companies that have signaled they would apply for licenses are subsidiaries of Chinese tech giants, including the e-commerce firm JD and Ant Group, the financial services firm spun out of and partly owned by the Chinese internet company Alibaba. In July, several start-ups and a Chinese state-owned firm said they would create a stablecoin backed by the offshore renminbi.
The Hong Kong Monetary Authority said that as of Sunday, 77 entities, including banks, technology companies, investment firms and e-commerce companies, had expressed interest in applying for a stablecoin issuer license.
“We have clearly stated that only a handful of stablecoin issuer licenses will be granted in the initial stage,” a spokesman for the Hong Kong Monetary Authority said.
In Hong Kong, stablecoins are not likely to soon become a mainstream way for people to buy and sell things. Like in China, residents already use multiple other kinds of instant payments including Octopus, the city’s popular contactless payment card, which works at vending machines, at convenience stores and on public transportation.
But Hong Kong’s status as a global financial center made it an obvious choice as a testing ground.
And even as Beijing has asserted more political control over Hong Kong in recent years, the city has remained the Chinese economy’s deepest point of connection with the global financial system. It still draws high levels of activity from companies and banks from around the world.
“You’ve got the world’s two largest economies — the United States and China, through Hong Kong — coming out with similar stablecoin laws pretty much at the same time,” Mr. Fei said. “That in of itself is indicative of the growing recognition that stablecoins are important for the future of finance.”
Xinyun Wu contributed reporting from Taipei, Taiwan.
Meaghan Tobin covers business and tech stories in Asia with a focus on China and is based in Taipei.
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