Are Stablecoins the Answer to Financial Surveillance in Hong Kong?

Hong Kong has long been an international economic center, feted for its low taxes and technological innovation. But the current geopolitical picture has caused many citizens to question just how secure their personal assets really are. Beijing’s tightening grip on the region has manifested in ever greater levels of financial surveillance and online censorship, and provoked a wave of emigration by self-described asylum-seeking activists.

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Q3 2020 hedge fund letters, conferences and more

Dissenters Suffer as Crackdowns Continue

Regardless of whether you believe that the semi-autonomous city is turning to a de facto police state, it is easy to see why state-sanctioned incursions make residents uncomfortable. Under a national security law brought into effect on June 30, the government can freeze and confiscate assets from entities deemed to be involved in “national security crimes”.

Seth Klarman: Investors Always Need A Strategy To Guide Them

Volatility"Many investors lack a strategy that equips them to deal with a rise in volatility and declining markets," Seth Klarman told his audience in a speech at MIT in 2012. Q3 2020 hedge fund letters, conferences and more Klarman was talking about the benefits of having a strategy, such as value investing, to provide a Read More


In August, HSBC faced condemnation in the west after claims that the London-based lender helped China punish pro-democracy supporters like Jimmy Lai, founder of newspaper publisher Next Digital. The bank had frozen accounts belonging to Lai and other Next Digital executives in accordance with the aforementioned law. Even before the legislation came into effect, HSBC had frozen accounts used by protestors to cover bail for detained prisoners late last year. A member of the FTSE 100 share index, HSBC was founded in Hong Kong in 1864 and remains its largest bank.

Against this troubling backdrop, the growing popularity of stablecoins is easy to fathom. Digital currencies whose value is pegged to an underlying asset (typically the U.S. dollar), stablecoins have historically been used by crypto traders to hedge against market volatility. But in the current milieu, they can also help users self-custody funds and avoid strict capital controls (the People’s Bank of China forbids yearly money transfers exceeding $50,000). Cross-border money transactions are less traceable when made with stablecoins rather than fiat.

Stablecoin use has increased in the region of late, a probable consequence of the national securities law and heightened fears of Chinese overreach. Unlike fiat currencies, stablecoins cannot be confiscated by a government, providing the user self-custodies the funds rather than leaving them sitting on an exchange. Retaining control of one’s private keys is important at the best of times, but particularly so for those in the cross-hairs of Chinese authorities.

A recent report by Amun research Eliézer Ndinga suggested that USD-pegged stablecoins in particular had become a “major investment vehicle for promptly fleeing capital controls in an attempt to preserve wealth.” The report focused on stablecoin use in Hong Kong, China and Singapore, and noted that trades involving Tether (USDT) – the premier US-pegged stablecoin – were done in person rather than via an exchange, an attempt to circumvent rigorous KYC/AML regulations.

Where Did Stablecoins Come From?

Stablecoin history traces back to the Mastercoin project in 2012. Rebranded to Omni a few years later, it went on to support the initial launch of Tether. As much as 70% of crypto trading volume is currently denominated in Tether alone, with another 5% in similar stablecoins such as USD Coin (USDC), True USD (TUSD), and Dai (DAI). This represents a dramatic shift from only 5% of total volume just a few years ago, and a trend that doesn’t look like reversing any time soon outside of strong regulatory intervention.

Though the stablecoin market remains dominated by Tether ($16 billion), over 100 alternative projects are building out stable digital currencies, some backed by a basket of currencies and others by reserves denominated in cryptocurrencies, usually Ethereum (ETH). One of the most talked-about stablecoin projects, Facebook’s Libra, positioned itself as a “global currency” prior to becoming entangled in regulatory red tape.

The U.S. dollar remains mighty, but other projects have pegged their stablecoins to alternate national currencies – including the Hong Kong Dollar (HKD). One such stablecoin, AHKD, is issued on the Ethereum blockchain and can be easily converted to other currencies or back to cash. Its HKD reserves are held in an independent trust and benefit from regular attestations to guarantee proof of funds.

As Ethereum has buckled under the load being placed upon it, other blockchains have taken the strain, routing a significant tranche of stablecoin demand through their more scalable infrastructure. Chief among these is Syscoin, which is aiming to bring the PAX stablecoin, which exists as an ERC20 token, from Ethereum to its own network, there throughput is several thousand times higher. To achieve this, Syscoin has developed a bridge that enables ERC20 tokens such as stablecoins to move between each blockchain, without introducing a centralized point of control.

Chinese Authorities Recognize Threat of Stablecoins

It would appear that the Chinese government is well aware of the potential of stablecoins to provide protection to holders. This month, authorities shut down a slew of online gambling sites for activities involving Tether. Although the arrests were said to relate to alleged money laundering, in which USDT had been utilized to conceal funds acquired via illegal gambling, the authorities will know that most parties interested in stablecoins do not have criminal intentions.

Fiat-collateralized stablecoins are, after all, backed by real-world assets: they just don’t appear on a bank’s radar. In the past 12 months, Chinese citizens moved $50 billion worth of crypto out of the country, with Tether facilitating most of the outflows.

Interestingly, China’s national blockchain project recently announced that it would be integrating stablecoin support next year, meaning businesses building and deploying blockchain apps can transact using crypto. However, the only stablecoin likely to be supported is the People’s Bank of China’s forthcoming digital yuan. Indeed, a draft law published last week emphasized that the state “forbids any party from making or issuing yuan-backed digital tokens to replace the renminbi in the market.”

If China continues to exert its totalitarian influence, expect stablecoin use to follow suit as individuals decide to be their own bank. You could say they’ve been given no choice.