Is it feasible for Yiwu foreign trade merchants to use stablecoins on a large scale and in compliance?

In recent months, stablecoins have absolutely become the rising star in the financial and crypto world! The United States and Hong Kong have successively passed legislation supporting stablecoins, while internet giants and established financial institutions have jumped into the fray, either hoarding coins or applying for licenses, as if spring has suddenly arrived overnight, with thousands of pear trees in bloom. In contrast, the situation in mainland China appears to show no signs of policy easing, giving off a strong sense of sitting tight and fishing. Among this, a piece of news about the large-scale use of stablecoins in Yiwu has spread widely online, with the main sources of information being two: Huatai Securities research report shows that stablecoins have become an important tool for cross-border payments in Yiwu, and blockchain analysis company Chainalysis estimates that the on-chain stablecoin flow in the Yiwu market will exceed $10 billion in 2023.

Interestingly, when reporters conducted field visits and surveys, most merchants stated that they had never heard of stablecoins and were not familiar with them. A few merchants expressed doubts about the compliance and costs of stablecoins, while only a very small number of merchants explicitly stated that they had used stablecoins for payments. The situation was somewhat reminiscent of the elderly man downstairs responding to Charlotte with "What horse is Mei?" "What horse is Dong?" "What is Dongmei?" in a mystical way. What is the real situation? Let's dig into the two sources of this information.

Huatai Securities Research Report

According to publicly available information, the author could not find any media that provided the specific name and source of the research report from Huatai Securities. However, with the help of friends, the author found a macro securities research report published by Huatai Securities on June 25, titled "How Will Stablecoins Impact the Global Monetary System?" In this 31-page report, Huatai Securities systematically elaborates on the development prospects and risks of stablecoins globally through 8 chapters. On page 8 of the report, there is a statement regarding the use scenarios of stablecoins:

"In addition to being used directly for trading crypto assets, stablecoins are rapidly developing in terms of their share in global trade of goods and services, serving as a means of value storage, and the penetration rate of residents holding them. Specifically, in Yiwu, the world’s small commodity center in China, stablecoins have become an important tool for cross-border payments. Blockchain analytics company Chainalysis estimates that in 2023, the on-chain stablecoin flow in the Yiwu market exceeded 10 billion USD."

However, unlike other viewpoints in the report that are supported by data charts, this viewpoint is not accompanied by data support.

Overall, the readability of the report is quite high. Here are some points selected by the author:

1. Countries represented by the United States (U.S. dollar hegemony), the European Union (single market), and China (potential market), which have a large money supply and a stronger legislative push, have a huge market scale for stablecoins; countries represented by South Korea, which have a developed digital and virtual economy, and countries represented by Singapore, which have a high degree of openness and strong foreign dependence, will have a high penetration rate of stablecoins; countries represented by emerging market economies such as Turkey, Argentina, and Nigeria, which have low currency stability, underdeveloped banking systems, a large proportion of underground economies, and capital flow restrictions or even sanctions, will also have a high penetration rate of stablecoins.

2. In response to the challenges brought by the development of stablecoins, major economies typically adopt two approaches: issuing digital currencies or strengthening regulation of stablecoins. For mainland China, research on digital currency was initiated as early as 2014, and a pilot program was launched in 2019. With the rapid development of stablecoins, especially the stablecoin legislation in Hong Kong that is set to take effect this August, it could signify China's shift to a "dual-track" development path. The remarks made by the central bank's top official at the Lujiazui Forum on June 18 this year also clearly indicated that emerging technologies such as Blockchain and distributed ledgers are driving the vigorous development of central bank digital technology and stablecoins, reflecting a significant increase in the importance the People's Bank of China places on stablecoins.

3. The legislative framework for stablecoins in Hong Kong is expected to accelerate the development of the HKD, offshore RMB, and even RMB stablecoins, providing further impetus for the appreciation of the RMB. Expanding the "funding pool" for HKD and offshore RMB, enriching the high liquidity assets available for investment such as interest rate bonds, vigorously developing cross-border business, digital economy, virtual economy, and increasing the use cases for stablecoins are key measures for the success of Hong Kong's stablecoins, which will also reactivate the process of RMB internationalization.

4. Stablecoins pose challenges to cross-border financial regulation and face certain degrees of redemption risk. When the value of reserve assets fluctuates, the credit of the issuer is challenged, or even in the case of the issuer's bankruptcy, fiat stablecoins may also experience a de-pegging of value. As the scale of stablecoins expands and their impact on the traditional financial system deepens, it may ultimately require accepting more stringent regulation, or even partial nationalization, in exchange for true stability.

Chainalysis data analysis

Unfortunately, through searching both domestic and international networks, I did not find any relevant statements or data support regarding Yiwu merchants using stablecoins in the "Cryptocurrency Geographical Reports" published by Chainalysis for 2023 and 2024.

The author has also selected some data and viewpoints about Mainland China and Hong Kong from the two reports by Chainalysis:

1. For a long time, the value of crypto assets held by Hong Kong users has accounted for over 40% in stablecoins. With the legislation on stablecoins in Hong Kong set to take effect this August, it is expected that this proportion will further increase.

Figure 1 The proportion of stablecoins in the crypto assets received in Hong Kong is high - Chainalysis

2. Data shows that Chinese users utilize crypto assets to achieve wealth preservation and appreciation.

Figure 2 Comparison of the Shanghai Composite Index and OTC Inflow from January 2023 to June 2024 - Chainalysis

In the author's view, there may be a lack of accurate data verification regarding whether stablecoins are used on a large scale in Yiwu, but the combination of foreign trade and stablecoins indeed has natural advantages. The characteristics of stablecoin payments, such as instant arrival, stable value, and low fees, address many business pain points for numerous small and medium-sized foreign trade merchants.

On the other hand, considering the regulatory policies regarding stablecoins and other crypto assets in mainland China, foreign trade merchants in the mainland may face serious compliance issues if they directly use stablecoins during transactions, and there may even be potential criminal risks.

Moreover, considering that the implementation of our country's current export tax rebate policy often requires the provision of the bank's foreign exchange settlement slip, using stablecoins means that this certificate cannot be provided, thus making it impossible to enjoy the export tax rebate, which is fatal for the merchants' profits. On the other hand, the exhibition qualifications for trade fairs such as the Canton Fair usually regard the bank transaction records of export enterprises as an important reference standard, and the loan review standards of commercial banks also pay attention to the bank transaction records of export enterprises. These factors determine that, for now, the usage scale of stablecoins among Yiwu exporters will not be very large.

So, as a foreign trade merchant in mainland China, how can one compliantly utilize stablecoins to reduce costs and increase efficiency? Currently, a relatively compliant way is to connect a Hong Kong company with a mainland company, utilizing Hong Kong's trade facilitation and open policies towards crypto assets to achieve a compliant integration of traditional foreign trade and crypto payments.

Hong Kong Dollar stablecoin and feasible compliant use of stablecoin foreign trade models

On August 1, the Hong Kong "Stablecoin Regulation" will officially take effect, and the Hong Kong government will also begin processing license applications for issuing stablecoins in Hong Kong. This means that stablecoins officially recognized by the Hong Kong authorities will be launched, and Hong Kong dollar stablecoins will be regarded as a legal means of payment. The exchange between Hong Kong dollar stablecoins and fiat currency will also become more convenient and compliant.

1. The hard requirement that the Hong Kong dollar stablecoin is 100% redeemable.

Hong Kong's "Stablecoin Regulation" stipulates that issuers of stablecoins must ensure that the stablecoins they issue are backed by sufficient reserve assets, ensuring that the market value of the reserve assets is not less than the face value of the issued and circulating stablecoins.

The issuer of stablecoins must ensure that holders of stablecoins have the right to redeem them, and shall not obstruct or restrict the redemption of stablecoins. No fees other than reasonable transaction fees may be charged during the redemption of stablecoins.

2. Hong Kong dollar stablecoin meets compliance requirements for anti-money laundering, anti-terrorist financing, and other regulations.

The Hong Kong "Stablecoin Ordinance" stipulates that issuers of HKD stablecoins must adhere to strict anti-money laundering and counter-terrorism financing requirements.

In a consultation document released by the Hong Kong Monetary Authority on May 26, the authority outlined the relevant anti-money laundering and anti-terrorist financing requirements, with the core requirements including:

• Customer due diligence. Customers who make purchases or redemptions at or above the benchmark of 8000 HKD are required to undergo due diligence, including verifying the ownership of the wallet.
• Strict regulation of non-custodial wallets. Implement strict monitoring and transaction limits on the transactions of non-custodial wallets to reduce the risk of wallets being exploited by criminals;
• Continuous monitoring. Use Blockchain analysis to track transaction history and detect illegal activities, reporting suspicious transaction activities;
• Conduct due diligence on custodial wallet providers;
• Blacklist illegal wallet addresses.

3. Key Points for Mainland Foreign Trade Merchants to Comply with the Use of HKD Stablecoins

Considering the current policy differences regarding stablecoins between the mainland and Hong Kong, the author believes that mainland foreign trade merchants can avoid most compliance risks when utilizing HKD stablecoins by grasping the following three key points:

• Use Hong Kong or other offshore company entities to receive and pay stablecoins;
• The compliant exchange of stablecoins and fiat currency is completed in Hong Kong;
• Compliant currency conversion back to the mainland parent company;