News Analysis
The push by Hong Kong’s Legislative Council to authorize a diverse range of fiat-referenced stablecoins is raising concerns about the stability of its long-standing Linked Exchange Rate System (LERS) pegged to the U.S. dollar.
Fiat-referenced stablecoins are a type of cryptocurrency designed to maintain a consistent value by being pegged to a government-issued currency. The potential introduction of Chinese yuan-backed stablecoins, in particular, is drawing scrutiny due to the risks they may pose to Hong Kong’s financial stability and the acceleration of capital outflows.
This year, both Hong Kong and the United States have made strides in developing regulatory frameworks for stablecoins. Unlike the United States, which focuses primarily on U.S. dollar-denominated “payment stablecoins,” Hong Kong’s stablecoin ordinance, passed in May and going into effect on August 1, allows stablecoins pegged to multiple fiat currencies. This broader approach could create uncertainty about the stability of Hong Kong’s currency peg.
Risk of Stablecoins in Hong Kong
Since 1983, the LERS has anchored the Hong Kong dollar to the U.S. dollar within a tight 7.75–7.85 band, underpinning investor confidence and cementing Hong Kong’s status as a global financial hub. However, the introduction of stablecoins—particularly those linked to the Chinese yuan (RMB)—could usher in a dual-currency system. In this scenario, digital versions of the Hong Kong dollar, U.S. dollar, and RMB could circulate interchangeably, potentially eroding the Hong Kong dollar’s dominance in local transactions and cross-border capital flows, and challenging the LERS’s stability.
The Hong Kong Monetary Authority (HKMA) has previously flagged stablecoins as a risk to capital flight in a report in 2022. The report warned that in a financial crisis, capital could rapidly shift into stablecoins, weakening the Hong Kong dollar’s role as the unit of account and fueling outflows. The Bank for International Settlements (BIS) echoed similar concerns in its latest annual report published in June, cautioning that widespread stablecoin adoption could undermine monetary sovereignty and amplify capital flight risks.
Assuming a dual-track system involving the yuan stablecoins, the Hong Kong dollar, and the U.S. dollar takes shape, the main threat to Hong Kong’s LERS may shift from geopolitical pressures to the risk of large-scale capital flight.
HKMA Chief Executive Eddie Yue has reaffirmed the importance of LERS, stating in January 2025 that there is “no intention” and “no need” to alter it.
Relying on the stable LERS, Hong Kong is positioning itself as a hub for digital asset innovation. The ordinance could push forward yuan-backed stablecoins to circulate in the global market.
Christopher Hui, Hong Kong’s Secretary for Financial Services and the Treasury, said at the 2025 Lujiazui Forum in June that the possibility of yuan-pegged stablecoins cannot be ruled out, signaling the policy could allow seamless exchange with the Hong Kong dollar and yuan, by extension, the U.S. dollar under LERS.
However, Hong Kong’s open markets make it vulnerable to capital outflows, a concern amplified by a 2024 Wall Street Journal report estimating $254 billion in illicit capital flows from China due to economic instability and tight controls. Yuan-linked stablecoins could exacerbate this, offering a frictionless channel for moving funds offshore, particularly if investor confidence in the Hong Kong dollar wanes amid geopolitical tensions or a sluggish Chinese property market.
The BIS report warns that stablecoins could trigger “loss of monetary sovereignty and capital flight,” as well as pose financial stability risks, particularly threatening emerging markets.
One of the main uses of stablecoins, according to legislative documents, is payments. Pan Gongsheng, governor of the People’s Bank of China, said at the Lujiazui Forum that stablecoins have cross-border payment potential. He emphasized that both stablecoins and the digital yuan could enhance cross-border payment systems, improve efficiency, and reduce reliance on traditional infrastructures like the SWIFT financial communication platform.
Stablecoin payments differ from traditional yuan-based transactions. Since 2009, Hong Kong has promoted offshore yuan business, enabling the currency’s use in investment, banking settlements, and even retail payments. An initiative called the Faster Payment System has supported yuan transactions since 2018, allowing residents to send and receive yuan in real time and make payments to merchants. Nonetheless, this system still operates through banks and treats the yuan as a foreign currency, with the Hong Kong dollar remaining the sole legal tender.
In fact, in its 2022 report, the HKMA indicated that stablecoins add risks of “accelerating the flight to these stablecoins during any financial crisis period, thereby undermining the control of central banks over local monetary conditions.” The report also warned that widespread adoption of stablecoins with better payment and remittance features could undermine the role of local currency as the unit of account.
The regulations do not explicitly specify whether stablecoin transactions are peer-to-peer (P2P) or on-chain transfers.
In contrast, the USDC stablecoin is inherently a P2P function and does not go through traditional bank settlement channels. In international practice, USDC can already be used for payments on platforms like Shopify and Stripe.
Stablecoin Push: US versus Hong Kong
In the United States, stablecoin adoption is gaining momentum. In June 2025, the U.S. Senate approved the GENIUS Act, which would bring payment-type stablecoin issuers under bank-like regulatory standards and establish a federal oversight framework. The bill has yet to be fully enacted. Meanwhile, a similar proposal—the STABLE Act—is under review in the House of Representatives. Both bills call for stricter regulatory requirements for issuers, including federal supervision, FDIC insurance, and mandated reserve holdings.
The IMF’s Q2 2025 Digital Currency Monitor reports that the growth of U.S. stablecoins has increased demand for the U.S. dollar in international payments, especially in cross-border remittances and digital commerce. The report also notes that stablecoin issuers must hold large amounts of U.S. treasuries as reserve assets. For example, Tether, which maintains a 1:1 U.S. dollar peg, held over $98.5 billion in U.S. treasuries as of Q1 2025, about 1.6 percent of total U.S. bonds.
Despite this trend, data from the IMF show the U.S. dollar’s share of global foreign exchange reserves has declined—from 65.4 percent in 2016 to 57.8 percent in 2024. Nevertheless, according to a JPMorgan report cited by Reuters, stablecoin issuers could emerge as the third-largest buyers of U.S. treasury bills in the coming years, potentially reshaping demand dynamics in sovereign debt markets.
The U.S. market holds a positive attitude toward government stablecoin legislation. According to CNN, JPMorgan recently filed a second trademark application for “JPMD,” signaling its intent to expand into the stablecoin space. Other major global banks, including Santander and Deutsche Bank, are also actively exploring stablecoin solutions. Meanwhile, Coinbase, a major U.S.-based cryptocurrency exchange and financial technology company, has launched Coinbase Payments, a stablecoin-based payment service that now supports USDC on Shopify. Following the Senate’s approval of the GENIUS Act, Coinbase shares surged by approximately 16 percent.
Compared to U.S. legislation, which aims to increase purchasing power for U.S. Treasuries, Hong Kong’s newly passed Stablecoin Ordinance has sparked market turbulence. According to Bloomberg, on June 25, the Hong Kong dollar hit the weak-side limit of 7.85 against the U.S. dollar under the LERS. The HKMA intervened in the market for the second time in a month, absorbing U.S. dollar sell orders to defend the currency peg, underscoring the challenges of integrating stablecoins into the region’s financial framework.
The HKMA held a cautious attitude to licensing stablecoin issuers. Citing the risks associated with stablecoin issuance, the authority said that only a limited number of licenses are expected to be granted in the initial phase. Hong Kong’s regulatory framework for virtual asset trading platforms has been in effect since June 1, 2023.
Hong Kong’s Securities and Futures Commission’s website shows that only 11 platforms have been officially licensed to date. Major platforms such as Binance and Coinbase have not applied for licenses, and investment enthusiasm remains subdued.
Meanwhile, a report from BBVA Research in January 2024 raised questions about the long-term viability of the Hong Kong-U.S. peg, particularly in the context of a potential second Trump administration. The report pointed to Hong Kong’s growing geopolitical tensions, as over half of its trade is linked to mainland China. Additionally, as more transactions and capital flows use the yuan, the U.S. dollar peg may no longer accurately reflect Hong Kong’s economic reality.
“Although we deem the change of currency peg is not realistic in the short term,” the report read, “this duality creates uncertainty about the long-term viability of the [U.S. dollar] peg, especially as geopolitical tensions between the U.S. and China escalate.”
“The growing prominence of RMB business in Hong Kong is prompting some to question whether a strategic shift is inevitable in the future,” it stated.
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