What exactly are stablecoins and why are they sending big ripples through global capital markets?

Stablecoins, cryptocurrencies pegged to real-world assets like the US dollar, are poised to reshape technology and financial industries within the next decade, potentially altering the very landscape of global trade and geopolitics.

Hong Kong's recent passage of the Stablecoin Bill signals China's readiness to embrace this wave, solidifying its position as the world's second-largest economy in this evolving digital frontier.

Often referred to as the "cash of the digital world," stablecoins serve as a critical link between virtual and real-world assets, according to a report from Guosen Securities. Their emergence has already sent ripples through capital markets, introducing opportunities, changes and challenges for nearly all assets – from bitcoin and traditional currencies to gold and stock markets.

Their influence is set to extend across a long list of industries, including banking, payment platforms, tech giants and government regulators.

In the long term, a new era of authorized stablecoins, led by both China and the US, is dawning. Its impact could parallel that of current artificial-intelligence tools like ChatGPT and DeepSeek. Crucially, a reliable and sustainable stablecoin ecosystem will heavily depend on advanced AI algorithms and robust digital infrastructure.

What is a stablecoin?

In essence, a stablecoin is a type of virtual asset used as a medium of exchange for payments of goods or services, with its value tied to a government currency like the US dollar or Hong Kong dollar, or tied to commodities such as gold.

Notably, unlike cryptocurrencies such as Bitcoin, whose value is largely determined by market sentiment, stablecoins are specifically designed to maintain a stable value relative to their pegged asset. While stablecoins are often used as a currency for trading other cryptocurrencies in overseas markets, their distribution and trading remain banned on the Chinese mainland.

Hong Kong's new Stablecoin Bill, passed at the end of May, marks a significant shift in China's broader approach to digital assets.

While domestic investors in the mainland have been forbidden from accessing trading in cryptocurrencies since 2021, the Hong Kong bill aims to expand the cryptocurrency licensing regime, aligning with growing global trends towards digital-asset regulation.

The new legislation requires stablecoin issuers to obtain a license from the Hong Kong Monetary Authority and adhere to strict requirements, including proper management of asset reserves and segregation of client assets.

The authority said the bill will "foster financial stability and encourage financial innovation."

The first Hong Kong-pegged stablecoins are expected to be issued later this year.

Hong Kong has been conducting a sandbox experimentation in Hong Kong dollar-pegged stablecoins with several issuers since 2024. The US, EU, Singapore, the United Arab Emirates and Japan are also actively developing their own stablecoin regulatory frameworks.

In the US, where the Trump family's involvement in crypto activities is attracting a lot of attention, the Senate in May passed the Guiding and Establishing National Innovation for US Stablecoins Act, or Genius Act, that focuses on dollar-pegged stablecoins.

"Dollar-pegged stablecoins, particularly once Genius is enacted, are going to help the American economy and the American dollar," Vice President J.D. Vance told a Bitcoin conference in Las Vegas recently.

Opportunities and market dynamics

The push for government regulation stems from the surging demand for stablecoins, which now account for over two-thirds of all cryptocurrency trading. The stablecoin market has been growing exponentially, with its market value skyrocketing from US$20 billion in 2020 to US$246 billion in 2024, according to a report by Deutsche Bank.

Citibank forecasts that the stablecoin market could reach US$1.6-3.7 trillion by 2030.

Beyond their use in cryptocurrency trading, stablecoins are viewed as a crucial bridge between traditional finance and digital assets. They offer advantages in facilitating faster and cheaper transactions while reducing price volatility and associated risks. The new regulatory frameworks are expected to aid in developing efficient digital currency payment and settlement interfaces.

For cross-border payments, stablecoins enable transactions to be completed within seconds at minimal cost, offering a competitive alternative to the often lengthy and complex processes of the current banking system, especially for small-scale transactions. This presents an opportunity for payment platforms that could potentially benefit from commission fees and interest income from high volumes, even at lower rates compared with traditional banks.

Companies seizing the trend

Companies are already making moves in anticipation of this shift.

Boston-based Circle, one of the two major global stablecoin issuers, recently priced its initial public offering at a higher-than-expected US$31 per share, giving the company a market value of US$6.8 billion ahead of its New York Stock Exchange debut.

In Hong Kong, Lianlian DigiTech, a China-based cross-border payments company, saw its shares surge over 80 percent in intraday trading on Monday, the first trading day after passage of the city's stablecoin bill. The prospect of new stablecoin payment capabilities is expected to accelerate its international transaction business.

However, the shares subsequently dropped after investors surveyed the competition and realized that Lianlian might not be the sole beneficiary of the stablecoin wave.

Shares in Hong Kong-listed ZhongAn Online, an online finance and insurance firm backed by Alibaba and Ping An, jumped 46 percent last week, marking its best week on record. ZhongAn Online holds a 43 percent stake in ZA Bank, Hong Kong's first digital bank, which is expected to provide reserve-banking services for stablecoin issuers.

Online retail giant JD.com is reportedly testing stablecoins in retail payments and cross-border transactions. Other Chinese tech giants like Alibaba and Tencent are widely expected to issue their own stablecoins in the future.

Influence on asset and risk management

Concerns have been raised that stablecoins may potentially increase money supply and pose inflationary risks. However, Gui Haoming, chief analyst of Shenwan Hongyuan Securities, dismissed that idea.

Gui said stablecoins, particularly those to be issued in Hong Kong, are designed to be strictly pegged to real assets like the Hong Kong dollar or to commodities. He said he expects Hong Kong stablecoin issuers will primarily be well-established banks, major Internet companies and FinTech firms, which all have solid risk-management systems and comply with regulations.

The surging price of gold this year might be influenced, at least in part, by stablecoins. Gui said stablecoins are like an "authorized, more stable Bitcoin," but "you can't, and probably won't, buy a pizza" with them.

For stock markets like China's A-shares, stablecoins are expected to have limited direct impact because they are not seen as siphoning off capital.

Instead, they are predicted to create a new, long-term tradable sector, much like AI-related shares this year. While giants like Tencent and JD might not see immediate stock boosts due to their immense market sizes and diverse businesses, smaller firms offering technologies, services and platforms for the new Hong Kong stablecoin system might well benefit significantly.

A clear regulatory framework is crucial to mitigating potential risks, including threats to monetary and financial stability, money laundering and illegal asset transfers. Fortunately, both the mainland and Hong Kong possess the experience and capabilities to ensure that.

There appears to be little possibility of a repeat of the TerraUSD crisis in China.

In May 2022, the Terra blockchain was temporarily halted following the catastrophic collapse of the algorithmic stablecoin TerraUSD and its sister cryptocurrency Luna, which plummeted to nearly zero in value. The event severely impacted the wider crypto market, wiping out approximately US$45 billion in market capitalization within a week and contributing to total losses estimated at up to US$500 billion.

The company filed for bankruptcy in 2024. After that, Circle and bigger rival Tether dominate global stablecoin markets.