Stablecoins gain traction in Asia: But challenges remain

At the Singapore Fintech Festival in November, one big piece of news caught people's attention: Singapore decided to issue licenses to stablecoin issuers Paxos Digital Singapore Pte and StraitsX . This move marks the Singapore government's cautious recognition of stablecoins, a less volatile cryptocurrency. Stablecoins are usually pegged to fiat currencies at a 1:1 ratio and 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 “substantially align” with the regulator’s upcoming stablecoin regulatory framework.

At the same time, he made it clear that Singapore will continue to be cautious about cryptocurrencies. Digital assets such as Bitcoin "have performed poorly as a medium of exchange or store of value, their prices have been subject to wild speculative fluctuations, and many cryptocurrency investors have suffered significant losses," Menon said.

Stablecoins in Singapore

Singapore has been frequently reported in the media in recent years as a "crypto hub" or similar descriptions, but the reality is more nuanced. As Menon stressed at the recent Fintech Festival, cryptocurrencies are still fraught with risk. In the industry's worst hacks and scandals, such as the FTX crash, it is the average retail investor who suffers the most. Even if institutional investors suffer heavy losses, they can withstand the blow better than retail investors, who could lose their life savings in the worst case scenario.

With this in mind, Singapore appears to be betting that stablecoins have staying power and will play an increasingly important role in future financial services. The decision to regulate stablecoins is consistent with Singapore’s interest in developing itself as a digital asset hub for institutional investors — according to a recent report from cryptocurrency exchange Bybit , stablecoins account for a whopping 45% of institutional investors’ cryptocurrency portfolios, outpacing other crypto categories.

This also gives Singapore an advantage over Hong Kong, which is going all-in on 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 digital medium of exchange, thereby building a bridge between the fiat and digital asset ecosystems. To do this, MAS will require that the reserves to which the stablecoins are pegged must hold low-risk, highly liquid assets whose value must always equal or exceed the value of the stablecoins in circulation. This stablecoin regulatory framework will apply to single-currency stablecoins (SCS), which are pegged to the Singapore dollar or any G10 currency issued in Singapore.

Meanwhile, other types of stablecoins — SCSs issued outside Singapore or pegged to other currencies or assets — 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 bringing other types of tokens under the SCS framework,” MAS said in its consultation paper.

Japanese approach

Apart from Singapore, Japan is by far the most interested country in Asia in stablecoins. However, unlike the centralized strategy led by MAS, in Japan, financial institutions are experimenting with stablecoins spontaneously and in an organized manner, while regulators and lawmakers are also working to promote the use of stablecoins in the Japanese financial system.

For example, in March, three Japanese banks said they would experiment with asset-backed stablecoins using a system developed by Web3 infrastructure company GU Technologies. Experiments in proof-of-concept projects led by Tokyo Kiraboshi Financial Group, Minna no Bank, and The Shikoku Bank are being conducted on Japan Open Chain, a public blockchain compatible with Ethereum and compliant with Japanese law. In addition, in March, large Japanese bank Mitsubishi UFJ Financial Group began working with blockchain companies Datachain , Progmat Coin, and Soramitsu on an internal project aimed at launching a stablecoin interoperability pilot.

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

While some payment services companies, notably Circle , have expressed interest in issuing stablecoins in Japan, no company has yet ventured into the space in the country. Whether these companies can meet regulatory requirements remains to be seen.

Resistance still exists

Contrary 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 in trade and investment flows in the Asia-Pacific region, it will be difficult for them to gain a foothold. Circle CEO Jeremy Allaire seems to be well aware of the impact and consequences of China’s ban on stablecoins - which may explain why he raised the possibility of a renminbi-backed stablecoin to the South China Morning Post in July. He said: “If the Chinese government wants to see the renminbi used more freely in global trade and commerce, stablecoins may be a better way to achieve this goal than central bank digital currencies.”

While Allaire’s candor is commendable, the likelihood that the Chinese government will relinquish control of the digital yuan and move toward a cryptocurrency to promote the internationalization of the yuan is highly unlikely. China still wants to see its currency more widely used in the international financial system, but it has quietly shelved ambitious unofficial goals set in the early 2010s amid greater concerns about 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 subject states that stablecoins based on arbitrage or algorithmically determined value 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 the process of establishing Hong Kong’s stablecoin regulatory regime is long and strict, the likelihood of digital asset liberalization in mainland China will be reduced accordingly.

Finally, in keeping with its skeptical stance towards digital assets, the Reserve Bank of India ( RBI ) has so far taken a negative stance towards 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,” said T Rabi Sankar, deputy governor of the Reserve Bank of India, in July. “If large stablecoins are pegged to some other currency, there is a risk of dollarization.”

He added that rather than focusing on stablecoin payments, it would be better for countries to have their own CBDCs and then “create a mechanism that allows CBDCs from various countries to be connected and traded with each other.”

If forced to choose between CBDC and stablecoins, we expect most central banks to choose the former. However, it remains to be seen whether other regions have enough space to accommodate both, as has been the case in Singapore and Japan.