Four Key Questions About Stablecoins: How to Mitigate Native Risks and Where Do They Add Value?

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Stablecoins have surged into the global financial spotlight in recent months, driven by regulatory milestones, institutional interest, and evolving digital finance infrastructure. From Hong Kong’s groundbreaking Stablecoin Ordinance to Circle’s upcoming NYSE IPO, the stablecoin ecosystem is undergoing a transformation — one that blends innovation with increasing oversight.

But as excitement builds, so do questions: What exactly are stablecoins? How can they escape the volatile shadows of the crypto industry? In which sectors can they create real impact? And critically, can users from mainland China participate?

This article explores these four pivotal questions, offering clarity on stablecoin fundamentals, risk mitigation strategies, practical applications, and cross-border accessibility — all within the context of 2025’s evolving regulatory and technological landscape.

What Are Stablecoins?

At their core, stablecoins are blockchain-based digital assets designed to maintain a stable value by being pegged to traditional fiat currencies like the US dollar or Hong Kong dollar. Examples include USDT (Tether) and HKDR (Hong Kong Dollar Reminbi Stablecoin). Unlike volatile cryptocurrencies such as Bitcoin or Ethereum, stablecoins aim to provide price stability, making them ideal for payments, settlements, and cross-border transactions.

The Hong Kong Special Administrative Region officially enacted its Stablecoin Ordinance on May 30, marking the world’s first comprehensive regulatory framework for fiat-referenced stablecoins. According to the ordinance, a stablecoin is defined as a digital asset intended for public use as a medium of exchange — usable for purchasing goods and services, settling debts, or investment — and transferable electronically.

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This formal recognition elevates stablecoins beyond speculative assets, positioning them as critical components of the emerging digital financial infrastructure. Originally conceived to simplify cryptocurrency trading by reducing exposure to volatility, stablecoins now serve as a "bridge" between traditional finance and the decentralized web — Web3, NFTs, and the metaverse.

However, early stablecoins operated in regulatory gray zones. Episodes of de-pegging, liquidity crunches, and reserve opacity revealed systemic vulnerabilities. As these risks emerged, regulators worldwide began stepping in — not to stifle innovation, but to ensure financial integrity.

As Yu Jianing, co-chair of the Blockchain Committee at the China Communications Industry Association, notes: "Hong Kong treats stablecoins not just as payment tools, but as foundational financial infrastructure. Their programmable nature allows built-in risk controls, aligning with anti-money laundering (AML) and financial security frameworks."

How Can Stablecoins Overcome Native Crypto Risks?

Despite growing legitimacy, stablecoins still carry inherited risks from the broader crypto ecosystem — including volatility triggers, opacity in reserves, and potential misuse in illicit activities. The key to long-term sustainability lies in robust design and proactive regulation.

Hong Kong’s Stablecoin Ordinance introduces a pioneering value-backed regulatory model, requiring any entity issuing fiat-pegged stablecoins in Hong Kong — or referencing the HKD abroad — to obtain a license from the Financial Secretary. Key requirements include:

These measures directly address common failure points seen in past stablecoin collapses, such as insufficient or illiquid reserves.

Yu Jianing emphasizes three essential "firewalls" for risk mitigation:

  1. Asset Backing Integrity: Issuers must maintain transparent, audited reserves to prevent shadow banking behaviors.
  2. Transaction Traceability: All transactions should be on-chain traceable, freeze-capable, and reversible when necessary — crucial for combating money laundering.
  3. Structural Isolation: Stablecoins must not be used as funding vehicles for leveraged trading, anonymous transfers, or illegal arbitrage.

Legal expert Liu Honglin, founder of Shanghai Manqin Law Firm, adds: "True stability comes from more than just pegging to a currency. It requires operational transparency, strong governance, technical resilience, and regulatory compliance. Without these, even well-capitalized projects risk becoming short-term hype vehicles."

Market reactions underscore this point. In early June, so-called “stablecoin概念股” (concept stocks) saw dramatic swings — some surging over 80% before crashing. Companies like YeePay experienced sharp volatility despite limited direct involvement in stablecoin issuance.

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Experts agree: much of this movement reflects regulatory-themed speculation, not fundamental value shifts. Investors responding to policy announcements without understanding implementation timelines or business models risk falling into a bubble.

Where Are Stablecoins Making an Impact?

While speculation swirls around equities, real-world utility is quietly expanding. Several institutions are already testing use cases under Hong Kong’s regulatory sandbox — including JD ChainTech, Standard Chartered Bank, Circle, and HK Telecom.

According to Liu Peng, CEO of JD ChainTech, their stablecoin project is currently in Phase 2 of sandbox testing. Initial versions will be pegged to the HKD and USD, with pilot applications in:

In cross-border trade, stablecoins offer clear advantages: payment equals settlement, eliminating multi-day clearing cycles. When paired with low transaction costs and protection against FX volatility, they become powerful tools for international commerce.

A report cited by Dongwu Securities shows that global stablecoin transfer volume exceeded $27.6 trillion in 2024 — surpassing combined annual transaction volumes of Visa and Mastercard.

Beyond payments, stablecoins are enabling new financial architectures:

Yu Jianing believes that if stablecoins achieve network effects in cross-border clearing, digital asset trading, and enterprise payments, Hong Kong could solidify its role as a global digital finance hub — leveraging stablecoins as pillars of monetary sovereignty and risk control.

Liu Honglin adds: "With strict reserve rules, Hong Kong’s stablecoins function like 'digital HKD' — reliable, transparent, and compliant. They’re not meant for speculation, but for building trust in digital finance."

Can Mainland Chinese Users Participate?

Despite Hong Kong’s progressive stance, participation for mainland residents remains legally constrained.

Since 2017, mainland China has maintained a comprehensive ban on cryptocurrency issuance, trading, and related services. The People’s Bank of China explicitly states that virtual currencies do not have legal tender status, and all crypto-related activities are classified as illegal financial operations. This includes foreign exchanges serving mainland users via the internet.

While some social media posts suggest that Hong Kong-issued HKD stablecoins offer a “backdoor” into crypto trading, experts warn against misinterpretation.

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“Stablecoins are tools — not loopholes,” stresses Liu Honglin. “Their existence doesn’t override mainland regulations. Even if a stablecoin is legally issued in Hong Kong, using it for unauthorized crypto trading from the mainland still violates PBOC rules.”

Moreover, capital controls and foreign exchange regulations remain firmly in place. Cross-border movement of funds through digital assets may trigger scrutiny or penalties.

Yu Jianing cautions against overestimating spillover effects: "Hong Kong’s legal autonomy doesn’t equate to open access for mainland investors. Participation depends on jurisdictional alignment, regulatory coordination, and capital flow mechanisms — not just technical feasibility."

In short: while Hong Kong builds a compliant digital asset ecosystem, mainland users must continue operating within national regulatory boundaries.

Frequently Asked Questions (FAQ)

Q: Are stablecoins safer than other cryptocurrencies?
A: Yes — when properly regulated. Fully reserved, audited stablecoins like those under Hong Kong’s framework are significantly less risky than speculative cryptos due to their pegged value and transparent backing.

Q: Can I use stablecoins for everyday purchases?
A: Increasingly yes — especially in regions like Hong Kong where pilot programs integrate them into retail and cross-border payment systems.

Q: Is Circle’s IPO a sign of mainstream adoption?
A: Absolutely. Circle going public marks the first major stablecoin issuer entering traditional markets — a milestone for industry legitimacy.

Q: Do stablecoins earn interest?
A: Some platforms offer yield on stablecoin deposits, but these involve counterparty risk. The coins themselves don’t generate returns unless lent or staked.

Q: Could China launch its own stablecoin?
A: Unlikely in the private sector. However, the Digital Yuan (e-CNY) serves a similar function as a state-backed digital currency with stability and controlled programmability.

Q: Are all stablecoins backed 1:1 by cash?
A: Not always. While top-tier ones like USDC are fully backed by cash or cash equivalents, others use mixed reserves or algorithmic mechanisms — increasing risk if not properly audited.

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