Wang Yang, Cai Wensheng, and others proposed the issuance of a stablecoin backed by foreign exchange reserves in Hong Kong.

23-07-04 11:05

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Author: Wang Yang, Cai Wensheng, Lei Zhibin, Wen Yizhou

As the global digital asset market grows rapidly, 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 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 - have become an important issue for Hong Kong in promoting the development of digital assets. Stablecoins play an important role in the digital financial ecosystem. The issuance of stablecoins denominated in Hong Kong dollars not only helps to consolidate Hong Kong's leadership position in blockchain, but also promotes the progress of digital Hong Kong dollars, improves transaction efficiency, reduces transaction costs, and improves the current payment system, further strengthening Hong Kong's financial technology strength. At the same time, Hong Kong dollar stablecoins 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 Hong Kong dollar stablecoins 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 Hong Kong 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 large-scale plan of the Hong Kong government to promote digital assets and digital economy. Hong Kong dollar stablecoins issued by private institutions are difficult to gain significant market share and may ultimately become a marginalized product. The new coin stablecoin (XSGD) issued by Xfers in Singapore is an example, with a market value of only $6.6 million, compared to the market values of USDT and USDC, which are $830 billion and $28 billion, respectively. A stablecoin of the size of 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 government of the Special Administrative Region 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 HKDG stablecoin will have dual protection: on the one hand, it will benefit from government regulation; on the other hand, it will benefit from the information transparency and tamper resistance 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 the Blockchain Industry

Until March 2023, Hong Kong's foreign exchange reserves amounted to as much as $430 billion, significantly surpassing the combined market capitalization of USDT and USDC, which is $120 billion. In comparison, HKDG, which is backed by the Hong Kong government, will have higher credibility and lower risk. Especially when the credibility of USDT is still in question, and USDC has recently experienced a significant discount, HKDG has the potential to challenge the monopoly position of the US dollar stablecoin and become a mainstream stablecoin in the blockchain and digital asset ecosystem. In addition, issuing HKDG brings many other advantages:

Take a substantial step towards dollarization: Obviously, it is impossible to challenge the dominance of the US dollar solely with HKD. However, with the rapid development of blockchain and digital asset ecosystems, the powerful HKD can challenge the dominance of the US dollar in this ecosystem, thus achieving de-dollarization in substance. In addition, the success of HKD will also inevitably lead to the emulation of other sovereign currencies, further promoting the diversification of the global financial market and helping to reduce excessive reliance on the US dollar. Under proper regulation, it can also serve as a means of reshaping the international strategy of the Hong Kong dollar by delivering 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 new 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 project operating costs.

Realizing the digitization of traditional assets worth trillions in Hong Kong: HKDG can assist in the digitization of traditional assets in Hong Kong, thereby increasing the scope of traditional asset business, liquidity, low-cost transactions, and transparency. Digitized assets have opened up a wider range of application scenarios and usage methods, while driving the optimization of financial services, allowing more people to participate in transactions and trading 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: The HKDG issued by the government is more easily supervised and risk managed compared to those issued by private institutions. The government directly regulates the issuance and circulation of HKDG, which can enhance the effectiveness of monetary policy and the consistency of Hong Kong's financial stability and technical standards. In addition, the government can flexibly manage it 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 compromised. Compared to private institutions that may bear 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 the development of HKDG, encourage financial innovation, and attract more blockchain, digital currency, especially Web3-related enterprises 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 significantly reduce the cost of digital asset transactions and cross-border payments, and provide more convenient and secure 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 currency policies, trade restrictions and other factors in international cooperation. One possible application scenario is that HKDG can provide a simpler, more convenient and reliable way of fund circulation and improve fund utilization efficiency 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 greater information and trust through its open and transparent records and tracking methods, further attracting international investment. In the promotion and application of the "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 HKDG issued by the Hong Kong government has multiple advantages, we should still pay attention to its hidden risks. Firstly, legal and regulatory challenges will arise, 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, should not 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 government-issued HKDG are still significantly lower than those of privately issued Hong Kong dollar stablecoins. The government's strong fiscal strength and abundant foreign exchange reserves far exceed those of private institutions, and as a sovereign entity, the government is more credible, 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 stablecoin trend of major countries around the world. Taking into account the above risks, the benefits of the SAR government issuing HKDG outweigh the drawbacks.

Therefore, we advocate that the special administrative region government should issue a stablecoin pegged to the Hong Kong foreign exchange reserves to promote financial technology innovation, enhance financial market competitiveness, 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.