EU, U.S., and Hong Kong Establish Regulatory Frameworks for Stablecoins
Stablecoins are a type of cryptocurrency pegged to specific assets (typically fiat currencies), serving as a bridge between decentralized finance (DeFi) and traditional financial systems. They are also a critical infrastructure for DeFi. Recently, the U.S. passed its first stablecoin legislation, filling a regulatory gap in this sector. Just two days later, Hong Kong enacted a similar bill, bolstering its position as a global digital finance hub and reinforcing its status as an international financial center.
Following the EU's lead, both the U.S. and Hong Kong have introduced regulatory frameworks for stablecoins, marking a significant step toward integrating cryptocurrencies into mainstream finance.
CICC’s Analysis: Three Regulatory Models Established, On-Chain Dollar Takes Shape
Source: CICC Research
CICC’s Analysis: Three Regulatory Models Established, On-Chain Dollar Takes Shape
Source: Tether, MakerDAO, CICC Research
CICC’s Analysis: Three Regulatory Models Established, On-Chain Dollar Takes Shape
Note: Data as of May 31, 2025. Source: CoinGecko, CICC Research
The stablecoin sector has faced significant risks and regulatory challenges, including:
The collapse of TerraUSD (UST) in 2022
Tether (USDT) facing EU restrictions in 2024 due to opaque reserve assets
New York regulators halting Binance USD (BUSD) issuance in 2023
The new U.S. and Hong Kong legislation addresses key risks such as:
Transparency & Liquidity – Mandating 100% backing by fiat or high-liquidity assets (cash, demand deposits, short-term U.S. Treasuries), with reserves segregated from operational funds.
Licensing & Capital Requirements – Issuers must obtain regulatory approval and meet minimum capital thresholds.
AML Compliance – Integrating stablecoins into existing anti-money laundering frameworks with customer identification rules.
Consumer Protection – Guaranteeing redemption at face value and priority claims in bankruptcy.
Ban on Interest Payments – Preventing stablecoins from offering yields to minimize disruption to traditional finance.
These rules mirror traditional financial regulations but impose stricter liquidity requirements. While banks operate with near-0% reserve ratios, stablecoin issuers must maintain 100% reserves, reflecting their role as "on-chain cash" rather than deposits. This ensures stability in DeFi’s dollar-pegged infrastructure.
CICC’s Analysis: Three Regulatory Models Established, On-Chain Dollar Takes Shape
Source: U.S. Senate, HKMA, EU Parliament, CICC Research
As of May 2025, stablecoin market capitalization reached ~$230 billion—a 40x increase since 2020—but remains small compared to traditional finance (e.g., $19T in U.S. deposits, $37T in U.S. Treasuries). However, stablecoins facilitate ~$28T in annual transactions, surpassing Visa/Mastercard (~$26T) and Bitcoin ($19T in 2024).
Traditional remittances: Avg. fee of 6.62%, 1–5 business days (World Bank, 2024).
Stablecoin transfers: Fees <1%, settlement in minutes.
However, prior regulatory gaps allowed circumvention of KYC/AML rules, challenging emerging-market capital controls. With regulation, compliance costs may rise, but adoption in global payments is expected to grow.
Source: SWIFT, CICC Research
100% reserves prevent credit expansion—stablecoin issuance shifts deposits but doesn’t increase money supply.
Dollarization effects: Stablecoins may attract foreign currency conversions but don’t alter total USD supply.
DeFi lending platforms (~$37B in 2024) mimic fractional-reserve banking but remain niche.
Source: U.S. Treasury, CICC Research
Deposit outflows: Stablecoins could divert bank deposits, replacing them with interbank liabilities.
Mitigating factors:
Stablecoins cannot pay interest, reducing attractiveness vs. deposits.
Current stablecoin volume is just ~1% of U.S. deposits; even at 15% annual growth, impact remains limited.
Long-term risks: If stablecoins reach $2T by 2028 (per U.S. Treasury estimates) or integrate yield-bearing products (e.g., tokenized MMFs, RWAs), pressure on banks could intensify.
Banks are adapting:
JPMorgan’s JPM Coin for institutional payments
Société Générale’s USD/EUR CoinVertible
Standard Chartered’s planned HKD stablecoin
Source: CICC Research
With stablecoins now under regulatory oversight, DeFi’s integration with traditional finance accelerates—presenting both opportunities and challenges for the global financial system.
