In a recent interview with the South China Morning Post, Circle CEO Jeremy Allaire advocated for introducing Chinese Yuan (CNY)-backed stablecoins to facilitate the currency’s internationalization. Allaire argued that stablecoins could be a more effective means than central bank digital currencies (CBDCs) to achieve this goal. While acknowledging the complimentary nature of stablecoins and CBDCs, Allaire emphasized the innovative potential of the private sector in leveraging distributed ledger technology (DLT) on the public internet.
However, implementing such a plan in China may face obstacles due to the country’s economic policy, which emphasizes capital controls and restrictions on the free convertibility of the yuan. The International Monetary Fund’s (IMF) First Deputy Managing Director, Gita Gopinath, previously stated that China would need to open its capital markets and allow full currency convertibility to challenge the dominance of the US dollar. Some experts believe that China is likely to maintain its current rules to safeguard its economic stability and avoid significant disruptions to the structure of trade settlements.
Brad Setser, a former senior advisor to the U.S. trade representative, expressed his views on the matter, suggesting that China might gradually increase the use of the yuan in trade with commodity-exporting countries. However, Setser also noted that radically transforming the trade settlement structure could prove challenging for China. Meanwhile, stablecoins like Circle and Tether have emerged as beneficiaries, particularly in facilitating remittances for Chinese companies that require overseas sourcing. Notably, earlier this year, the developers behind CNHC, a stablecoin linked to the offshore yuan primarily used in the bond market, were arrested in Shanghai.
China’s approach to stablecoins and Hong Kong’s regulatory development
While mainland China’s stance on cryptocurrencies remains strict, Jeremy Allaire expressed optimism about Web3 development in Hong Kong and the local monetary authority’s steps toward regulating stablecoins. Allaire acknowledged that mainland China’s government has not shown any signs of warming up to cryptocurrencies, despite some statements made by government officials from Hong Kong. However, he emphasized that stablecoins, such as those pegged to fiat currency, provide a more immediate solution for China’s goal of internationalizing the yuan compared to central bank digital currencies.
Allaire cited the example of a stablecoin pegged to the offshore yuan (CNH) and its potential benefits. Hong Kong aims to regulate stablecoins as part of its efforts to become a global virtual asset hub. The Hong Kong Monetary Authority (HKMA) has committed to introducing stablecoin regulations by 2024, recognizing the potential impact of such products on financial markets. The Securities and Futures Commission is also working on complementary regulations for stablecoins, following the implementation of rules for licensing sellers of other types of cryptocurrencies.
Circle’s CEO expressed encouragement regarding the HKMA’s plans, which were outlined in a conclusion paper for cryptoassets and stablecoins released in January. Allaire viewed the priority given to this matter by the Hong Kong government and the HKMA as positive and motivating for Circle’s business expansion in the region.
The role of stablecoins and CBDCs in the future financial landscape
Concerns have been raised globally about the potential impact of stablecoins on financial stability, prompting central banks to explore mitigation measures. The HKMA, for instance, suggested that the value of reserve assets should match the value of outstanding stablecoins at all times.
Furthermore, the HKMA has been researching the possibility of a digital Hong Kong dollar, and the city is already participating in a cross-border trial of the eCNY using the mBridge blockchain. While questions persist about the future role of stablecoins once CBDCs are available in a well-regulated environment, Jeremy Allaire emphasized that CBDCs and private coins can coexist, with each playing a unique role in driving innovation.
Circle has been actively involved in Asia, representing its largest non-U.S. market. With approximately 125 employees based in Asia, the company remains committed to leveraging the region’s potential for growth and advancement.
