Circle Ventures, the venture arm of USDC issuer Circle, has invested in an offshore Chinese yuan-backed stablecoin project, CNHC.

It’s hard to overlook the timing and strategic importance of the collaboration. In a few years, stablecoins have grown from a fringe category to a market worth more than $130 billion. These digital coins are usually backed by traditional assets like the US dollar and are designed to offer a less volatile way of trading than the likes of Bitcoin and Ethereum.

As the stablecoin industry booms, a hierarchy is beginning to form, reflecting the traditional USD-dominated financial world. Currently, over 99% of 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 struggling since March. It was hit first by the Silvergate shutdown and later by the Silicon Valley Bank implosion. News surfaced that the stablecoin issuer had held reserve deposits with both banks. Over the past week, the USDC briefly decoupled from the $1 target value.

It is unclear the size of Circle Ventures’ stake in CNHC, 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, currently the fourth largest crypto exchange in the world. IDG Capital and Circle Ventures were participating investors.

cryptocurrency in hong kong

While the USD-dominated stablecoin world has matured and is highly regulated, the Yuan-backed world is only beginning to take shape. The move is taking place in Hong Kong, which has traditionally been the largest offshore yuan center.

In 2009, the city established a yuan regime, 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 itself from the onshore CNY.

In recent years, the city’s status as Asia’s financial center has been shaken by geopolitical events. But there are signs that it is trying to restore investor confidence.

Most notable are the easing of rules around crypto-based funding. In late February, the city proposed a set of rules that could allow private investors to trade major cryptocurrencies such as Ethereum and Bitcoin, a stark contrast to mainland China’s crackdown on all forms of crypto transactions.

CNHC’s namesake stablecoin was born to compete in the region’s new wave of crypto regulation. The start-up, which was founded in early 2021, will be headquartered in Hong Kong.

“The development of regulated stablecoins is positive for Hong Kong as an international financial center,” said Curt Shi, founder of new Hong Kong-based web3 venture capital firm Prodigital Future Fund. “Improved transparency and better investor protection are where Hong Kong is headed, and I imagine more traditional banks will join as issuers.”

USD alternative

As a fully collateralized 1:1 stablecoin backed by offshore Chinese yuan, CNHC requires approval from the Hong Kong Monetary Authority and is required to submit audit reports if requested by the local government, the company told CoinTech.

The stablecoin issuer has also built a trust structure for holding collateral-backed fiat currency and a framework for KYC (know your customer) and AML (anti-money laundering).

CNHC can be exchanged for fiat offshore yuan on the stablecoin platform. To convert to other currencies such as USD, EUR and GBP, CNHC works with partners in different countries.

CNHC is issued on Ethereum and Conflux, a KuCoin-backed blockchain that offers fast and low-cost transactions. Conflux is also one of a kind in that it claims to be the only regulatory-compliant, regulatory-compliant blockchain in China. The Chinese blockchain was planning to move its headquarters to Hong Kong, the co-founder said at an event in January.

Other crypto companies 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 helps Chinese exporters collect payments from developing countries, where banks and other traditional financial institutions are underdeveloped, using stablecoins. In 2022, the company processed $40-50 million in monthly transactions through the USD-pegged USDT and USDC, as well as the CNHC stablecoin.