A PUSH in Hong Kong to roll out rules for stablecoins as soon as this quarter has drawn interest from companies including the international arm of major Chinese asset manager Harvest Fund Management, sources familiar with the matter said.

Harvest Global Investments, fintech specialist RD Technologies and crypto exchange-traded fund aspirant Venture Smart Financial Holdings are in discussions with the Hong Kong Monetary Authority (HKMA) about planned stablecoin trials known as regulatory sandboxes, the sources said, asking not to be identified as the talks are private.

The HKMA and the Financial Services and the Treasury Bureau last month began a consultation on stablecoin rules and said the sandbox will help convey supervisory expectations. There’s no guarantee the upcoming framework will be finalised by the end of March or that all those seeking to participate in the trials will get the green light, the sources said.

Stablecoins are typically pegged 1-1 to fiat currencies and backed by reserves of cash and bonds. They make up US$136 billion of the US$1.7 trillion digital asset market. The blockchain-based tokens facilitate crypto trading and lending but some commentators argue they have the potential for wider use in payments.

Chequered history

Stablecoins have a history of chaotic crashes and de-pegs, while some tokens have been criticised for opacity about reserves. As a result, jurisdictions such as the European Union, Japan, Singapore, Hong Kong and Dubai have stepped up efforts to regulate the sector as they jostle to become digital asset hubs.

An HKMA spokesperson said the agency is preparing for the start of the stablecoin sandbox and will announce details in due course. Hong Kong-based Harvest Global Investments did not reply to a request for comment.

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Venture Smart Financial – or VSFG – said it expects the sandbox to begin in the first quarter. RD Technologies chief operating officer Rita Liu said the company plans to take part pending regulatory approval and is seeking to launch the HKDR stablecoin for uses such as cross-border payments between businesses.

‘Powerful alternative’

A Hong Kong-dollar referenced token can be a “powerful alternative” to US dollar-linked rivals given that the city has a well-developed financial sector, said Sean Lee, senior adviser and head of stablecoin at VSFG.

The stablecoin market is currently dominated by dollar-linked tokens USDT and USDC from Tether Holdings and Circle Internet Financial respectively. The sector is notorious for the 2022 collapse of a stablecoin variant, TerraUSD, that wiped out at least US$40 billion, exacerbated a crypto rout and contributed to the downfall of the FTX digital-asset exchange.

Hong Kong’s eight-month-old virtual-asset rulebook aims to protect investors from such risks while encouraging innovation, leading to questions about whether compliance costs could be an obstacle for some businesses. BLOOMBERG