Viewpoint: Hong Kong should issue a stablecoin backed by foreign exchange reserves

Authors: Yang Wang, Wensheng Cai, Zhibin Lei, and Yizhou Wen; Article Source: Ta Kung Pao

In the rapidly growing 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 the gradual strengthening of digital asset policies in other countries and regions such as the United States and Singapore, has demonstrated Hong Kong’s 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 issue for Hong Kong in promoting digital asset development. Stablecoins have an important role in the digital financial ecosystem.

Issuing a stablecoin denominated in the Hong Kong dollar not only helps to consolidate Hong Kong’s blockchain leadership position, but can also promote the progress of the digital Hong Kong dollar, improve transaction efficiency, reduce transaction costs, and enhance the existing payment system, further strengthening Hong Kong’s financial technology capabilities. At the same time, a Hong Kong dollar stablecoin can enhance the efficiency and inclusiveness of Hong Kong’s financial system. Its stability, free convertibility, high level of security, high degree of openness, and cross-border mobility can provide support for a wider range of financial innovations. The introduction of a Hong Kong dollar stablecoin will undoubtedly inject new momentum 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 view, this measure is too conservative and cannot match the SAR government’s large-scale plans to promote digital assets and the digital economy. Hong Kong dollar stablecoins issued by private institutions are difficult to gain important market positions and may ultimately become a marginalized product. XSGD, the 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, which are $830 billion and $28 billion, respectively. A stablecoin with a scale like XSGD cannot have an impact on the dominant position of the US dollar stablecoin. Hong Kong must have higher goals and determination on this issue.

Therefore, we strongly urge the SAR government to issue a Hong Kong dollar stablecoin (referred to as HKDG, where G stands for government) backed by Hong Kong’s foreign exchange reserves. Government-backed Hong Kong dollar stablecoins will have dual guarantees: on the one hand, they will benefit from government regulation; on the other hand, they will benefit from the transparency and tamper-proof nature of 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 in blockchain

As of March 2023, Hong Kong’s foreign exchange reserves totalled $430 billion, significantly exceeding the combined market capitalisation of USDT and USDC of $120 billion. In comparison, HKDG, endorsed by the SAR Government, would 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 stablecoins pegged to the US dollar and become the mainstream stablecoin in the blockchain and digital asset ecosystem. In addition, issuing HKDG brings many other advantages:

A substantial step towards de-dollarisation: Obviously, HKDG alone cannot 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 dominance of the US dollar in this ecosystem, and in essence achieve de-dollarisation. In addition, HKDG’s success will inevitably lead to imitation by other sovereign currencies, further promoting the diversification of the global financial market and helping to reduce excessive dependence on the US dollar. Under proper regulation, it can also serve as a role in reshaping the international strategy 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. This 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 and industrial development. HKDG can be used in the government’s financial investment plan to reduce the operating costs of projects.

Realising the digitisation of Hong Kong’s traditional trillion-dollar assets: HKDG can assist Hong Kong’s traditional assets in digitisation, thereby increasing the business scope, liquidity, low-cost transactions and transparency of traditional assets. Digital assets open up a wider range of application scenarios and usage methods, while driving the optimisation 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 centre, enhance its liquidity and influence but also bring new vitality and opportunities to Hong Kong’s digital economy.

Easier supervision and risk management: HKDG issued by the government is easier to monitor and manage risks than those issued by private institutions. The government directly regulates the issuance and circulation of HKDG, which can improve the effectiveness of monetary policy, the stability of Hong Kong’s financial system, and the consistency of technical standards. In addition, the government can flexibly manage HKDG according to 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 infringed. Compared with private institutions that may assume 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.

Promote financial innovation: Government support and regulation will help develop HKDG, encourage financial innovation, and attract more blockchain, digital currency, especially Web3-related companies and projects to settle in Hong Kong 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 technology 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 greatly reduce the cost of digital asset transactions and cross-border payments, and provide more convenient and secure financial services for the real economy.

Enhance competitiveness in the digital economy era

Support national important 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” initiative. Blockchain technology can not only eliminate redundant links in traditional transactions and reduce transaction costs, but its open and transparent records and tracking methods can also give transactions greater information and trust, 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. Firstly, legal and regulatory aspects will face challenges, such as cross-border transactions may involve the legal and regulatory standards of multiple countries. 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 stablecoins issued by private institutions. The government’s strong fiscal strength and abundant foreign exchange reserves far exceed those of private institutions. Moreover, as a sovereign entity, the government has more credibility, and the motivation and objectives 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 enrich the application scenarios of stablecoins, and integrate the cooperation between state-owned financial institutions and non-state-owned financial innovation enterprises and stablecoin payment systems. into the global stablecoin trend. Considering the above risks, the benefits of the SAR government issuing HKDG outweigh the costs.

Therefore, we advocate that the SAR government should issue a Hong Kong dollar stablecoin guaranteed 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.

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