Professor Xiang Fang, Professor Yang Liu, and Professor Haonan Zhou
29 July 2026
Since the Hong Kong Monetary Authority, with the local banking system as its anchor, granted the first batch of stablecoin issuer licences in April this year, expectations have been high for the banking sector’s participation in stablecoin issuance. Regulated banks can take this opportunity not only to enhance payment and settlement efficiency, but also to expand cross-border financial services and further connect the digital asset ecosystem with the real economy. However, while these potential benefits have been widely discussed, the potential challenges and risks involved have received relatively little systematic analysis.
Responding to lawmakers’ questions at the Legislative Council last month, Christopher Hui, Secretary for Financial Services and the Treasury, said that the HKSAR Government would maintain ongoing and effective regulatory oversight of stablecoin issuers to ensure financial stability. He also pointed out that the impact of the widespread use of stablecoins on the traditional banking system remains, at this stage, at the frontier of research. Drawing on the latest studies, this article discusses how stablecoins, if issued on a large scale and adopted as an important component of economic activity, may affect bank deposits, liquidity management, and banking regulation.
The impact of stablecoins on bank liabilities and deposits
To examine the effects of stablecoins on Hong Kong’s banking system, it is not sufficient simply to apply an analytical framework centred on non-bank issuers. Current concerns over so-called “financial disintermediation” mainly stem from the institutional features of the US market, where stablecoins are mostly issued by non-bank institutions. When depositors convert bank deposits into stablecoins, this results in a mechanical outflow of deposits from the banking system. Moreover, because bank deposit interest rates are sticky and are usually lower than the returns implied by or offered on stablecoin-related products, pressure for funds to flow from banks to the non-bank sector is bound to intensify.
By contrast, in Hong Kong, if stablecoins are mainly issued by banks, this logic requires reconsideration. Stablecoins remain liabilities of the issuing banks. Payment transfers among holders, as well as conversions between deposits and stablecoins, do not necessarily change the overall scale of liabilities in the banking system. In fact, if stablecoins can effectively reduce transaction costs, the convenience they offer in payments may generate a liquidity premium relative to traditional deposits and, through adjustments to liability structures, lower banks’ overall funding costs.
Funding costs under the banking regulatory framework
That said, from the perspective of individual bank issuers, stablecoin issuance may still have a substantive impact on funding costs through the existing regulatory framework. The key indicator here is one of the major pillars of post-crisis banking regulatory reform: the liquidity coverage ratio (LCR). Banks subject to LCR requirements must hold a sufficient amount of high-quality liquid assets to address potential cash outflows under stressed conditions. This affects both the allocation of banks’ balance sheets and the market’s assessment of their liquidity risk. Our recent research shows that bank creditors tend to reward lower liquidity risk with more favourable pricing, for example through lower borrowing rates. In other words, liquidity regulatory metrics are not merely compliance constraints; they can also change banks’ actual funding costs through the channel of market pricing. Therefore, in evaluating the costs and benefits of stablecoin issuance by banks, the LCR is a dimension that cannot be ignored.
At the core of the LCR calculation is the risk that various types of liabilities may be rapidly withdrawn or redeemed in times of stress. The premise for banks to support the stablecoin liabilities they issue with high-quality liquid assets depends on the speed with which such liabilities may be redeemed under stressed conditions. Given the crypto-asset characteristics of stablecoins, if banks are unable to identify the ultimate holders, the existing regulatory framework often requires more conservative outflow-rate assumptions, thereby lowering banks’ liquidity coverage ratios and pushing up funding costs.
If banks can effectively identify stablecoin holders, the relevant liabilities may receive less stringent regulatory treatment, a point that is particularly important for Hong Kong. The customer due diligence and identity verification requirements under the Stablecoins Ordinance help bank issuers obtain sufficient information about holders. Therefore, banks’ stablecoin liabilities need not place significant pressure on their LCR, and their negative impact on banks’ funding costs may be relatively limited.
Ultimately, whether stablecoin issuance by banks will push up funding costs depends on how it is incorporated into the banking regulatory framework. Whether holders can be identified, whether redemption behaviour can be predicted, and how stablecoin liabilities are classified in the LCR will directly affect the amount of liquid assets that banks are required to hold, and in turn affect market perceptions of banks’ liquidity risk and their funding costs.
Looking ahead, the impact of banks’ issuance of stablecoins on the banking system can be summarized in several areas that merit continued monitoring.
The dual tensions in stablecoin issuance
The first concerns a structural trade-off in banks’ profitability. Stablecoin issuance by banks is a commercial activity. If it reduces transaction costs and creates a liquidity premium through more payment convenience, it may lower funding costs on the liability side of banks’ balance sheets. At the same time, these benefits must be assessed alongside downward pressure on asset-side yields.
As bank liabilities redeemable at any time, stablecoins usually need to be backed by highly liquid, low-risk assets. As the share of stablecoins in banks’ liabilities rises, banks must correspondingly increase their holdings of high-quality liquid assets such as government bonds, rather than allocate funds to higher-yielding corporate or retail loans. Accordingly, the impact of banks’ issuance of stablecoins on profitability is shaped by changes in funding costs and fluctuations in asset-side yields. An expansion in stablecoin issuance may put pressure on banks’ overall net interest margins. The ultimate effect will hinge on the relative magnitude of changes in liability costs and asset returns.
The second concerns the assumptions about liquidity risk associated with stablecoin liabilities in different use cases. As shown in the analysis above, if banks can identify stablecoin holders and reasonably assess their redemption behaviour, stablecoins do not necessarily create significant pressure on banks’ LCR. However, this conclusion does not apply to all scenarios. If the use of stablecoins extends from everyday payments and corporate settlements to tokenized real-world asset transactions, on-chain financial products, or other areas characterized by greater price volatility, their holder structure and transaction motivations will inevitably change.
In these scenarios, stablecoins are more likely to be used as a short-term trading medium, and the resulting redemption behaviour will be more concentrated, more procyclical, and more susceptible to market sentiment. Consequently, the liquidity regulatory framework for banks must dynamically assess outflow-rate assumptions across different use cases, instead of mechanically determining liquidity risk on the basis of stablecoins’ formal status as bank liabilities.
The cross-border positioning of Hong Kong dollar stablecoins
For Hong Kong dollar stablecoins, their local payment function is certainly crucial, but Hong Kong already has mature real-time payment and real-time gross settlement infrastructure. The greater potential of Hong Kong dollar stablecoins lies in cross-border transactions, cross-platform settlement, and interoperability within the digital asset ecosystem. Recently, Circle, the issuer of USDC, a major US stablecoin, was approved to establish a federally regulated national trust bank, but it has yet to obtain the primary gateway to the settlement system—a Federal Reserve master account.
In Hong Kong’s case, with banks serving as the issuers of stablecoins, the issuers themselves are already embedded in payment, settlement, and cross-border banking networks, and are therefore well placed to connect Hong Kong dollar stablecoins to global financial use cases. If Hong Kong dollar stablecoins can establish reliable connections across different jurisdictions, blockchain networks, and financial market infrastructures, they will not merely be another payment tool, but may become a strategic interface through which Hong Kong’s financial market connects on-chain and off-chain systems, domestic and international markets, and Hong Kong dollar assets with global liquidity.
