Dialogue with Xiao Feng: Some Cool Thoughts on the Hong Kong Stablecoin Boom

As Hong Kong issues licenses for stablecoins, stablecoins and RWA have become super popular terms in the Chinese-speaking world. Dr. Xiao Feng, Chairman and CEO of HashKey Group, shared his cool thoughts on this trend, returning to some basic principles.

Hong Kong's stablecoin regulation is strict, with a greater focus on anti-money laundering.

Hong Kong's regulation of stablecoins is surprisingly strict. Officials from the Hong Kong Monetary Authority have repeatedly warned that the stablecoin sector is overheating, and Hong Kong will not issue many licenses. The issuance of stablecoins in Hong Kong will be very strict in the initial stages, with not only stringent licensing but also stringent regulation, especially regarding anti-money laundering measures related to the use of stablecoins in crypto.

Hong Kong is an international financial center with decades of experience, and as such, its regulatory authorities are very sensitive to trends in the international financial market, which is a stark contrast to the mainland. The mainland interprets stablecoins, especially offshore RMB stablecoins, primarily from the perspectives of currency, great power currency competition, and US dollar hegemony. However, Hong Kong is different; the regulatory authorities there are primarily concerned about whether the issuance of stablecoins could lead to a lack of regulation due to their departure from the banking account system.

Hong Kong is more concerned about whether there will be loopholes in anti-money laundering in this regard. As an international financial center, if Hong Kong is criticized by other major international financial centers globally for its anti-money laundering efforts, it will have a huge impact on the reputation of Hong Kong's so-called international financial center. Conversely, although Hong Kong is hot, the regulatory authorities are very cautious about this topic, which creates a huge gap.

The mainland will start accepting stablecoins and the entire crypto.

In Beijing, a consensus is gradually forming on two points. The first consensus is that China cannot continue to turn a blind eye to the wave of legislative compliance regarding Crypto, stablecoins, and blockchain from the United States on a global scale. The second consensus is how to respond. If China continues to ignore and not accept these new things, it may find itself at a disadvantage in the competition for national currency.

Since you have started to accept stablecoins, you must also accept public chains; otherwise, your stablecoins will not have global competitiveness, and issuing them would be pointless. Around this time next year, we might be discussing RWA, and the mainland may start to accept asset tokenization. After RWA, the third step in the future may be accepting Bitcoin.

RWA has three development stages

I call RWA asset tokenization, and I divide it into three stages.

The easiest is the tokenization of fiat currency.

The second stage is financial assets. Its issuer and custodian are licensed financial institutions, which are subject to strict regulation, making it easier to complete the process of digitization and tokenization.

The final stage is the tokenization of physical assets. There is still one core issue that has not been resolved regarding the tokenization of physical assets, which is the oracle. How can you ensure that a physical asset off-chain corresponds one-to-one with its digital twin on-chain, and remains anchored forever, ensuring the existence of the offline asset?

The True Value of Stablecoins

Stablecoins will become a measure of value in the virtual and digital worlds, serving as a medium of exchange for all virtual and crypto assets. In the future, a significant portion of the scenarios for Hong Kong dollar stablecoins and offshore renminbi stablecoins will also be used as a medium of exchange for RWA and other transactions.

Stablecoins were created not for payments, but because the asset volatility of crypto is too high. Therefore, we need something with a relatively stable value to price and trade these highly volatile assets. The stability of stablecoins is relative to the volatility of Bitcoin, not to the US dollar.

Stablecoins on consortium chains will not succeed

Consortium chains are not feasible. The essence of a chain lies in its built-in token; without a token, it is just the internet.

Most applications, or rather successful applications, are generated in an unpermissioned state. Because we mentioned earlier about the digital economy, the so-called cross-time, cross-space, cross-jurisdiction, and cross-entity organization, who is going to permit this? Based on what standards will it be permitted? So if you really want to promote and achieve success, you must adhere to a fundamental principle of blockchain, just like whether there is a coin, this is also a fundamental principle.

Hong Kong is expected to become a digital asset trading hub

Hong Kong has a great chance of becoming the world center for digital asset trading, or rather, it possesses its own unique advantages. The core factor of this advantage is actually China, as the main global competition in areas such as the Internet, AI, and Crypto comes from the US and China. In addition, under the "one country, two systems" framework, Hong Kong's common law system and the structure of the Anglo-American legal system also differentiate it from mainland China, providing it with unique advantages.

Positioning of Singapore vs Hong Kong

Singapore positions itself as the Switzerland of Asia, while Hong Kong is seen as the Wall Street of Asia. There isn't much to trade in Singapore; the most active trading markets for various assets are in Hong Kong. If you position yourself as the Switzerland of Asia, you hope for social stability and a calm market, avoiding major fluctuations and criticism. However, if you position yourself as the Wall Street of Asia, it’s different. You must keep the market active and provide numerous investment and trading opportunities; otherwise, it’s not Wall Street.

The Trend of Traditional Finance Embracing Crypto Assets

Next year will be a period of rapid growth for the embrace of cryptocurrency in traditional financial markets. The fundamental reason is that U.S. legislation provides legitimacy and compliance endorsement for the entire crypto industry.

Whether the entire cryptocurrency industry will experience a second growth curve depends on this year's legislation in the United States. U.S. legislation will impact the world, and other countries will follow suit, which may even compel China to reform.

The underlying protocol of blockchain is decentralized, but the application layer must be centralized.

The underlying protocol must be decentralized, while at the application layer, a certain degree of centralization is inevitable. Centralization and decentralization can be explained from the perspective of fairness and efficiency in economics. Emphasizing fairness requires decentralization, with more people participating in voting; emphasizing efficiency necessitates centralization, as the highest efficiency often comes from one person making the decision. Most commercial applications should find a balance between fairness and efficiency.

The Journey of Supporting Ethereum

After returning in 2014, we started taking action in 2015. At the end of 2014, I spoke about Ethereum at a forum hosted by a financial magazine, which was live-streamed by Sina Finance. After the live stream, Shen Bo introduced me to Vitalik. We met in 2015, and this led to investment opportunities.

In 2015, I supported $500,000. By 2016, ETH had already launched on the mainnet, and the price had risen to several dozen dollars each. I continued to ask the Ethereum Foundation: "Do you still need money this year?" At that time, they said: "We don't need money this year." I said: "But I promised that we would continue to support you in 2016, so I still plan to spend this money."

We discussed a condition: if you hold Devcon in Shanghai, I will cover all the expenses, including advertising costs and other ticket fees, which will all go to the Taiwan Foundation. In this case, the 2016 Devcon was held in Shanghai, with total expenses of 500,000 dollars.