Hong Kong stablecoins deepen US dollar peg while opening a path for offshore RMB tokens

With its new ordinance going into effect this month, Hong Kong becomes the first jurisdiction in the world to adopt legislation dedicated to fiat-backed stablecoins. Besides facilitating the SAR’s ambitions to develop into a virtual asset trading centre, the law clears a regulatory pathway for offshore yuan (CNH) stablecoins, possibly boosting demand for renminbi (RMB) assets like offshore government bonds or central bank bills.

The move comes as other financial hubs vie for a share of the near US$300 billion stablecoin market, which analysts believe could grow to as much as US$1.6 trillion by the end of the decade. Considered the glue of the crypto ecosystem by linking virtual tokens to traditional fiat currencies, stablecoins, along with the blockchains they run on, are often touted as viable solutions for addressing fragmented cross-border payment systems, particularly among businesses operating across emerging markets.

Speaking at the Lujiazui Forum this past June, People’s Bank of China (PBoC) Governor Pan Gongsheng voiced concerns about the limitations of legacy payment systems, citing inefficiency and vulnerability to geopolitical risks. Advocating for a multipolar global currency framework, Pan highlighted the digital yuan and stablecoins as promising alternatives for international payments, signalling a notable departure from the stance of his predecessors as cryptocurrencies remain banned in mainland China.

[See more: China makes a record offshore yuan loan deal in a boost to the currency’s globalisation]

But while stablecoins are generally issued in the same currency as their reserves, the new ordinance allows US dollar (USD) assets to back Hong Kong dollar (HKD) stablecoins, effectively mimicking the currency intervention mechanism of the Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, notes Ying Wang of Simmons & Simmons in comments to Macao News.

“The HKD stablecoin provides a regulated digital rail that could eventually facilitate CNH stablecoins and support RMB internationalisation, however, the immediate impact will be on the city’s peg,” she explains, adding that when the HKD trades near the strong end of its band ($7.75), issuers would likely choose to acquire US dollar reserves.

While the CNH is permitted as an acceptable reserve under the ordinance, Ying Wang expects issuers to prioritise HKD-pegged and USD-pegged stablecoins to facilitate technical functionality and market trust, mentioning the delicate balance Hong Kong strikes between fostering digital asset innovation and maintaining its long-standing monetary stability.

Peg discomfort

The peg’s reinforcement comes amid a backdrop of USD weakness, with the greenback having lost 10 percent of its value against a basket of currencies this year. Critics have long argued that Hong Kong’s trading band unfairly anchors the SAR to US policies that may not suit local economic conditions.

But the peg has proven its worth. Since the 1983 introduction of Hong Kong’s Linked Exchange Rate System, which ties the two currencies, the dynamic has managed to survive several market panics, including the Asian financial crisis in 1997 and the Covid-19 pandemic.

[See more: China’s central bank unveils plans for an international digital yuan centre]

Washington’s erratic tariff policies and rising debt levels have amplified scrutiny that undermines the dollar’s safe-haven status. According to the IMF, at the beginning of the century, the USD accounted for 70 percent of foreign reserves. But as other sovereign currencies have gained traction, the greenback still accounts for 60 percent, compared to the euro’s 20 percent share, highlighting the limited alternatives that can match the dollar’s liquidity. 

Hong Kong’s sandbox

While the new law allows the PBoC to explore Hong Kong as a sandbox for future payment alternatives, experts believe that tokenisation alone is unlikely to internationalise the RMB. China’s sovereign digital yuan enjoys direct policy support and integration advantages, positioning it as Beijing’s preferred digital currency and thus relegating private CNH-pegged stablecoins to a complementary role, note analysts at Morgan Stanley.

[See more: Stablecoins are inching closer to mainstream approval]

Although the launch of an offshore RMB stablecoin could occur sometime in 2025 or even 2026, any early-stage developments are expected to be slow and deliberate, the investment bank writes. Instead, expect the HKMA to greenlight large, well-capitalised issuers that can first address commercial needs such as cross-border payments, retail transactions, smart contracts, and supply-chain financing. Such approvals would strategically address Governor Pan’s remarks without instigating capital control risks or market instability concerns that authorities remain cautious about.

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