Using stablecoins and other popular cryptocurrencies to settle accounts is gaining prominence worldwide despite the lack of regulation on crypto exchanges. As Zhang Tianyuan reports in Hong Kong, clearing transactions digitally is favored in e-commerce as it’s much cheaper than traditional banking methods.
In the shadows of Hong Kong’s gleaming skyscrapers, a quiet revolution is brewing in the digital currency settlement world.
Roy Cheung, who set up a Hong Kong-based payment solutions firm, found himself at the center of the financial upheaval. The sideline businesses of his company, established in 2019, assist clients in navigating the murky waters of the cryptocurrency domain.
He has seen a growing number of small and medium-sized enterprises from the Chinese mainland and the Hong Kong Special Administrative Region eager to embrace the digital change. Some seek to convert their foreign currency revenues into crypto tokens, while others are keen to settle transactions directly in cryptocurrencies. About 10 percent of his clientele now make such requests — a trend that highlights their growing appetite for alternative payment methods.
Accepting cryptocurrencies as a settlement unit would be a crucial step. The decision is closely tied to Hong Kong’s future position in the global financial market and its role in the central government’s overall financial planning.
Ivan Chu Siu-lun, convenor of the Hong Kong Sustainable Development Research Institute
Most of the clients prefer to use tether (USDT) — a type of stablecoin pegged to the US dollar and described as the third-largest cryptocurrency in circulation with a market capitalization of more than $110 billion — in settling their transactions. The allure of stablecoins lies in their promise of high efficiency and low costs in cross-border transfers, which many multinational businesses hope can streamline their operations. They can be transferred between users’ digital accounts within seconds.
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One example comes from a mainland client who operates a livestream e-commerce operation in Iran. The sector recently took the plunge into overseas markets and has emerged as a widely favored shopping method on the mainland. “It’s almost impossible to receive earnings from Iranian bank accounts through the traditional banking system,” explains Cheung. In 2018, Iranian banks were ousted from SWIFT (the Society for Worldwide Interbank Financial Telecommunications) — a global messaging system facilitating cross-border payments.
But, as the world grapples with the implications of digital currencies, few authorities and traditional financial institutions have embraced settling business deals with cryptocurrencies. The bewildering regulatory reality in many economies has created a gray area for businesspeople like Cheung, who operates global payment transactions amid a climate of uncertainty and apprehension.
Hong Kong has been exploring licensing regulations on crypto exchanges and over-the-counter (OTC) virtual assets services providers, and does not directly oversee businesses settled with cryptocurrencies.
Some OTC crypto outlets that allow customers to swap between cash and digital assets with few questions asked are suspected of conducting illegal activities, exposing the authorities and investors to a variety of risks, such as aiding mainland investors in skirting restrictions on foreign currency transfer limits, potentially breeding virtual scams, and leaving both parties vulnerable to tax evasion, money laundering and theft of digital assets.
Settling international business transactions with cryptocurrencies, such as bitcoin, ethereum and stablecoins, already prevails globally, notes Nabil Manji, senior vice-president of financial technology growth at Worldpay — one of the world’s largest payment processors dabbling in the crypto field. “Despite their small share in overall global payments, cryptocurrencies are growing fairly quickly,” he says.
Manji stresses that transactions using stablecoins are not necessarily illicit in jurisdictions that have yet to regulate digital assets. “They’re just unregulated.”
According to Worldpay’s 2024 Global Payment Report, cryptocurrencies based on blockchain technology accounted for about 0.2 percent of global e-commerce transaction value, or $11 billion, last year. The figure failed to hit 0.5 percent in any of the 40 markets surveyed across the globe, including the Chinese mainland and Hong Kong.
Cheaper alternatives
Offering a far cheaper alternative to traditional banks in making cross-border payments, settling transactions with cryptocurrencies quickly gained ground among e-commerce businesses, especially small and medium-sized enterprises.
According to Matt Higginson, a partner at global management consulting firm McKinsey & Company, fees on public blockchains can be as low as a fraction of a cent regardless of the size of the payment. “On private blockchains, transactions can be conducted at practically no cost to the end user.”
In stark contrast, when it comes to traditional cross-border banking, Higginson says, “Large e-commerce merchants can negotiate faster and cheaper rates, but transaction fees remain a major pain point for SMEs. The transfer process can take several days and cost hundreds of basis points in fees for intermediaries.”
The global stablecoin market, with a circulation value of $150 billion, is seeing daily transaction volumes matching or even exceeding the total circulation value, suggesting that stablecoins, as a digital asset class, have achieved scale and are being widely used to settle transactions worldwide, he added.
A recent report by the Hong Kong Monetary Authority (HKMA) — the city’s de facto central bank — revealed that two-thirds of 59 local entities surveyed were already using or planning to use virtual assets in their business operations, partly driven by the efficiency gains that can improve customer experience.
The growing adoption of stablecoins heralds its competition with central bank-backed fiat currencies in global trade settlements, highlighting the need for governments and financial authorities to update their regulations to keep pace with the evolving digital landscape.
Calvin Tang Siu-fung, a district councilor of Sha Tin West in Hong Kong and chartered financial analyst, suggests that the HKSAR government should consider formulating policies to strike a balance between the development of central bank digital currencies and cryptocurrencies to maintain financial stability, especially when the thriving crypto token market may reduce the need for fiat currencies.
However, questions over whether regulators will set rules for businesses settling deals with cryptocurrencies remain contentious. In lieu of resorting to harsh regulations, Tang says the SAR’s financial authorities should upgrade auditing and other relevant systems to stay current because “Hong Kong legal entities have the right and freedom to manage their assets, such as investing in stocks or cryptocurrencies.”
Ivan Chu Siu-lun, convenor of local think tank, the Hong Kong Sustainable Development Research Institute, points out that no government anywhere in the world has yet recognized the legal status of cryptocurrencies, or authorized them as a unit for business transactions.
Regulating cryptocurrency deals could inadvertently acknowledge them as a form of legal tender, although many reference books and textbooks now “define cryptocurrencies as commodities rather than currencies”, says Chu.
“Accepting cryptocurrencies as a settlement unit would be a crucial step. The decision is closely tied to Hong Kong’s future position in the global financial market and its role in the central government’s overall financial planning,” he says.
Hong Kong has been ramping up efforts to gauge its allure as a regional digital asset center since rolling out a crypto-asset road map in late 2022. In June last year, the city introduced a mandatory licensing regime for centralized exchanges, prioritizing investor protection and implementing stringent compliance rules.
Meeting the Hong Kong Securities and Futures Commission’s (SFC) standards has proven to be challenging. The commission’s website shows 12 firms have withdrawn their license applications to date. Currently, there are only two authorized digital-asset exchanges in the SAR — HashKey Exchange and OSL Group.
New rules
The new rules required crypto exchanges to obtain a license to operate legally in the city. Those failing to obtain or apply for a license had to cease services by May 31, or within three months of being notified by the SFC, whichever came later.
Despite the deadline, unlicensed exchanges still have the lion’s share of Hong Kong’s crypto market, according to CEO of HashKey Exchange Weng Xiaoqi.
“At present, some that have withdrawn their license applications are still available for investors in Hong Kong,” he says, warning that the situation is unlikely to change in the short term.
Weng notes that virtual asset trading platforms that have withdrawn their license applications mainly cater to retail investors. In contrast, platforms with institutional backgrounds and traditional financial experience are the preferred choice in Hong Kong’s licensing process. “The user profile of future new traders at crypto exchanges will also lean more toward institutional investors.”
Due to Hong Kong’s rigorous regulatory framework, the range of services provided by licensed or “deemed-to-be-licensed” exchanges won’t be markedly distinct, says Weng. “There might be slight variations in specific aspects, but whether there are two or 10 exchanges, they will not provide derivatives or a wide variety of new tokens.”
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The online dashboard of HashKey Exchange shows it now allows professional investors to trade in 20 types of tokens, including bitcoin, ethereum and toncoin, using Hong Kong and US dollars, USDT or USDC. However, retail investors are restricted to buying and selling bitcoin and ethereum using Hong Kong and US dollars.
“In the coming months, the SFC will be conducting on-site inspections to ascertain the compliance of ‘deemed-to-be-licensed’ virtual asset applicants with the SFC’s regulatory requirements. It will focus on their safeguarding of clients’ assets and know-your-client processes,” which verify a client’s identity and assess their investment knowledge and financial profile, an SFC spokesperson said.
The SFC’s findings will apply in the licensing process, and it will swiftly reject applications in case of noncompliance with key regulatory requirements.
The commission spokesperson warned it is a criminal offense to run a virtual asset trading platform in Hong Kong in breach of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, and the SFC will take appropriate action against offenders.
Hong Kong has been at the forefront of the global race for digital money trials. The HKMA has been trying out a retail version of its central bank digital currency, called the e-HKD, since May, with 14 tests carried out so far, while public comments have been invited on a legislative proposal to allow the sale of stablecoin to retail investors.
Contact the writer at tianyuanzhang@chinadailyhk.com
