PETER PARKS

HSBC's first Hong Kong dollar stablecoin, HSBC RedCoin (ticker: RCHKD), was launched on PayMe by HSBC on October 23. More than 3.3 million PayMe users will be able to activate a stablecoin wallet in the app in phases over the following days, using it for peer-to-peer transfers and payments at more than 100,000 merchants. It is Hong Kong's second stablecoin regulated by the Hong Kong Monetary Authority, following the launch of Anchorpoint Financial's HKDAP on August 12.

The issuers of the two stablecoins are the first — and so far only — two holders of stablecoin issuer licences approved by the HKMA on April 10. One is The Hongkong and Shanghai Banking Corporation, a wholly owned subsidiary of HSBC Holdings (0005.HK), under licence number FRS02. The other is Anchorpoint Financial (Anchorpoint), a joint venture between Standard Chartered Bank (Hong Kong), HKT and Animoca Brands, under licence number FRS01. The HKMA received 36 applications in its first round.

3.3 million is a ceiling, not the number of users

The biggest variable for RedCoin is its reach. Previously, ordinary users who wanted to hold stablecoins generally had to deposit funds with a cryptocurrency exchange before making a purchase. RedCoin, by contrast, is built directly into PayMe. Users can activate a wallet after updating the app, without opening a separate account or maintaining a minimum balance. Transaction and balance limits are the same as those for PayMe's existing Hong Kong dollar wallet. For now, RedCoin is available only through HSBC's own platform and is not traded on cryptocurrency exchanges.

However, 3.3 million refers to PayMe's existing user base — the maximum number of people eligible to activate the wallet — not the number who have already done so. Similarly, the more than 100,000 merchants are part of PayMe's existing merchant network; this does not mean an equal number were accepting RedCoin on its first day. Before the launch, HSBC arranged a trial involving nearly 100 employees to test the full process, from minting and wallet activation to actual transfers.

RedCoin's product design clearly downplays its investment features. It has only two initial uses: person-to-person (P2P) transfers and person-to-merchant (P2M) payments. Lee Koon-hong, HSBC's head of retail banking products and chief executive of PayMe, said the experience of using RedCoin on PayMe was no different from using Hong Kong dollars. In other words, users will see almost no change in the interface, but the settlement instrument behind it will have shifted from bank deposits recorded on the bank's books to an on-chain token backed by full reserves and redeemable one-for-one for Hong Kong dollars.

Different starting points: one targets institutions, the other retail users

The business strategies of the first two licensed institutions are clearly differentiated. Anchorpoint's HKDAP adopts a business-to-business-to-consumer (B2B2C) model. In its initial phase, it is available only through approved distributors and targets institutional, corporate and professional-investor users. Its first distributors are OSL Group (0863.HK) and HashKey Exchange, with applications focused on settlement for tokenised real-world assets (RWA), tokenised funds and cross-border payments. HKDAP remains at an early stage: according to figures from Anchorpoint's website cited in a Sing Tao Daily column, its circulation stood at only about HK$1 million roughly one and a half months after launch.

RedCoin, meanwhile, is entering the market through basic retail transfers and payments. The different approaches mean the two products do not need to compete head-on in the short term, while also reflecting differences in the institutions' resources and risk appetites. HKDAP is focused on improving the efficiency of moving large institutional sums between different asset classes. RedCoin is leveraging PayMe's existing user network to encourage people to switch to on-chain settlement without changing their established habits.

The boundaries between the two are already beginning to overlap. Anchorpoint is reportedly expected to open HKDAP to retail use around the end of the year, although it has not committed to a specific date. John O'Neill, HSBC's managing director for digital assets and currencies, said HSBC would launch more products "very soon", including applications for corporate and institutional customers, but gave no timetable.

The bank's strategy: retain the payments gateway and connect it to wealth management

Why is HSBC investing substantial compliance and technology resources in issuing a stablecoin? At its core, the move is about monetising its existing customer base and defensive innovation. As mobile payments have become more widespread in recent years, traditional banks have increasingly been reduced to back-end channels in Hong Kong's retail payments market, putting pressure on their profit margins. Through its own stablecoin, HSBC has an opportunity to regain control of the gateway and data linked to the flow of funds.

More important is the connection with wealth management products. HSBC plans to add a stablecoin wallet to the HSBC HK App later this year and allow customers to subscribe to tokenised investment products using RedCoin, including a new share class of the HSBC Hong Kong dollar money market fund. The reported entry threshold is as low as HK$100.

This means a stablecoin could become more than a tool for transfers and payments; it could also serve as an entry point to digital wealth management. If PayMe users' daily liquidity remains in HSBC's ecosystem in stablecoin form, the opportunity to convert it into yield-bearing assets increases accordingly. This is a trust advantage that third-party crypto start-ups would find difficult to replicate. It is important to note, however, that under Hong Kong's current regulatory framework, stablecoins themselves do not pay interest. An earlier HSBC survey also found that about 10 per cent of respondents mistakenly believed stablecoins could generate interest.

There are also differing views in the market. Before the official launch of RedCoin, Sing Tao Daily columnist Tang Chun-yee questioned whether users would gain any practical benefit: compared with paying and transferring Hong Kong dollars directly, using a stablecoin would simply add another conversion step.

Challenges: compliance costs, fees and risks

The first challenge is compliance and operating costs. Under the Stablecoins Ordinance, every RedCoin in circulation must be fully backed by high-quality liquid reserve assets held in a segregated account, and the issuer must make regular disclosures. Whether these fixed costs can be covered by extremely low transfer fees, or will ultimately be passed on to users through hidden charges, will determine whether the business model is viable. HSBC is currently promoting RedCoin with transaction coupons and "RewardCash". Lee said the offers were separately funded and would not affect PayMe's existing promotions.

The second challenge is technological and reputational risk. The introduction of smart contracts and on-chain settlement brings additional risks from technical vulnerabilities and changes in regulatory policy. For an international bank managing trillions of US dollars in assets, the reputational damage caused by a systemic cyberattack or a run would be difficult to withstand. HSBC has also warned the public that it has not authorised any third party to "exchange" RedCoin on its behalf, cautioning against impersonation scams.

The final area is the potential for cross-border expansion. RedCoin is currently limited to Hong Kong's retail market, but HSBC's global network gives it the conditions to facilitate cross-border fund transfers. If the local closed-loop model is proven, expanding to Macau or other offshore financial centres in the Asia-Pacific region could give it a first-mover advantage. HSBC has not announced any such plans for now.

Indicators to watch next

  • Active wallet ratio in the first month: 3.3 million is the ceiling. The real benchmark will be the number of wallets generating non-promotional transactions.
  • Actual merchant settlement fees: Whether the fees charged to merchants accepting RedCoin are lower than those of Visa and Mastercard will determine whether there is an incentive for organic offline adoption.
  • Size of the tokenised money market fund: The proportion of RedCoin converted into yield-bearing assets over the coming months will show its genuine commercial retention value.