Risks of stablecoins: Concerns behind the halo

Author: Liu Yong, Dean of the Zhongguancun Internet Finance Research Institute, Secretary-General of the Zhongguancun Financial Technology Industry Development Alliance

In 2025, the global digital economy will enter a critical juncture of deep transformation. As a "bridge" connecting traditional finance and the blockchain ecosystem, by August 2025, stablecoins have grown into a massive market exceeding $271.4 billion, becoming indispensable infrastructure for crypto asset trading, cross-border payments, and decentralized finance (DeFi). In particular, fiat-collateralized stablecoins represented by USDT and USDC, which are pegged to the US dollar and claimed to be "1:1 redeemable", are widely regarded as a "safe haven" in the crypto world. However, beneath the halo, the hidden risks cannot be ignored. Recently, major financial centers around the world have intensively implemented regulatory policies. The Hong Kong "Stablecoin Ordinance" will take effect on August 1, 2025, the EU's "Regulation on Markets in Crypto-Assets" (MiCA) has entered a stage of full implementation, and the US "Payment Stablecoin Regulatory Act" (GENIUS Act) officially took effect on July 18, 2025. This marks the end of the "wild growth" era for stablecoins, and global regulation enters a new phase of "compliance, prudence, and transparency". This article will delve into the true picture of stablecoins from three dimensions: risk disclosure, latest regulatory developments, and future trends.

1. The Risks of Stablecoins: The Hidden Concerns Behind the Halo

The "stability" in stablecoins is the core of their market appeal, but also their greatest illusion. While investors enjoy their convenience, they must be fully aware of the multiple risks hidden behind them.

1. Centralization Risk: The Fragile Foundation of Trust

Fiat-backed stablecoins (such as USDT and USDC) operate on the basis of "trust"—trust that the issuer holds sufficient dollar reserves, trust in their asset management stability, and trust in the effectiveness of their auditing mechanisms. However, this trust is essentially centralized, relying on the self-discipline of private companies and the credibility of external audits, rather than the certainty provided by technology or mathematics.

Taking USDT, the largest stablecoin by global market capitalization, as an example, its issuer Tether has long been questioned due to the opacity of its reserve assets. Although it has shifted to primarily holding U.S. Treasury bonds, historical data shows that it has previously invested heavily in commercial paper, gold, and even high-risk assets like Bitcoin. Behind this "high-yield" strategy lies potential credit risk and market volatility risk. In 2021, Tether was fined $41 million by the Commodity Futures Trading Commission (CFTC) for failing to report significant losses, exposing the flaws in its governance and disclosure mechanisms.

Although USDC markets itself on "transparency and compliance," during the 2023 Silicon Valley Bank (SVB) crisis, as much as 80% of its reserve assets were held at that bank, causing its price to severely depeg to $0.85 at one point. Although it ultimately recovered through external assistance, this incident fully illustrates that even the most compliant stablecoins rely on the robustness of the traditional financial system for their "1:1 redemption" promise, and their risk resistance capabilities are severely overestimated.

2. Liquidity and Run Risks: On-chain "Banking Crisis"

Another fatal weakness of stablecoins is the liquidity risk and the risk of bank runs. In traditional banking systems, banks create credit through "maturity mismatch," which also leads to the risk of "bank runs." Stablecoins face similar issues: their reserve assets may include illiquid assets, or there may be delays in their redemption mechanisms.

Once the market develops a general doubt about the issuer's solvency (for example, suspecting insufficient reserves or asset devaluation), it may trigger a large-scale redemption request in a very short period of time. Due to the public transparency of blockchain transactions, this "on-chain run" can quickly form a self-reinforcing panic cycle, leading to a sharp drop in stablecoin prices and even triggering a chain liquidation across the entire DeFi ecosystem. The collapse of TerraUSD (UST) in 2022 is a typical case of algorithmic stablecoins running out of liquidity under market pressure, and its lessons are still profoundly resonant today.

3. Compliance and Systemic Risk: The Damocles Sword of Regulation

The cross-border, around-the-clock, peer-to-peer characteristics of stablecoins make them a potential tool for money laundering, terrorist financing, and capital flight. Their anonymity or pseudo-anonymity facilitates the flow of illegal funds, posing a significant challenge to global financial regulation. Moreover, the scale of stablecoins is not to be underestimated. As of August 2025, the total market capitalization of global stablecoins reached $270 billion, with USDT and USDC collectively accounting for over 80% of the market share, resulting in a "duopoly." This high concentration not only exacerbates the risk of being "too big to fail," but if a leading stablecoin encounters issues, the repercussions will affect the entire crypto market and even the traditional financial system. Federal Reserve Chair Jerome Powell has repeatedly warned that large stablecoins could pose a threat to financial stability. Therefore, stablecoins are by no means "risk-free assets." Investors should be fully aware that their "stability" is backed by complex financial operations and potential systemic risks, and they must not equate them with bank deposits or cash.

2. Latest Developments on Hong Kong Stablecoins: The "Chinese Model" of Regulation and Global Coordinates

On August 1, 2025, Hong Kong's "Stablecoin Ordinance" officially came into effect, marking the implementation of the world's first comprehensive regulatory framework for fiat-backed stablecoins. This event is not only a milestone in the development of Hong Kong's fintech but may also become a "weather vane" for global stablecoin regulation.

1. Market Dynamics: Giants Rush In, License Competition Heats Up

After the implementation of the "Stablecoin Regulation," a "license competition" quickly erupted in Hong Kong's financial sector. Although the Hong Kong Monetary Authority has clearly stated that "no licenses have been issued as of August 1," and the first batch of licenses is expected to be announced in early 2026, this has not dampened the market's enthusiasm.

• Traditional financial institutions have the upper hand: Hong Kong's three major note-issuing banks—Bank of China (Hong Kong), HSBC, and Standard Chartered Bank—have become strong competitors for the first batch of licenses due to their mature experience in managing fiat currency reserves, strong capital strength, and close relationships with regulatory authorities. Among them, Standard Chartered Bank and Bank of China (Hong Kong) have already initiated the application process.
• Tech giants are actively positioning themselves: JD Coin Chain Technology has entered the second phase of the Hong Kong Monetary Authority's "Stablecoin Issuer Sandbox," with testing scenarios covering cross-border payments, supply chain finance, and retail transactions; Ant Group has initiated the application process and conducted multiple rounds of communication with regulatory authorities.
• Market Sentiment and Warnings: Despite the bullish market sentiment, the Hong Kong Securities and Futures Commission and the Monetary Authority jointly issued a statement on August 14, urging the public to remain cautious about market fluctuations related to the concept of stablecoins, emphasizing that "expressing intent or submitting an application does not equate to the final issuance of a license," and warning market participants to avoid making misleading statements. This reflects the regulators' high prudence in preventing "concept speculation" and "stock price manipulation."

2. Regulatory Requirements: The strictest in the world, setting the "Hong Kong Standard"

The core of Hong Kong's "Stablecoin Regulation" lies in "strict supervision, high thresholds, and strong transparency," with requirements that are among the strictest in the world, mainly reflected in:

• Mandatory Licensing System: Any entity issuing fiat-backed stablecoins in Hong Kong, or issuing stablecoins pegged to the Hong Kong dollar overseas, must apply for a license from the Monetary Authority. Operating without a license will face a fine of up to HKD 5 million and 7 years of imprisonment.
• High capital threshold: Non-bank institution applicants must have a paid-in capital of no less than 25 million HKD, filtering out issuers that do not possess sufficient risk resistance capability from the source.
• 100% full reserve and asset segregation: The issuer must allocate 100% of the reserve assets to cash, short-term government bonds, and other highly liquid assets, and independently custody them with a licensed bank to ensure "full support, high liquidity, and strict segregation."
• Mandatory transparency and anti-money laundering: Issuers must publicly disclose daily reserve asset audit reports, establish a sound KYC/AML mechanism, prohibit interest payments to prevent disguised savings, and only licensed institutions may publish advertisements.
• Prudent Licensing: The Chief Executive of the Hong Kong Monetary Authority, Yu Weiwen, clearly stated that initially only a "small number of licenses" (single digits) will be granted, emphasizing "better to have none than to have too many," to ensure the stable development of the market.

Hong Kong's move aims to establish itself as a "compliance high ground for global digital finance" by creating the world's strictest regulatory framework, attracting truly capable and compliant innovative forces rather than speculators.

3. Latest Developments: Regulatory "Cold Water" and Market "Cooling"

As we enter mid-August, the development of stablecoins in Hong Kong has entered a critical "cooling-off period" and "observation period." As of August 17, the Hong Kong Monetary Authority and the Securities and Futures Commission have not announced any substantial progress in the approval of license applications, clearly reiterating that "preliminary communication does not equal approval." The regulatory authorities' "cold water" actions have been effective:

• Market speculation rapidly subsides: Several companies that previously saw their stock prices surge due to the "stablecoin license" concept are now experiencing significant price corrections, indicating that the market is shifting from irrational speculation to a rational assessment of fundamentals and regulatory outcomes.
• Applicants face rigorous tests: More than 50 institutions have expressed their intention to apply, including internet giants, international banks, and payment platforms. However, regulatory authorities have made it clear that initially only a limited number of licenses will be issued, with extremely high approval standards, posing comprehensive challenges to applicants in terms of capital strength, compliance risk control, real business scenarios (such as cross-border trade settlement), and anti-money laundering capabilities.
• Regulatory technology upgrade: To address potential market manipulation, the Hong Kong Securities and Futures Commission has activated its dedicated market surveillance team and advanced systems to closely monitor trading activities related to stablecoins, and will take strict action against any violations.

These latest updates clearly convey one message: Hong Kong's stablecoin strategy is not aimed at creating short-term market bubbles, but rather at building a long-term, robust, and compliant global digital financial infrastructure. The issuance of Hong Kong stablecoin licenses will be prudent, slow, and of high standards, and the true "winners" will be those long-termists who can deeply integrate stablecoin technology with the real economy and possess excellent compliance capabilities.

III. Global Stablecoin Outlook: A New Landscape Under the Wave of Compliance

The regulatory practices in Hong Kong are not isolated incidents, but rather a reflection of the increased regulation of stablecoins by major global economies. Looking ahead, the development of stablecoins will exhibit the following trends:

1. Global regulatory convergence, compliance becomes the only way out

Major economies such as the United States, the European Union, the United Kingdom, and Japan are advancing or have implemented strict regulatory frameworks for stablecoins. For example, the U.S. "GENIUS Act" and the EU's "MiCA" both require 100% full reserves, mandatory audits, and licensed operations. This means that in the future, only stablecoins that meet the stringent compliance requirements of major global markets will be able to survive and develop, and the "compliance costs" for global stablecoins will rise sharply, forming a strong "compliance moat."

2. Reshaping Market Structure, Intensifying Matthew Effect

In a strictly regulated environment, resources will concentrate towards leading compliant institutions. USDC may further solidify its market position due to its high compliance, while USDT will face greater challenges if it cannot fully transparently disclose its reserves. At the same time, traditional financial institutions (such as banks and payment giants) will become significant players in the stablecoin market due to their capital, compliance, and customer base. Tech giants like Ant Group and JD.com, if they successfully obtain licenses in key markets such as Hong Kong, will also open up new growth trajectories.

3. Competing and cooperating with CBDC to build the future payment ecosystem

The rise of stablecoins will form a competitive and cooperative relationship with central bank digital currencies (CBDCs) of various countries. CBDCs are backed by national credit, offering higher security, and will dominate domestic payments and the transmission of monetary policy. Meanwhile, compliant stablecoins may play a supplementary role in cross-border payments and specific scenarios (such as supply chain finance and RWA tokenization). In the future, a diversified payment ecosystem composed of CBDCs, compliant stablecoins, and traditional payment tools will gradually take shape.

4. Integration of Technology and Regulation to Enhance Transparency

The transparency of blockchain will be used to empower regulation. In the future, regulatory agencies may require issuers to make the status of reserve assets verifiable to regulators and the public through methods such as "on-chain real-time audits," thereby completely addressing the issue of "trust." Privacy technologies like zero-knowledge proofs (ZKP) will also satisfy KYC/AML regulatory requirements while protecting user privacy.

Conclusion

Stablecoins, as a product of financial innovation, undeniably hold value. However, beneath their allure, risks such as centralization, liquidity, and compliance loom large like the sword of Damocles. In 2025, with the implementation of global regulatory frameworks such as Hong Kong's "Stablecoin Ordinance," stablecoins are transitioning from a "free kingdom" to an "era of rule of law." The recent timely intervention by Hong Kong regulators in market speculation and their cautious attitude towards license issuance further confirm their determination and resolve to build a "global digital financial hub."

For market participants, only by embracing regulation, adhering to compliance, and enhancing transparency can they navigate the future wave of digital finance steadily and sustainably. For investors, they should abandon the simplistic notion that "stability = safety" and deeply understand the essence of its risks for rational investment. The future of stablecoins lies not in disrupting tradition, but in how they can become a robust bridge connecting traditional finance with the digital world within the regulatory framework.