Author | Wang Yang, Cai Wensheng, Lei Zhibin, Wen Yizhou
In the context of the rapid growth of the global digital asset market, the Hong Kong Special Administrative Region government is vigorously promoting the development of digital assets and the digital economy. This effort, in contrast to other countries and regions such as the United States and Singapore, which are gradually strengthening their digital asset policies, has formed a distinct contrast. Hong Kong has demonstrated to the world its acceptance and openness to the digital asset market. In this context, stablecoins, a tool that plays a bridging role between traditional finance and the digital economy, has become an important topic for Hong Kong in promoting the development of digital assets. Stablecoins play an indispensable role in the digital financial ecosystem. The issuance of a stablecoin denominated in Hong Kong dollars not only helps to consolidate Hong Kong’s blockchain leadership position, but can also promote the advancement of digital Hong Kong dollars, improve transaction efficiency, reduce transaction costs, and improve the existing payment system, further strengthening Hong Kong’s financial technology strength. At the same time, the Hong Kong dollar stablecoin can improve the efficiency and inclusiveness of Hong Kong’s financial system. Its stability, free convertibility, high security, high openness, and cross-border mobility can provide support for a broader range of financial innovations. The introduction of a Hong Kong dollar stablecoin will undoubtedly inject new impetus into the Hong Kong economy and help enhance Hong Kong’s competitiveness in the digital economy era.
However, the government’s current plan is limited to allowing and encouraging private institutions to issue Hong Kong dollar stablecoins. In our view, this measure is too conservative and cannot match the large-scale plans of the SAR government to promote digital assets and the digital economy. Hong Kong dollar stablecoins issued by private institutions are difficult to obtain important market positions and may ultimately become marginalized products. Singapore’s XSGD, issued by Xfers, is an example, with a market value of only $6.6 million, compared to the market values of USDT and USDC of $830 billion and $28 billion, respectively. A stablecoin of the size of XSGD cannot affect the dominant position of USD stablecoins. Hong Kong must have higher goals and determination on this issue.
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Therefore, we strongly urge the SAR government to issue a Hong Kong dollar stablecoin (referred to as HKDG, with “G” representing the government) backed by Hong Kong’s foreign exchange reserves. The government-backed Hong Kong dollar stablecoin will have dual guarantees: on the one hand, it will benefit from government supervision; on the other hand, it will benefit from the information transparency and tamper-proofness brought by blockchain contracts. This innovative policy direction will provide strong support for Hong Kong’s leadership position in the digital finance field.
Strengthening Hong Kong’s Leadership Position in Blockchain
As of March 2023, Hong Kong’s foreign exchange reserves amounted to a substantial $430 billion, which is significantly higher than the combined market capitalization of USDT and USDC, at $120 billion. In comparison, HKDG, backed by the Special Administrative Region government, would have higher credibility and lower risk. Especially in the case where USDT’s credibility is still in question and USDC recently experienced significant depreciation, HKDG has the potential to challenge the monopoly status of USD stablecoins and become the mainstream stablecoin within the blockchain and digital asset ecosystem. In addition, the issuance of HKDG brings many other advantages:
A substantial step towards de-dollarization: Obviously, relying solely on HKDG is not enough to shake the dominance of the US dollar, but with the rapid development of the blockchain and digital asset ecosystem, a strong HKDG can challenge the US dollar hegemony in this ecosystem and effectively achieve de-dollarization. Furthermore, the success of HKDG is likely to lead to the imitation of other sovereign currencies, further promoting the diversification of the global financial market and helping to reduce overreliance on the US dollar. Under proper regulation, it can also serve as a means of reshaping the internationalization of the Hong Kong dollar stablecoin to other countries.
Providing additional liquidity to support government investment projects: Issuing HKDG can not only provide a large amount of additional liquidity but also further expand Hong Kong’s foreign exchange reserves. These additional liquidity will further enhance the efficiency of the financial market. The additional liquidity can be used to reduce government debt, provide more fiscal space for infrastructure development and industrial growth. HKDG can be used for the government’s financial investment plan to reduce the operating costs of special cases.
Realizing the digitalization of Hong Kong’s traditional trillion-dollar assets: HKDG can assist Hong Kong’s traditional assets in moving towards digitalization, thereby increasing the business scope, liquidity, low-cost trading, and transparency of traditional assets. Digital assets open up a wider range of application scenarios and usage methods while driving the optimization of financial services, allowing more people to participate in the trading and buying and selling of the financial industry. Such changes can not only strengthen Hong Kong’s position as an international financial center, enhance its liquidity and influence but also bring new vitality and opportunities to Hong Kong’s digital economy.
More easily supervised and risk-managed: The government-issued HKDG is more easily monitored and risk-managed compared to those issued by private institutions. Direct government supervision of the issuance and circulation of HKDG can enhance the effectiveness of monetary policy and the stability and technical standardization of Hong Kong’s finance. In addition, the government can flexibly manage it based on market conditions and policy needs to maintain its value stability. The government has the responsibility and ability to protect the interests of HKDG holders and ensure that their value is not compromised. Compared to private institutions that may assume commercial risks, the government is better able to comply with relevant regulations and strictly monitor the flow of funds when dealing with issues such as money laundering.
Promoting financial innovation: Government support and regulation will help to develop HKDG, encourage financial innovation, and attract more blockchain, digital currency, especially Web3-related enterprises and projects to Hong Kong to promote Hong Kong as a global Web3 innovation center. HKDG can provide a strong competition for the Hong Kong dollar in the global market, bring differentiated high-quality financial services to the market, provide advanced technology platforms, high-quality service quality, prudent regulatory environment, and promote benign competition. As an important free trade port and international financial center in our country, Hong Kong can significantly reduce the cost of digital asset transactions and cross-border payments, and provide more convenient and safer financial services for the real economy.
Enhancing competitiveness in the digital economy era
Supporting important national development strategies: HKDG can solve the obstacles to trade and investment cooperation caused by factors such as monetary policy and trade restrictions in international cooperation. One possible application scenario is that HKDG can provide a simpler, more convenient, and reliable way of fund flow and improve the efficiency of fund utilization for the Belt and Road. Blockchain technology can not only eliminate redundant links in traditional transactions and reduce transaction costs, but also give transactions more information and trust through open and transparent records and tracking methods, further attracting international investment. In the promotion and application of HKDG in countries along the Belt and Road, its application can not only promote Hong Kong’s innovative technology and related services, but also enhance Hong Kong’s international competitiveness.
Although the HKDG issued by the Hong Kong government has multiple advantages, we should still pay attention to its hidden risks. First of all, legal and regulatory aspects will face challenges, such as cross-border transactions may involve the legal and regulatory standards of multiple countries. If any illegal financial activities, money laundering, and terrorist financing issues are associated with it, it may provoke international disputes. Technical risks, such as hacker attacks and system failures, cannot be underestimated. In addition, large-scale demand for exchange may cause short-term fluctuations in the Hong Kong dollar exchange rate.
However, despite these risks, the risks borne by HKDG issued by the government are still significantly lower than those of Hong Kong dollar stablecoins issued by private institutions. The government’s strong fiscal strength and abundant foreign exchange reserves far exceed those of private institutions, and as a sovereign entity, the government has more credibility, and the motivation and goals of issuing stablecoins are more transparent. At the same time, the HKDG endorsed by the government will help attract Hong Kong private and non-state-owned enterprises to participate in the stablecoin market, further enrich the application scenarios of stablecoins, and integrate the cooperation between state-owned financial institutions and non-state-owned financial innovation enterprises as well as stablecoin payment systems and other financial technology explorations into the global trend of stablecoins. Considering the above risks, the benefits of the SAR government issuing HKDG outweigh the drawbacks.
Therefore, we advocate that the SAR government should issue a Hong Kong dollar stablecoin backed by Hong Kong’s foreign exchange reserves to promote financial technology innovation, enhance the competitiveness of the financial market, optimize the use of foreign exchange reserves, and take a substantial step towards de-dollarization. Only in this way can Hong Kong maintain its competitive advantage in the digital economy era.