Stablecoins are "recognized" in Asia, but resistance remains

Source: Forbes

Compilation: BitpushNews Yanan

At the Singapore Fintech Festival in November, the big news caught the eye: Singapore’s decision to license stablecoin issuers Paxos Digital Singapore Pte and StraitsX. The move marks the Singapore government’s cautious endorsement of stablecoins, a less volatile cryptocurrency. Stablecoins are typically pegged to fiat currencies at a 1-to-1 ratio and are backed by assets such as cash and bonds as reserves.

Outgoing Monetary Authority of Singapore (MAS) CEO Ravi Menon said at the Singapore FinTech Festival that stablecoins could play a “useful role” in “digital currencies”, adding that Paxos Digital and StraitsX are “substantially compliant” with the regulator’s upcoming regulatory framework for stablecoins.

At the same time, he made it clear that Singapore will continue to be cautious about cryptocurrencies. BTC and other digital assets “have performed poorly as a medium of exchange or store of value, and their prices have been subject to speculative wildness, with many cryptocurrency investors incurring significant losses,” Menon said.

Stablecoin in Singapore

In recent years, Singapore has often been reported by the media as a “crypto hub” or with similar descriptions, but the reality is more nuanced. As Menon highlighted at a recent fintech festival, cryptocurrencies are still fraught with risks. In the worst hacks and scandals in the industry, such as the FTX crash, it was the average retail investor who lost the most. Even if institutional investors lose a lot, they are better able to withstand the blow than retail investors, who can lose their life savings in the worst-case scenario.

In light of this, Singapore appears to be betting on the enduring viability of stablecoins and will play an increasingly important role in financial services in the future. The decision to regulate stablecoins is in line with Singapore’s interest in planning to develop itself as a digital asset hub for institutional investors, with stablecoins accounting for a whopping 45% share of institutional investors’ crypto portfolios, outpacing other crypto categories, according to a recent report from crypto exchange Bybit.

This also gives Singapore an edge in competition with Hong Kong, which is fully committed to cryptocurrency development but has yet to introduce any regulatory framework for stablecoins.

Through its regulatory framework, MAS aims to legitimize fiat-backed stablecoins as a reliable medium of digital exchange, thereby building a bridge between fiat and digital asset ecosystems. To this end, MAS will require that the reserves pegged to the stablecoin must hold low-risk, highly liquid assets whose value must always be equal to or exceed the value of the stablecoin in circulation. This regulatory framework for stablecoins will apply to single-currency stablecoins (SCS), which are pegged to the Singapore dollar or any G10 currency issued in Singapore.

At the same time, other types of stablecoins – SCSs that are issued or pegged to other currencies or assets outside of Singapore – will continue to be subject to the existing regulatory regime for digital payment tokens (DPTs). “MAS will continue to monitor developments in the stablecoin space and consider incorporating other types of tokens into the SCS framework,” MAS said in its consultation paper. ”

Japanese method

Aside from Singapore, Japan is by far the most interested country in Asia in stablecoins. However, unlike the MAS-led centralized strategy, in Japan, financial institutions are experimenting with stablecoins spontaneously and organically, while regulators and legislators are working to promote the adoption of stablecoins in the Japanese financial system.

In March, for example, three Japanese banks said they would try asset-backed stablecoins using a system developed by Web3 infrastructure company GU Technologies. Proof-of-concept experiments led by Tokyo Kiraboshi Financial Group, Minna no Bank and The Shikoku Bank are underway on the Japan Open Chain, a public blockchain that is compatible with ETH and complies with Japanese law. In addition, in March this year, Mitsubishi UFJ Financial Group, a major Japanese bank, began a collaboration with blockchain companies Datachain, Progmat Coin, and Soramitsu on an in-group project aimed at launching a stablecoin interoperability pilot.

In June, Japan’s revised Payment Services Law came into effect, making Japan one of the first countries to develop a framework for the use of stablecoins overseas. The law authorizes banks, trust companies, and fund transfer operators to issue stablecoins. Stablecoins must be pegged to the Japanese yen or other fiat currency and guarantee that holders have the right to redeem at face value. This legislation appears to be aimed at preventing possible risks, such as issuers lacking real assets to support stablecoins, and assets being involved in opaque shady investments.

While some payment service companies, notably Circle, have expressed interest in issuing stablecoins in Japan, no company has yet ventured into the space in Japan. It remains to be seen whether these companies will be able to meet the regulatory requirements.

Resistance remains

In contrast to Singapore and Japan, Asia’s two most populous countries remain skeptical of stablecoins. This trend is significant given the economic importance of China and India. If stablecoins are effectively banned by China and India in trade and investment flows in the Asia-Pacific region, it will be difficult for them to gain a foothold. Jeremy Allaire, CEO of Circle, seems to be well aware of the implications and consequences of China’s ban on stablecoins – which may explain why he raised the possibility of a renminbi backing stablecoin to the South China Morning Post in July. “If the Chinese government wants to see the renminbi used more freely in global trade and commerce, stablecoins may be a better way to do that than a central bank digital currency,” he said. ”

While Allaire’s candid remarks are commendable, it is highly unlikely that the Chinese government will abandon control of the digital yuan and switch to a cryptocurrency to internationalize the yuan. China still wants to see its currency used more widely in the international financial system, but it has quietly shelved ambitious unofficial targets set in the early 2010s due to a greater focus on high capital outflows and associated systemic financial risks.

Nonetheless, Hong Kong is reportedly planning to introduce a stablecoin regulatory regime in 2024. A discussion paper on the topic says that stablecoins based on arbitrage or algorithmic value determination will not be accepted, which could lead to the exclusion of algorithmic stablecoins such as UST.

The evolution of Hong Kong’s regulatory regime is worth watching, as it may provide some clues as to how the Chinese government views stablecoins. If Hong Kong’s stablecoin regulatory regime is long and stringent, it will be less likely that mainland China will liberalize digital assets.

Finally, in keeping with its skepticism about digital assets, the Reserve Bank of India (RBI) has so far also taken a negative stance on stablecoins – arguing that they infringe on its monetary policy sovereignty. “We have to be very cautious about the use of stablecoins. From the past experience of other countries, this is an existential threat to policy sovereignty,” RBI Deputy Governor T Rabi Sankar said in July, adding, “There is a risk of dollarization if large stablecoins are pegged to some other currencies.” ”

He added that instead of focusing on stablecoin payments, it would be better for countries to have their own CBDCs and then “create a mechanism that will enable national CBDCs to dock and trade with each other”.

If you have to choose between CBDCs and stablecoins, we expect most central banks to choose the former. However, it remains to be seen whether there will be enough space in other regions to accommodate both, as is the case in Singapore and Japan.