Author| Wang Yang, Cai Wensheng, Lei Zhibin, Wen Yizhou
With the rapid growth of the global digital asset market, the Hong Kong SAR 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 its acceptance and open attitude towards the digital asset market to the world. In this context, stablecoins, a tool that plays a bridging role between traditional finance and the digital economy, has become an important issue 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 leadership position in blockchain, but also promotes the progress of the digital Hong Kong dollar, improves transaction efficiency, reduces transaction costs, improves the current payment system, and further strengthens Hong Kong’s financial technology strength. At the same time, the Hong Kong dollar stablecoin can enhance 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 wider range of financial innovations. The launch of the 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 current plan of the SAR government is limited to allowing and encouraging private institutions to issue Hong Kong dollar stablecoins. In our opinion, 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 may be difficult to gain important market positions and may eventually become a marginalized product. XSGD, a new stablecoin issued by Xfers in Singapore, is an example of this. Its market value is only $6.6 million, compared to the market values of USDT and USDC of $83 billion and $28 billion, respectively. A stablecoin with the scale of XSGD cannot affect the dominant position of the US dollar stablecoin. Hong Kong must have higher goals and determination on this issue.
Therefore, we strongly urge the government to issue a Hong Kong dollar stablecoin (HKDG) backed by Hong Kong’s foreign exchange reserves. The government-backed HKDG will have a dual guarantee: on the one hand, it will benefit from government regulation; on the other hand, it will benefit from the transparency and immutability brought by blockchain contracts. This innovative policy direction will provide strong support for Hong Kong’s leadership position in the digital finance field.
Consolidating Hong Kong’s leadership position in blockchain technology
As of March 2023, Hong Kong’s foreign exchange reserves totaled as high as US$430 billion, significantly surpassing the combined market capitalization of USDT and USDC of US$120 billion. Compared with USDT and USDC, HKDG backed by the government will have higher credibility and lower risk. Especially when the credibility of USDT is still in question and USDC has recently experienced serious discounts, HKDG has the potential to challenge the monopoly of the US dollar stablecoin and become a mainstream stablecoin in 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 challenge the dominance of the US dollar, but with the rapid development of the blockchain and digital asset ecosystem, the powerful HKDG can challenge the US dollar hegemony in this ecosystem, thus achieving de-dollarization in essence. In addition, the success of HKDG will also inevitably lead to the imitation of other sovereign currencies, further promoting the diversification of the global financial market and helping to reduce over-reliance on the US dollar. Under proper regulation, it can also serve as a role in reshaping the international strategy of the Hong Kong dollar to deliver stablecoins to other countries.
Provide 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 and provide more fiscal space for infrastructure development and industrial development. HKDG can be used in the government’s financial investment plan to reduce the operating costs of projects.
Implementing the digitization of traditional assets in Hong Kong: HKDG can assist in the digitization of traditional assets in Hong Kong, increasing the scope of traditional assets, liquidity, low-cost trading, and transparency. The digitization of assets opens up a wider range of application scenarios and usage, driving the optimization of financial services, and allowing more people to participate in transactions and buying and selling in 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: HKDG issued by the government is more easily monitored and risk-managed than those issued by private institutions. The government directly supervises the issuance and circulation of HKDG, which can enhance the effectiveness of monetary policy implementation, as well as the stability and technical specifications of Hong Kong’s finance. In addition, the government can manage it flexibly according to market conditions and policy requirements 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 infringed. Compared with private institutions that may bear commercial risks, the government is more 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 the development of HKDG, encourage financial innovation, and attract more blockchain, digital currency, especially Web3-related companies and projects to settle in Hong Kong, in order to promote Hong Kong as a global Web3 innovation center. HKDG can provide strong competition for the Hong Kong dollar in the global market, bring differentiated high-quality financial services to the market, provide advanced technical platforms, high-quality service quality, prudent regulatory environment, and promote benign competition. As an important free trade port and international financial center in China, Hong Kong can significantly reduce the cost of digital asset transactions and cross-border payments, providing 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 brought about 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 circulation and improve the efficiency of fund utilization for the “Belt and Road” initiative. 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 “Belt and Road” countries, the application of HKDG 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 potential risks. First, legal and regulatory challenges will be encountered, such as cross-border transactions may involve multiple countries’ legal and regulatory standards. If there are any illegal financial activities, money laundering, and terrorist financing issues associated with it, it may cause international disputes. Technical risks, such as hacker attacks and system failures, cannot be underestimated. In addition, large-scale exchange demand may cause short-term fluctuations in the Hong Kong dollar exchange rate.
However, despite these risks, the risks borne by the HKDG issued by the government are still significantly lower than those of the Hong Kong dollar stablecoin issued by private institutions. The government’s strong fiscal strength and abundant foreign exchange reserves far exceed 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 government-backed HKDG will help attract Hong Kong private and non-state-owned enterprises to participate in the stablecoin market, further enriching the application scenarios of stablecoins, and integrating 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 trend of stablecoins in major countries around the world. Taking into account the above risks, the benefits of the SAR government issuing HKDG outweigh the disadvantages.
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 substantive step towards de-dollarization. Only in this way can Hong Kong maintain its competitive advantage in the digital economy era.
The authors are respectively the Vice President of the Hong Kong University of Science and Technology and the Chief Scientific Advisor of the Hong Kong Web3.0 Association; a well-known angel investor; the founder of Blockcity Web3.0 Technology Company; and a PhD student at the Hong Kong University of Science and Technology.