The Hong Kong dollar stablecoin debate: government minting vs private issuance

The Hong Kong dollar stablecoin is becoming a hot topic in Hong Kong's web3.0 field.

On July 3, Wang Yang, Vice-President of the Hong Kong University of Science and Technology and Chief Scientific Advisor of the Hong Kong Web3.0 Association, angel investor Cai Wensheng, and Lei Zhibin, founder of BlockCity Web3.0 Technology Company, published an article in the Ta Kung Pao Wen Wei Po entitled "Policy Recommendations/Proposal for Hong Kong to Issue a Hong Kong Dollar Stablecoin Backed by Foreign Exchange Reserves" (hereinafter referred to as "Policy Recommendations"), which sparked a lot of discussion.

The article suggests that the Hong Kong government's plan is limited to allowing and encouraging private institutions to issue Hong Kong dollar stablecoins, which is too conservative and cannot be coordinated with the SAR government's large-scale plan to promote digital assets and the digital economy. It strongly calls on the SAR government to issue a Hong Kong dollar stablecoin (HKDG) backed by Hong Kong's foreign exchange reserves.

Fang Hongjin, a blockchain technology and application expert and co-chairman of the Hong Kong Blockchain Association, said that Hong Kong should introduce regulatory policies for stablecoins as soon as possible to encourage commercial institutions to issue compliant stablecoins, including Hong Kong dollar stablecoins and offshore RMB stablecoins.

The issuance of 1 Hong Kong dollar stablecoin can refer to USDC

At present, most of the popular stablecoins in the market are US dollar stablecoins, such as USDT and USDC, while stablecoins anchored to other fiat currencies account for a relatively small proportion. According to coinmarketcap.com, the market capitalizations of USDT and USDC are 83.3 billion and 27.7 billion US dollars respectively, ranking third and fifth in the cryptocurrency market, and the two together account for more than 85% of the entire stablecoin market.

The Policy Recommendations propose that it is difficult for a Hong Kong dollar stablecoin issued by a private institution to gain an important market position and may eventually become a marginalized product. It cannot have an impact on the dominance of the US dollar stablecoin. Hong Kong must have higher goals and determination on this issue. Therefore, we strongly call on the SAR government to issue a Hong Kong dollar stablecoin backed by Hong Kong's foreign exchange reserves.

Meng Dinglin, partner and chief technology expert of Minimalist Currency, told Techub News that it is appropriate for the Hong Kong government to launch a Hong Kong dollar stablecoin, which can solve pain points such as SWIFT payment delays and will give birth to a large number of new business models. Stablecoins backed by the government will have greater application prospects.

However, on social media, many people have questioned the Hong Kong SAR government's proposal to issue a Hong Kong dollar stablecoin.

Fang Hongjin, a blockchain technology and application expert and co-chairman of the Hong Kong Blockchain Association, told Techub News: “I very much look forward to the Hong Kong government issuing a stablecoin regulatory policy as soon as possible, but it is not appropriate for the Hong Kong government to issue stablecoins.”

Fang Hongjin believes that the Hong Kong SAR government has the right to mint coins, and should issue a digital currency form of legal tender (CBDC), i.e., digital Hong Kong dollars. "Stablecoins are digital certificates issued based on legal tender, etc., which are equivalent to commercial bills in traditional finance and should be issued by commercial institutions in Hong Kong under the supervision of the Hong Kong government."

On June 12, Hong Kong's Deputy Secretary for Financial Services and the Treasury, Chan Ho-lim, said that the Hong Kong Monetary Authority has conducted public consultation on the launch of stablecoins and will gradually establish a regulatory framework in the future, with the goal of launching it before the end of 2024.

In terms of technology, the Hong Kong government will also face some difficulties in issuing Hong Kong dollar stablecoin.

Fang Hongjin believes that it is not appropriate for the Hong Kong government to issue Hong Kong dollar stablecoins on public chains such as Ethereum, and it is more appropriate for commercial organizations to issue them; if they are issued on private chains, not only will the technology be very difficult, but the same entity issuing decentralized Hong Kong dollar stablecoins and centralized digital Hong Kong dollars will create conflicts.

Previously, several Hong Kong dollar stablecoins have been issued by private institutions.

Tong Yi, co-chairman of the Hong Kong Blockchain Association HKBA.club, told Techub News that as a Hong Konger, he hopes to see a local compliant stablecoin in Hong Kong to facilitate everyone's food, clothing, housing and transportation. Currently, the stablecoins used by Hong Kong people are mainly USDT, followed by USDC, and there are few other stablecoins.

"Hong Kong dollar stablecoins have been issued by private companies, but they are not popular," Tang Yi revealed.

According to relevant media reports, in 2018, digital banking service platform CoinBank and Cayman Anchor Company cooperated on the Hong Kong dollar-pegged stablecoin HKDT.

In 2019, OneCash issued the Hong Kong dollar stablecoin HKC based on public chains such as TRON, ETH, and PlatON, and TrustToken issued the Hong Kong dollar-pegged stablecoin TrueHKD (THKD) based on the Binance Chain.

However, these stablecoins are very low in scale and market acceptance, and are hard to find in the entire cryptocurrency market.

Tang Yi said that USDC is one of the most compliant stablecoins currently, and the Hong Kong dollar stablecoin can refer to USDC to a certain extent. The New York State government of the United States issued a license to circle.com, which issued the US dollar stablecoin USDC. The US compliance auditor Grant Thornton regularly endorsed the assets of USDC and made financial audit reports, which were open and transparent.

Jiang Zhaosheng, a senior researcher at OKLink Research Institute, said that USDC is subject to relevant legal supervision in various states of the United States, and there are regular audits of code and finance by third-party verifiers. In internal risk management, four sections have been set up: "risk warning", "fraud management", "monitoring plan" and "complaint management". In terms of operating mechanism, USDC deposits its collateralized fiat assets in the accounts of the Federal Deposit Insurance Corporation of the United States and other institutions for decentralized storage, all in designated independent accounts "for the benefit of USDC holders".

2Digital Hong Kong dollar and Hong Kong dollar stablecoin may complement each other

Digital Hong Kong dollar may be another variable.

The "Policy Recommendations" pointed out that Hong Kong's issuance of a stablecoin in its own currency can promote the advancement of the digital Hong Kong dollar, improve transaction efficiency, reduce transaction costs, and improve the current payment system.

BC Technology CFO Hu Zhenbang previously stated in an interview with the media that the possibility of the emergence of the Hong Kong dollar stablecoin is estimated to be not very high. The Hong Kong government has previously clearly stated in the white paper that it will consider developing the digital Hong Kong dollar. This path will be somewhat similar to the digital RMB. The Hong Kong dollar stablecoin may to some extent be in competition with the digital Hong Kong dollar.

BC Technology is a Hong Kong-listed company. Its digital asset trading platform OSL obtained Type 1 and Type 7 licenses under the regulatory framework of the Hong Kong Securities and Futures Commission in 2020.

As early as October 2021, the Hong Kong SAR government released the white paper on central bank digital currency technology at the retail level, "e-HKD: A technical perspective", to discuss the technologies related to the digital Hong Kong dollar.

On May 18, 2023, the Hong Kong Monetary Authority announced the launch of the "Digital Hong Kong Dollar" pilot program, and 16 companies including Alipay (Hong Kong), HSBC, and Bank of China (Hong Kong) were selected for the first round of trials.

Tang Yi also told Techub News that there is a certain competitive relationship between the digital Hong Kong dollar and the Hong Kong dollar stablecoin.

Fang Hongjin is optimistic about the competitive relationship between the two. He believes that in addition to the competitive relationship, the Hong Kong dollar stablecoin can complement the digital Hong Kong dollar to a certain extent.

"The digital Hong Kong dollar is suitable for circulation within Hong Kong and can be used in the retail market. The Hong Kong dollar stablecoin is not subject to geographical restrictions and is more suitable for payment and settlement of cross-border trade and services. Because it does not directly represent the local legal currency, it will not involve issues such as the monetary sovereignty of other countries." Fang Hongjin said.

Jiang Zhaosheng, a senior researcher at OKLink Research Institute, said that the Hong Kong dollar stablecoin is an important infrastructure to promote the localization of Hong Kong's Web3, and the market is very enthusiastic about the launch of the Hong Kong dollar stablecoin. However, there is almost no mention of the Hong Kong dollar stablecoin in Hong Kong's official statements, and more encouragement is given to innovative practices such as digital Hong Kong dollars and tokenized deposits. At the same time, the Hong Kong government is accelerating the formulation of stablecoin regulatory policies. In the short term, the Hong Kong government may not have a strong demand for the Hong Kong dollar stablecoin, and the possibility of a compliant Hong Kong dollar stablecoin is not great.

3A good time to develop Hong Kong dollar stablecoin

Currently, 99% of the stablecoins circulating in the market are US dollar stablecoins. How the Hong Kong dollar stablecoin can occupy the market and how to achieve the goal of de-dollarization are also the focus of attention.

The Policy Recommendations pointed out that by March 2023, Hong Kong's total foreign exchange reserves will reach US$430 billion, significantly exceeding the US$120 billion market value of USDT and USDC combined. In contrast, HKDG, which is backed by the SAR government, will have higher credibility and lower risks. Especially when the credibility of USDT is still questioned and USDC has recently experienced a serious discount, 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.

Fang Hongjin attaches more importance to the liquidity and application scenarios of the Hong Kong dollar stablecoin. He said that liquidity is the most important, and everyone needs to work together to create more application scenarios for the Hong Kong dollar stablecoin to make the Hong Kong dollar stablecoin circulate.

In addition to the Hong Kong dollar stablecoin, Fang Hongjin believes that issuing offshore RMB stablecoins in Hong Kong may be a more important option. Since the Hong Kong dollar is issued with an anchor to the US dollar, has a linked exchange rate with the US dollar, and can be freely exchanged in Hong Kong, the Hong Kong dollar stablecoin has little effect on "de-dollarization".

"But if 2 trillion offshore RMB is activated in the form of stablecoins, it will play an important role in promoting areas such as cross-border payments. Under the current economic situation, cross-border trade is very difficult, and most developing countries lack US dollars for cross-border payments. This is a good opportunity to develop offshore RMB stablecoins. The Hong Kong Special Administrative Region Government should introduce regulatory policies for stablecoins as soon as possible to encourage commercial institutions to issue compliant stablecoins." Fang Hongjin said.

Jiang Zhaosheng suggested that non-market means should be used to allow the Hong Kong dollar stablecoin to circulate on virtual asset trading platforms licensed by the Hong Kong Securities and Futures Commission, and that mechanism innovation should be used to attract more institutions and users in order to gain greater development space. In addition, developing an interest-bearing Hong Kong dollar stablecoin may be a good choice, that is, using Hong Kong dollars as collateral assets and paying users all or part of the interest generated by the collateral to gain the trust and use of more institutions and users.