Circle Ventures, the venture arm of the USDC issuer Circle, has invested in an offshore Chinese yuan-backed stablecoin project, CNHC.
It's hard to overlook the timing and strategic significance of the tie-up. In a matter of several years, stablecoins have grown from a fringe category into a more than $130 billion market. These digital coins are typically backed by traditional assets like the U.S. dollar and are designed to offer a less volatile way to trade than, say, Bitcoin and Ethereum.
As the stablecoin industry booms, hierarchy starts to form, mirroring the traditional USD-dominated financial world. Currently, over 99% of the existing stablecoins are backed by USD, and CNHC represents one of the few attempts to challenge USD dominance in the blockchain world.
Circle itself has been facing troubles since March. It was hit first by Silvergate's closure and later by Silicon Valley Bank's implosion. News surfaced that the stablecoin issuer had held reserve deposits at both banks. Over the past week, USDC briefly depegged from its $1 target value.
It's unclear how big a stake Circle Ventures has in CNHC, which is a Cayman Islands-registered, cross-border payment service provider. But the move to establish some presence in the East could be a good hedging bet for the Boston-based crypto startup.
CNHC's latest funding round totals $10 million and was led by KuCoin Ventures, the investment arm of the fourth biggest crypto exchange in the world. IDG Capital and Circle Ventures were participating investors.
Crypto in Hong Kong
While the USD-dominated stablecoin world has matured and become closely regulated, the yuan-backed sphere has only begun to take shape. The movement is happening in Hong Kong, which has historically been the largest offshore yuan center.
In 2009, the city set up a yuan settlement scheme, paving the way for the gradual internationalization of the currency. This move was marked by the creation of the offshore currency CNH, with the ‘H’ standing for Hong Kong, to differentiate from the onshore CNY.
In the past few years, the city's status as Asia's financial hub has been shaken by geopolitical events. But there are signs that it is trying to restore investor confidence.
Most notably, it's relaxing rules around crypto-based finance. In late February, the city proposed a series of rules that could allow retail investors to trade major cryptocurrencies like Ethereum and Bitcoin, a stark contrast to mainland China's crackdown on all forms of crypto transactions.
CNHC's namesake stablecoin was born to ride the region's new wave of crypto regulations. The startup, which was founded in early 2021, is setting up its headquarters in Hong Kong.
"The development of regulated stablecoins is positive to Hong Kong as an international financial center," says Curt Shi, founding partner of a new Hong Kong-based web3 venture capital firm Prodigital Future Fund. "Improved transparency and better investor protection are where Hong Kong is going, and I assume more traditional banks may join as issuers."
As a 1:1 fully collateralized stablecoin backed by offshore Chinese yuan, CNHC needs approval from the Hong Kong Monetary Authority and is obliged to submit audit reports at the local government’s request, the company told TechCrunch.
The stablecoin issuer has also built up a trust structure to custody collateralized fiat currency and a framework for KYC (know-your-customer) and AML (anti-money laundering).
CNHC can be redeemed into fiat offshore yuan on the stablecoin's platform. To convert into other currencies like USD, EUR and GBP, CNHC is working with partners in different countries.
CNHC is issued on Ethereum and Conflux, a blockchain that boasts speedy and low-fee transactions. Conflux is also one of a kind as it claims to be the only regulatory-compliant public, permissionless blockchain in China. The Chinese blockchain was planning to move its headquarters to Hong Kong, its co-founder said at an event in January.
Other crypto firms are also creating yuan-pegged stablecoins. In December, crypto billionaire Justin Sun's blockchain Tron welcomed offshore Chinese yuan-pegged TCNH.
Founded in early 2021 by Jack Chou and Joy Cham, CNHC has been helping Chinese exporters collect payments from developing countries, where banking and other traditional financial institutions are underdeveloped, using stablecoins. In 2022, the company processed $40-50 million in monthly transactions via the USD-pegged USDT and USDC as well as the CNHC stablecoin.
Update: An earlier version of the story incorrectly said Conflux was backed by KuCoin.