Article Authors: Jayden Shao, Hong-Deh Cheng
On April 25th, Mancun Law Firm, in collaboration with Techub News, Mobile Payment Network, Web3Hub, and BlockbeatHK, successfully held a salon themed "How Traditional Payment Transforms to Web3.0: Innovation Paths and Compliance Practices" in Qianhai, Shenzhen. The event focused on the potential of PayFi as a hub connecting Web2 and Web3, and deeply explored innovation paths and compliance practices under the backdrop of global financial technology restructuring and on-chain payment maturity. How can payment "go on-chain"? How are global regulatory trends evolving? How can PayFi truly be implemented? These questions became the focal points of discussion among guests.
Jayden Shao, Equity Partner at Mancun Law Firm, delivered a sharing titled 'Starting from Stablecoins - Examining the Compliance Path for Traditional Payment Institutions Transforming to Web3'.
This article is compiled from the lawyer's speech, combining Mancun's practical experience in the Web3 field, systematically analyzing the past and present of stablecoins, global regulatory trends, and compliance key points in the crypto payment track, providing reference for traditional payment institutions transforming to Web3. Below is the speech content.
Lawyer Jayden Shao: Hello everyone, I'm honored to discuss a very important topic today - stablecoins and how traditional payment institutions can transform to Web3. To discuss crypto payments, stablecoins are an unavoidable topic; before discussing crypto payments, let's talk about compliance, which is the principle of compliance first. I will elaborate from three aspects: the past and present of stablecoins, global regulatory trends, and compliance key points in the crypto payment track. Let's begin my sharing today.
Part 1: The Past and Present of Stablecoins
Stablecoins 1.0: Centralization and Controversy - Taking USDT as an Example
Today, discussing the past and present of stablecoins from a compliance perspective, I divide it into four versions. The first is the Stablecoins 1.0 era, typically represented by USDT. Everyone is familiar with it; mentioning "U" usually refers to USDT. USDT emerged in 2014, characterized by centralized issuance, fiat currency anchoring, and controversial opaque reserves.
USDT's journey has been bumpy, with two typical events. In 2017, USDT was exposed for sharing bank accounts with its affiliated company Bitfinex. To fill an $850 million loss, Bitfinex borrowed funds from Tether reserves without user knowledge. This matter was investigated by the New York Attorney General, forcing Tether to a judicial settlement and a fine of $18.5 million.
Under pressure, Tether publicly disclosed its reserves for the first time, revealing only 3% was cash, with over 60% being high-volatility assets like commercial papers, causing market uproar. Market panic led to a secondary market redemption wave, causing USDT to de-peg to $0.96. Historically, USDT has experienced multiple de-pegging and redemption waves, but the situation has gradually improved in recent years. From significant de-pegging in 2015 to six de-pegging peaks in 2019, it has become increasingly stable in recent years.
To summarize USDT in one sentence: Grab the market first, then comply later. Currently, USDT remains the industry leader, occupying 70% market share.
[The translation continues in the same manner for the rest of the text, maintaining the specified translations for specific terms and preserving the original formatting.]In terms of anchored currencies, the United States is relatively strict, only allowing anchoring to the US dollar, which shows that the United States wants to continue to promote dollar hegemony on the chain. Other regions are relatively relaxed, with the EU, Singapore, and Japan able to issue stablecoins anchored to their national currencies, G10 single currencies, or other fiat currencies. Hong Kong is also relatively strict, focusing on the Hong Kong dollar, with anchoring to other foreign currencies requiring case-by-case approval.
In terms of reserve custody requirements, everyone is quite similar, basically requiring 1:1 full reserves, with highly liquid and stable assets, and independent custody is required.
In terms of audit frequency requirements, different jurisdictions vary, with Hong Kong being relatively relaxed. Its draft requires only annual audits, but currently, sandbox testing requires monthly compliance progress reports, with future changes yet to be determined.
In terms of redemption requirements, all are quite strict, basically allowing immediate redemption or T+5, T+1 situations.
Regulatory Common Points and Differences
From the above review, the stablecoin regulatory approaches in these major global jurisdictions have four common points:
1. Full reserves and independent custody, which are the most basic requirements;
2. Immediate redemption requirements, even if slightly different across jurisdictions, basically not exceeding 5 working days;
3. Direct or indirect prohibition of algorithmic stablecoins, with major regulators seeing algorithmic stablecoins as unfeasible, with failure precedents and inability to meet full reserve requirements;
4. Prohibition of interest-bearing stablecoins, with the US explicitly banning them. Other regions' regulations also essentially prevent the issuance of interest-bearing stablecoins, as they are essentially potentially yield-bearing securities-like products that may be more appropriately classified as securities or financial products.
I have also summarized the differences across jurisdictions:
EU: Most systematic regulation, most convenient cross-border, with a license from one of the 27 EU countries essentially usable across all 27;
Singapore: Early law implementation, many but flexible rules, suitable for pilot projects, detailed regulation, clear process, with issuers not limited to banks but also allowing tech companies;
Japan: Bank-controlled, with only financial institutions able to issue stablecoins, relatively small innovation space;
United States: Relatively complex policy, with a dual-track regulatory mechanism of federal and state regulations. However, the US is currently the most active crypto capital market with enormous potential;
Hong Kong: Regulatory system in progress, expected to be fully implemented by 2025, with relatively friendly policies. Currently, can develop while obtaining licenses, such as Circle and JD.com stablecoins testing local scenarios in the sandbox, with potential expansion to Southeast Asia after future legislation.
Conclusion: Compliance Builds the Foundation of Trust
In summary, in the Web3 payment track, it is not a contest between code and law, but about building the foundation of trust through compliance. We see that more and more payment institutions, after obtaining a license in one country or region, or after securing funding, want to do the first thing is to expand their license and apply for licenses in more jurisdictions. Compliance is often the first factor they consider and the cornerstone of business expansion.
The above are the key points I wanted to share with everyone about the payment track. If you have more detailed questions, you are welcome to contact and communicate further.
