Stablecoins and Tokenization of Stocks: Opportunities and Challenges in Reshaping the Global Encryption Landscape

This article is compiled from the Space AMA “A Discussion on Stablecoins and Stock Tokenization: Development Prospects and Compliance Challenges” hosted by Odaily and OKX Chinese. The attending guests included: William: FinTax COO; Kiwi: OKX Ventures Research; Zixi: CEO of Stablestock; Yue Xiaoyu: Web3 Product Manager.

1. Competition and Regulation in the Stablecoin Space

1.1 Stablecoin: Growing Together in Regulatory Games

In recent years, the stablecoin sector has developed rapidly, with continuous increase in market attention. The industry is highly concerned about whether stablecoins have entered a “arms race” phase, as well as which sub-markets will stand out in the future. In terms of market size, the total market value of global stablecoins is about $260 billion, with non-US dollar stablecoins accounting for only about $2 billion. Although the scale of non-US dollar stablecoins is relatively small, competition for non-US dollar stablecoins has quietly emerged globally. Several countries and regions have introduced or are formulating relevant laws and regulations, such as the MiCA (The Markets in Crypto Assets regulation bill) promulgated by the European Central Bank in mid-2023, and the recently effective “Stablecoin Ordinance” in Hong Kong. Both regulations reflect defensive characteristics, emphasizing the prevention of financial risks to address the ongoing expansion of USDT, USDC, and other US dollar stablecoins, showing the importance that global regulatory bodies place on the development of stablecoins. However, from an overall regulatory perspective, the stablecoin market is still in its early stages, and the relationship among various stablecoins tends to favor collaborative growth rather than a zero-sum game.

In terms of specific regulatory systems, the freezing mechanisms and blacklist management in different jurisdictions are key factors affecting the prospects of stablecoins. Currently, stablecoins are mainly used for the purchase of crypto assets and large transactions in the “grey” or “grey-white” areas. In the regulatory frameworks of various countries, how to balance the scale of freezing directly determines the survival ability of stablecoins. Stablecoins should fully utilize their functions as mediums of exchange and units of value measurement, especially in areas such as cross-border payments, where their high degree of freedom and ease of transaction can be fully leveraged. If stablecoins can form actual trading pairs with Bitcoin or specific physical goods, it will facilitate more real demand, thus gaining an advantage in competition. On the contrary, overly stringent regulations may cut off their application scenarios, leading to weakened competitiveness. From this perspective, regulatory authorities need to clearly define the scope of freezeable funds and establish a framework to ensure compliant funds can circulate freely within the original scenarios. This is not only a regulatory challenge but also a crucial factor determining which types of stablecoins can succeed under compliance conditions.

The licensing/permit system for stablecoins is equally crucial. The U.S. GENIUS Act stipulates that only institutions qualified as “Payment Stablecoin Issuers (PPSI)” can issue stablecoins, and they must be approved through federal or state regulatory pathways. Stablecoins must be fully backed by high-quality liquid assets (such as U.S. dollars or U.S. Treasury bonds) at a 1:1 ratio, and reserves must be disclosed and subject to regular audits. The EU’s MiCA categorizes stablecoins into single fiat-backed and multi-asset-backed types, clearly requiring that fiat stablecoins must be 1:1 backed by reserves, and prohibits the issuance of algorithmic stablecoins. Additionally, all issuing institutions must obtain authorization from regulatory authorities in member states, and once approved, can operate throughout the EU. Singapore has established a flexible and innovation-oriented system through the Payment Services Act (PSA) and its subsequent stablecoin framework. This regulation requires that if a non-bank issued stablecoin’s scale exceeds SGD 5 million, it must apply for a “Major Payment Institution (MPI)” license to operate; issuers below this threshold may temporarily be exempt. Banks issuing stablecoins do not need to apply for a separate license but must comply with the same reserve and compliance requirements. In Hong Kong, the regulatory framework for stablecoins is stricter than that of the U.S. and Singapore, with higher issuance thresholds and KYC requirements, which may make it difficult for HKD stablecoins to integrate into the DeFi ecosystem, thereby limiting their application in traditional coin trading and gray market scenarios. Therefore, the issuance of stablecoins in Hong Kong will need to be deeply integrated with enterprises that have native payment scenarios, and stablecoin licenses are expected to be prioritized for companies with inherent payment contexts, such as e-commerce platforms.

1.2 Dollar stablecoin: Dominance and Future Challenges

In the stablecoin market, USD stablecoins have become a core pillar of the global crypto financial system due to the long-term dominance of the US dollar and their first-mover advantage. For residents of many countries and regions, the threshold and cost of obtaining US dollars are relatively high, especially in areas with underdeveloped financial infrastructure or strict foreign exchange controls. The emergence of USD stablecoins has significantly lowered this barrier, allowing users to access a digital equivalent pegged to the US dollar at a 1:1 ratio simply by connecting to the internet, thereby greatly simplifying the processes of cross-border payments and trade, and bringing unprecedented convenience to global business activities. This convenience not only enhances the efficiency of international trade but also provides significant support for financial inclusion, especially in areas where traditional financial services are insufficient.

From a market structure perspective, the stablecoin market can be vividly compared to an iceberg: above the waterline are compliance dollar stablecoins represented by USDC, which occupy the majority of the market share due to their transparent reserve mechanisms and strict regulatory compliance; below the waterline are a large number of non-compliant offshore stablecoins like USDT, which are widely popular globally due to their extensive application scenarios and lower entry barriers. Despite this, countries are actively launching localized stablecoins based on local regulatory policies, optimizing for specific scenarios and regional markets. For example, some companies are attempting to deeply integrate stablecoins with e-commerce or payment ecosystems to enhance penetration in niche markets. However, while these localized initiatives can enhance the applicability of stablecoins in specific areas, the global dominance of dollar stablecoins, thanks to the unique status of the dollar as a global reserve currency and its wide acceptance in cross-border transactions and value storage, remains difficult to shake in the foreseeable future. This dominance not only stems from the monetary credibility of the dollar but also benefits from the comprehensive advantages of dollar stablecoins in terms of technological scalability, ecological compatibility, and market liquidity.

1.3 Emerging stablecoins: Wealth Effect and Competitive Advantage

In addition to the classification of dollar and non-dollar stablecoins, there are two types of stablecoins that possess significant growth potential and will play an important role in the global crypto financial market. On the one hand, although regulations in many countries prohibit stablecoins from paying interest to holders to avoid direct competition with traditional bank deposits, there is still room to develop “yield-generating stablecoins” in the regulatory gray areas of DeFi and Web3. Such stablecoins can provide users with stable and secure interest returns through deep integration with decentralized finance (DeFi) or centralized finance (CeFi) platforms, making them highly attractive to institutional investors and large funds. Currently, various yield-generating stablecoins adopting neutral strategies have emerged in the market, seeking to balance compliance and yield through innovative mechanisms, injecting new vitality into the market.

On the other hand, scenario-based stablecoins issued by Web2 giants rely on their mature payment or business ecosystems, effectively reaching user groups that dollar stablecoins find difficult to cover. By deeply cultivating specific application scenarios, such as e-commerce, payment, or social platforms, these stablecoins can significantly enhance market liquidity, increase user stickiness, and provide customized solutions for underdeveloped financial service areas. Particularly in the cross-border e-commerce sector, stablecoins are gradually challenging the position of traditional third-party payment platforms, showcasing unique competitive advantages.

In developed country markets, due to intense competition, payment projects generally attract users by lowering transaction fees, resulting in a relatively stable market structure. However, in emerging markets like Latin America, limited by high payment fees and inadequate financial infrastructure, stablecoins have greater room for development. Taking Mexico and Brazil as examples, in Mexico, the market share of stablecoins has decreased due to the ongoing improvement of the banking system; while in Brazil, due to severe exchange rate fluctuations and a relatively underdeveloped banking system, the demand for stablecoins is strong, with transaction fees reaching around 1%, offering a cost advantage over traditional payment methods. Traditional Web2 companies are more cautious about compliance and tend to strictly adhere to regulatory requirements, while USD stablecoin projects have advantages in flexibility and popularity in payment scenarios.

2. Opportunities and Challenges of Stock Tokenization

2.1 From Off-chain to On-chain: The Liberation of Liquidity

Stock tokenization, as a new hotspot for RWA, is profoundly reshaping the intersection of traditional finance and crypto finance. By transforming physical stocks into digital tokens on the blockchain, stock tokenization redefines asset management and trading mechanisms through innovative models. Its core value lies in bringing the liquidity of off-chain assets onto the chain, effectively alleviating the liquidity bottlenecks in traditional stock markets caused by trading time constraints, geographical barriers, and the complexity of clearing processes. From a broader perspective, the current innovation core in the blockchain field focuses on enhancing on-chain liquidity: stablecoins provide stable value anchoring for the on-chain economy by introducing dollar liquidity; while stock tokenization addresses the liquidity pain points of off-chain stocks, offering an efficient solution. Together, they construct a diversified on-chain and off-chain liquidity framework, significantly enhancing the liquidity and accessibility of assets, promoting the deep integration of traditional finance and decentralized finance (DeFi), and injecting new momentum into the modernization of the global financial system.

2.2 Leading New Narratives: Optimistic yet Cautious

The tokenization of stocks has attracted much attention as a potential core narrative for the next round of market prosperity, closely linked to market enthusiasm and regulatory trends. In fact, there have been similar early attempts in 2018: some platforms allowed retail investors to purchase stocks through on-chain representation, with real shares held by brokers behind the scenes. On the surface, this model connects blockchain with the traditional securities market, but the core legal attributes remain unchanged, as the SEC pointed out—packaging securities as tokens does not change their identity as securities. Additionally, due to differences in trading times, participant demographics, and liquidity between on-chain markets and traditional markets, there is low liquidity and frequent price fluctuations, with extreme deviations where prices can exceed real stocks by 300%. The lack of uniform regulation across different jurisdictions also poses challenges for investors when platforms face risks or collapse, leading to difficulties in protecting their rights. These factors have contributed to the gradual exit of this model.

Security Token Offerings (STOs) are seen as the “compliance upgrade” of ICOs, aiming to issue on-chain securities assets in accordance with securities regulations. However, the high compliance costs of STOs become the biggest obstacle, involving comprehensive KYC/AML checks, ongoing information disclosure, and legal compliance costs, which deter project teams. Even if successful in issuance, most STO tokens cannot enter mainstream exchanges and can only be traded on small platforms or OTC markets, resulting in extremely limited liquidity in the secondary market. Additionally, investors lack confidence in unfamiliar token structures and uncertain return expectations, leading to a sluggish market sentiment. The complexities of cross-border regulation and tax differences further increase the challenges of internationalization. Ultimately, while STOs retain the “compliance” aura, they have failed to form a scaled market application. These attempts have not contributed to a collective market force to enhance competitiveness in the field of stock tokenization.

However, stock tokenization still faces many challenges. First, when users purchase tokenized stocks, they may question whether they genuinely correspond to the underlying stocks. Second, without a continuous injection of new assets, on-chain liquidity is hard to maintain, and there are still barriers to the asset inflow and outflow mechanism. To address these two issues, the industry is actively exploring solutions. Some projects have adopted the “Proof of Reserve” mechanism, which ensures that on-chain transactions are linked 1:1 with actual stocks by establishing a fund pool and regularly disclosing reserve status, thereby enhancing the credibility of asset authenticity and liquidity. However, doubts about the authenticity of tokenized stocks still exist among users, and liquidity is highly dependent on the operational capabilities of the project parties, which carries certain risks. Third, and more importantly, tokenized stocks currently struggle to fully reflect the equity attributes of traditional stocks, such as voting rights and dividend rights, which limits their appeal as a true substitute for equity. Fourth, regulatory discrepancies also hinder the further development of the stock tokenization field. When tokenized stocks are traded globally, they must face different regulatory rules and complex tax policies across jurisdictions. In particular, the tax differences among countries are significant, and taxes are closely related to investors’ returns, which can have direct and profound impacts on investment behavior. Currently, the returns from tokenized stocks may involve tax administration rules from different jurisdictions, making the understanding and application of tax rules challenging. At the same time, tokenized stocks possess high combinability, bringing more challenges to tax accounting that require reliance on professional software tools for assistance. For example, two tokens can form a decentralized trading pair, generating transaction fee income on-chain; in the future, two stock tokens may also form a trading pair, leading to fee income. At this point, how to account for the income of liquidity providers (LPs), and how to handle the absence of dividend offsets for token holders, need regulatory agencies to establish matching rules based on the new technological carrier of Tokens, which could pose a significant challenge that requires more Web3 industry builders to assist regulatory bodies in jointly promoting the formation of reasonable regulatory rules.

3. Conclusion

Stablecoins and stock tokenization are profoundly reshaping the global financial landscape. This transformation stems from technological innovation and is promoting the deep integration of crypto finance with traditional systems. Stablecoins enhance financial inclusion and efficiency by injecting on-chain liquidity and optimizing payment scenarios. At the same time, stock tokenization breaks the liquidity bottleneck of traditional markets, bringing off-chain assets onto the blockchain, expanding the accessibility of asset circulation, and together with stablecoins, constructing a diversified liquidity framework to promote the collaborative development of DeFi and traditional finance.

However, these opportunities are also accompanied by numerous challenges. For example, the freezing mechanism, licensing system, and blacklist management directly affect the survival and competitiveness of stablecoins, while the legislative dynamics in various countries reflect their vigilance towards the expansion of USD stablecoins. Furthermore, stock tokenization faces issues such as authenticity doubts, incomplete rights, and tax complexities, with high compliance costs and cross-border regulatory differences further hindering its scalable application. The fields of stablecoins and stock tokenization undeniably have a bright future, but whether they can truly lead a new round of crypto narrative remains to be seen.