Author: Wang Yang, Vice President of the Hong Kong University of Science and Technology and Chief Scientific Advisor of the Hong Kong Web3.0 Association, and Wen Yizhou, PhD student at the Hong Kong University of Science and Technology.
In the previous article “Proposing a Hong Kong Dollar Stablecoin Backed by Foreign Exchange Reserves,” we advocated for the introduction of a stablecoin based on the Hong Kong Dollar (HKDG), supported by Hong Kong’s current foreign exchange reserves of up to $430 billion. We believe that this initiative will bring additional liquidity to Hong Kong, revitalize the financial market, and support government investment projects and national development strategies.
Although the government has not officially responded, our proposal has received widespread positive feedback in society. Given the rapid development in the field of digital assets, particularly the tokenization of Real-World Assets (RWA) and the plans of major entities to launch their own stablecoins, these developments highlight the urgency of issuing HKDG. In this follow-up article, we further elaborate on our position.
Tokenization of Real-World Assets (RWA) and the Increasing Demand for Stablecoins
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RWA tokenization, which involves transforming tangible or intangible assets into digital tokens, represents a breakthrough transformation in the field of digital assets and has the potential to redefine market dynamics. Through blockchain technology, RWA tokenization enhances transaction transparency, strengthens security, and broadens liquidity by enabling partial ownership. This approach not only addresses the inefficiencies of traditional financial systems but also narrows the gap between the digital asset space and the real economy, thereby driving the development of Web3.
The Digital Asset Market Will Experience Explosive Growth
Currently, the market value of US bonds and the global real estate market alone stands at $240 trillion and $280 trillion, respectively, not to mention other real-world assets. Even if only one percent of these assets were traded through RWA tokenization, it would have a significant impact on the digital asset market. As tokenization permeates various asset categories, from commodities to intellectual property rights, the digital asset market is bound to experience explosive growth.
It is foreseeable that, due to regulatory restrictions on RWA tokenization, the majority of RWA token transactions on public blockchains will occur in the form of stablecoins. Therefore, we must be prepared for the rapid expansion of the stablecoin market.
As we discussed in the previous article, Hong Kong has unique advantages to lead this revolution. However, this prospect depends on whether Hong Kong can timely issue the HKDG stablecoin backed by foreign exchange reserves. If Hong Kong lags behind major US entities that are already prepared to issue a large amount of USD stablecoins, it will miss a great opportunity.
It is worth mentioning that it is not enough for commercial institutions in Hong Kong to issue their own Hong Kong Dollar stablecoins. The issuance of fragmented versions of the Hong Kong Dollar stablecoin by different institutions leads to fragmentation and confusion because these institutions do not have sufficient scale to challenge mature USD stablecoins like USDT. If we do not issue the HKDG stablecoin backed by unified foreign exchange reserves, the separate issuance of stablecoins by individual institutions will undoubtedly become a marginalized niche product, incapable of challenging mature USD stablecoins. What’s worse is that this will foster a false sense of progress, concealing the reality of missed opportunities.
Here we can also consider adopting a compromise strategy, which is to authorize commercial institutions by the government to issue a unified HKDG stablecoin. This solution may stimulate the participation of commercial institutions, but it also brings many new challenges. These challenges include a series of unresolved issues such as auditing, regulatory balance between interests and risks, insurance, custody, and security.
The motivation for commercial institutions to issue stablecoins largely comes from the current high-interest-rate environment. However, once interest rates drop, these institutions will inevitably seek higher returns, which may increase risks. At the same time, if the regulation is too strict, these issuing institutions may not be able to profit from it, losing the motivation for sustainable development. In addition, under this scheme, the SAR government will not be able to enjoy the benefits brought by issuing HKDG. Therefore, we should take a global perspective to view the government’s authorization of commercial institutions to issue HKDG as a phased strategy and make the government’s unified issuance of HKDG our ultimate goal, and strive for it continuously.
Consolidating the global status of the Hong Kong dollar and challenging the dominance of the US dollar
Although the Hong Kong dollar can be exchanged for other currencies at any time, it is rarely used in international trade or as a global reserve currency, possibly due to its peg with the US dollar. If Hong Kong can seize the opportunity of tokenizing RWA and issue HKDG, the potential of the Hong Kong dollar as an international currency will be greatly enhanced, and it may even challenge the dominance of the US dollar in some areas.
“Window of opportunity” only lasts for one year
We have previously pointed out that the launch of HKDG can enhance the international status of the Hong Kong dollar, especially in the field of digital assets. Given the credit crises that have occurred with stablecoins like USDT and USDC, there is a strong demand in the market for highly credible stablecoins. With the support of the SAR government’s foreign exchange reserves, HKDG will enjoy unparalleled credibility. Due to the peg between the Hong Kong dollar and the US dollar, HKDG may become an attractive solution challenging the dominant position of the US dollar in stablecoin market.
We believe that the timely issuance of HKDG, combined with the upcoming tokenization of RWA, can lay a foundation for strengthening the internationalization of the Hong Kong dollar and provide a path to challenge the dominance of the US dollar. Although the stablecoin market is currently relatively small compared to the global economy, with the strong momentum of RWA tokenization, the stablecoin market will prosper. Before major US financial giants enter the market, if HKDG can occupy a favorable position and establish a foothold early on, it can still maintain a leading position even after the rapid growth of the stablecoin market. If the market value of the RWA tokenization market reaches trillions, and HKDG can occupy 10% of the stablecoin market, it will be a significant victory for the internationalization of the Hong Kong dollar and a substantial challenge to the dominance of the US dollar.
Summary
We once again strongly urge the government of the special administrative region to take action to issue HKDG. We have a narrow window of opportunity to truly make Hong Kong a major international hub for Web3. We expect this window of opportunity to be open for about a year at most. This is an important layout: it not only concerns whether Hong Kong can become the world center for digital assets and Web3 development, but also relates to the strategic goal of challenging the dominant position of the US dollar. We must seize this historic opportunity. Hong Kong cannot afford to wait, and national strategy cannot wait either.
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