Hong Kong taxis are a perfect stablecoin test case

Asia’s last bastion of Luddite resistance to modern payment technology is finally crumbling. From April 1, Hong Kong’s cash-loving cabbies will be required to offer passengers at least two alternatives to banknotes.

The drivers will be free to choose their digital-payment options. Most will probably install Octopus Holdings Ltd.’s readers, since Hong Kong residents use the ubiquitous stored-value card — or its app equivalent — on trains, buses and ferries anyway. The Octopus network can also be tapped by travellers from mainland China to pay via their Alipay and WeChat Pay accounts back home.

But the mandate is also timely for stablecoins. Issuers ought to push the upcoming digital clones of Hong Kong dollars in taxi rides, befitting the financial centre’s role as Asia’s crypto capital. A pilot in Abu Dhabi has shown that it can be done.

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It helps that the stablecoin market in Hong Kong is itself on the cusp of change. Under a new licensing regime that kicked off Friday, any cryptocurrency that purports to maintain a steady value against an underlying asset will need a permit.Those who snag the limited number of licenses after intense competition will look for creative ways to make their coins popular. Users looking for a ramp to move efficiently between fiat money and riskier crypto assets like Bitcoin and Ether will naturally prefer continued access to the two most popular private-sector clones of the official US currency, USDT and USDC.

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I would, however, pay more attention to what the Jack Ma-backed Ant Group Co. does with its license, should its application succeed. Ant, whose code-scanning product ignited China’s cashless-payment revolution, runs the country’s largest blockchain platform for enterprises. But since retail crypto activity remains banned on the mainland, Hong Kong is the perfect venue for the firm to establish a large stablecoin test case at China’s doorstep.

The US stablecoin industry, supported by newly minted domestic regulation, will flex its muscles globally. Slowing it down in Hong Kong would require rivals to harness blockchain technology to offer real-world advantages that can lure customers away from traditional finance. Tokenised currencies can speed up international money transfers and make them cheaper. But the ultimate litmus test of a cash substitute in Hong Kong will lie with that one group that has so far refused to go digital: the cabbies. Crack that market, and everyone will follow.

Hong Kong taxis are among the most affordable in the developed world. That’s not a new reputation. Of late, though, the iconic red-and-silver fleet is losing its lustre, with a near-50% jump in customer complaints over the past two years. And those are just passengers upset over usual stuff: cabbies driving rashly, refusing hire, behaving rudely, taking indirect routes, or overcharging.

A more glaring anachronism that befuddles visitors is that most rides can only be settled in Hong Kong dollar banknotes. Fleet owners blame ride-hailing services for the 60% plunge in the value of their taxi licenses since before the pandemic and work-from-home, and yet they won’t go cashless like Uber. Since a stablecoin is supposed to be a 1:1 alternative to cash, Ant should try introducing it on affiliate Alibaba Group Holding Ltd.’s mapping and taxi-booking service in the city.

“Stablecoins for me are a killer use case,” Franz Bergmueller, chief executive of Switzerland’s AMINA Bank AG, said in an interview. The bank has a license from Hong Kong’s Securities and Futures Commission to distribute and manage virtual assets. When the regulator allows, it would like to upgrade the permit to start offering crypto-backed loans.

Beijing would encourage the rise of Hong Kong as a bulwark against US stablecoin dominance, lest it pushes Asia into a deeper dependence on the greenback. The risks are already clear. Marco Reuter, a digital-money specialist at the International Monetary Fund, has peered deep into pseudonymous crypto addresses. His artificial-intelligence model breaks down last year’s $2 trillion in stablecoin activity by geography. Asia-Pacific dominates. The region is home to 31% of user-controlled wallets. Binance, the world’s largest crypto exchange, drove $11 billion in net stablecoin inflows last year to Chinese self-custodial wallets, despite being inaccessible without a virtual private network, Reuters estimates.

High inflation, the main driver of dollar stablecoin demand in Argentina and Turkey, is not a problem in most parts of Asia. In fact, China’s bigger challenge is deflation. Yet the IMF working paper shows that stablecoin inflows increase significantly when the dollar appreciates against the Chinese yuan. Beijing has good reasons to worry about erosion of capital controls and monetary sovereignty from a deluge of digital dollars. Which is where Hong Kong is expected to play a role.

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Since a crypto ban is not working, a better strategy may be to steer mainland demand — as well as demand from Belt-and-Road partners — toward regulated coins in Hong Kong. These would come with strong anti-money laundering protection. At least initially, the issuers — or any of the city’s 11 regulated crypto exchanges — will have to verify the identity of token holders every time stablecoins are issued, redeemed, or traded.

The speed bump is intentional. The plan, which Hong Kong has spent seven years fine-tuning, is to create a market where institutional and professional investors, including corporate treasuries, funds, family offices, and high-net-worth individuals, can transact reliably. The collapse of Sam Bankman-Fried’s FTX digital-asset empire vindicated the strategy. As Bergmueller told me, “People are just tired of losing money.”

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A market that works well for institutions will also attract retail customers; they want a fiat-equivalent that holds its value and can be trusted to a regulated intermediary to earn a yield. But above all, they want a safe environment to whip out their crypto wallet — and pay for a taxi ride.

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