Hong Hao: The scale of stablecoins will soon exceed one trillion US dollars

Author: Hong Hao, Managing Partner & CIO of Lotus Asset Management, Director of China Chief Economist Forum

Famous economist Hong Hao recently shared his latest views on the topic of "Stablecoin: Just a Trend or a Real Game Changer?" in an online dialogue.

Hong Hao mentioned that it is not surprising that large Internet platforms such as Tencent and Alibaba have obtained licenses to issue stablecoins.

But many participants are still in the planning stage, trying to come up with a more comprehensive way to operate this system.

He believes that most stablecoins issued in Hong Kong will be issued based on Hong Kong dollars rather than US Treasuries. In addition, the Hong Kong Monetary Authority has very large foreign exchange reserves, so Hong Kong's stablecoins may be more stable than those in the United States.

And the current stablecoin market is still very small, only $250 billion.

He expects that as more and more participants join, it will soon exceed one trillion US dollars.

And in theory, the issuance of stablecoins does increase the demand for US Treasuries because there are now multiple participants in the market who can issue stablecoins based on US Treasuries.

But Hong Hao expects that in the future, the real demand for US Treasuries will depend on the fiscal stability of the US government.

In addition, he pointed out that in order to allow foreign participants to buy and sell more with China, stablecoins are one of the better ways to solve the problem of cross-border transaction costs and speed.

But for Chinese regulators, stablecoins also mean the decentralization of the payment system, which may pose a challenge to the existing regulatory framework.

But in any case, he said: "The craze for stablecoins has begun, and the status of stablecoin technology in daily life will become more and more prominent, which will be a trend."

The Investment News has sorted out and selected the essence of Hong Hao's sharing as follows:

Internet giants get licenses, and Hong Kong stablecoins will be more stable than those in the United States

Q: One thing is very clear. According to regulations, whoever wants to issue stablecoins in Hong Kong needs to be approved by the Hong Kong Monetary Authority. So, to what extent do you think this regulation can be compared with the so-called "Genius Act" in the United States?

Hong Hao:The Hong Kong government has a set of criteria in the approval process, which is obviously for the list of companies that obtain the license to issue stablecoins.

We can see that there are some very large Internet platforms with a lot of resources. At the same time, they also have a long history of stable operation in Hong Kong.

You just mentioned JD.com, Tencent, and Alibaba, which are household names in China.

We are not surprised at all that they obtained the license to issue stablecoins.

Q: How do you understand the current business competition, the so-called American approach and the Hong Kong approach?

Hong Hao:I agree that the United States is the "Wild West".

If you look at history, there have been many very significant and major stablecoin crashes in the past, even the most recent one was in late 2022, when the value of USDC issued by Circle plummeted by 20%.

So, this system is historically unstable.

And there have been many other small-scale crashes in USDC over the past few years, not just the one in May 2022.

So, from the history, we can see that there is a lot of room for improvement in this system, and I don't think this system is perfect or very safe to use.

Then, looking at the situation here in Hong Kong, even though these players have obtained licenses, they are still developing plans to try to come up with more comprehensive ways to operate this system.

Also, I believe that most stablecoins issued in Hong Kong will be issued based on Hong Kong dollars, rather than US Treasuries, which are pegged to the US dollar.

Also, the Hong Kong Monetary Authority has very large foreign exchange reserves, so we can roughly assume that stablecoins here may be more stable than those in the United States.

The scale of stablecoins is expected to exceed one trillion US dollars soon

Q: Let me read a passage from Scott Bessant, who is the US Treasury Secretary. He said: "The development of the stablecoin ecosystem will drive private sector demand for US Treasury bonds that back stablecoins.

This new demand can reduce government borrowing costs and help control national debt. It can also enable millions of new users around the world to join the dollar-based digital asset economy."

Please tell us more about your views on the development of stablecoins pegged to the US dollar and the future of US Treasury bonds. What does this mean to you as an investor?

Hong Hao:I think, in theory, this does increase demand for U.S. Treasuries because now there are multiple players in the market that can issue stablecoins based on U.S. Treasuries.

Fundamentally, the velocity of money in the economy will increase; and the money multiplier is larger than before, so as liquidity in the system improves, the demand for safe assets will also rise.

So I think Scott Bessant's assumption is reasonable.

But the stablecoin market is still very small at $250 billion.

We expect it to be well over a trillion dollars soon as more and more players join.

I would say that this is a nascent source of demand for U.S. Treasuries, especially when the U.S. fiscal situation is so dire, it needs all this help from stablecoins.

Q: Because China is still very cautious when it comes to cryptocurrencies. So when stablecoins develop so rapidly, especially when it is pegged to the U.S. dollar, what does this mean for China? Considering the larger context of U.S.-China relations?

Hong Hao: I think China should use stablecoin technology.

Stablecoins beat everything else in terms of transaction speed and very low transaction costs, especially when it comes to cross-border transactions.

So I think, for China, now close to 50% of cross-border trade is settled in RMB.

Therefore, in order to allow foreign participants to buy and sell more with China, stablecoins are one of the better ways to solve the problem of cross-border transaction costs and speed.

Issuing stablecoins domestically is challenging the existing regulatory framework

Q: From the perspective of China or from the perspective of industry insiders, does it mean that there are more opportunities for free cross-border flow? Hong Hao: In a sense, it is a beneficial technology for China, in terms of trade costs, because it provides very low transaction costs, and very fast transaction speeds. I think the real challenge for China is that, generally speaking, capital accounts are still controlled, so if you want to exchange stablecoins for RMB, it is actually a bit tricky. Because RMB is not freely convertible at the moment. Secondly, I think that because the US dollar is still the dominant currency in the system, using stablecoins may mean that you bypass the SWIFT system and the US dollar payment system.

And China already has CIPS (Cross-Border Payment System), which is another way to make cross-border payments.

We have been developing CIPS for many years, and now, it is completely possible to do this with stablecoin technology.

For Chinese regulators, stablecoins also mean the decentralization of the payment system.

Allowing non-governmental actors to issue their own stablecoins may pose a challenge to the existing regulatory framework.

The real demand for U.S. Treasuries depends on the stability of U.S. finances

Q:By the way, due to the recent development of stablecoins, many stablecoins are pegged to the U.S. dollar and U.S. Treasuries. According to estimates by Bank of America, for every $1 of deposits transferred to stablecoins, $0.9 flows into U.S. Treasuries. So, what does this mean?

Hong Hao:Initially, this will help the demand for U.S. Treasuries because you are printing more money to buy U.S. Treasuries, so I think to some extent, this will push down U.S. Treasury yields and help the U.S. government's fiscal situation in this fiscal year.

But I think that in the future, the real demand for US Treasuries depends on whether the US government can finance its budget deficit and whether the US fiscal situation is healthy enough to attract buyers to buy its Treasuries.

So, whether you buy with stablecoins or with RMB, it ultimately depends on the fiscal stability of the US government.

The stablecoin craze has begun and will become a trend in the future

Q:But the fact is that most stablecoin issuers use the US dollar rather than the RMB as a backing, of course, given that the RMB is still not the most dominant currency, what does this mean? Will this bring a new trend and heat to the US dollar instead of following the rules and logic you have explained?

Hong Hao: Well, I think the U.S. dollar still accounts for 50% of the global reserve system, so it was an obvious choice to peg the stablecoin to the U.S. dollar at the beginning, and we were not too surprised, especially in the early stages of the development of stablecoins, right, the U.S. dollar is a very obvious choice.

But I think in the future, people can peg it to gold, Swiss francs, British pounds, and so on, and it really depends on the reserve status of the currency in the system.

But now 50% of the world's reserves, or even more than half, are still denominated in U.S. dollars.

Now, stablecoins have become a wave of craze. If you look at Hong Kong stocks, anything that has something to do with the concept of stablecoins has gone crazy, right?

The craze has already begun, but looking into the future, the status of stablecoin technology in daily life will become more and more prominent, which will be a trend.