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

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 is in stark contrast to the gradual strengthening of digital asset policies in other countries and regions, such as the United States and Singapore. Hong Kong has shown the world its acceptance and openness to the digital asset market. In this context, stablecoins, a tool that plays a bridge role between traditional finance and the digital economy, has become an important issue in Hong Kong in promoting the development of digital assets. Stablecoins play an indispensable role in the digital financial ecosystem. Hong Kong's issuance of its own currency stablecoin will not only help consolidate Hong Kong's blockchain leadership, but also promote the progress of the digital Hong Kong dollar, improve transaction efficiency, reduce transaction costs, improve the current payment system, and further strengthen Hong Kong's financial technology capabilities. 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 open source and cross-border liquidity can provide support for a wider range of financial innovations. The launch of the Hong Kong dollar stablecoin will undoubtedly inject new impetus into Hong Kong's economy and help enhance Hong Kong's competitiveness in the digital economy era.

However, the SAR government's current plan is limited to allowing and encouraging private institutions to issue Hong Kong dollar stablecoins. In our view, this measure is too conservative and cannot be coordinated with the SAR government's large-scale plan to promote digital assets and the digital economy. Hong Kong dollar stablecoins issued by private institutions will find it difficult to gain an important market position and may eventually become a marginalized product. An example is the Singapore stablecoin (XSGD) issued by Xfers in Singapore, which has a market value of only US$6.6 million. In comparison, the market values ​​of USDT and USDC have reached US$830 billion and US$28 billion, respectively. A stablecoin of the size of XSGD 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 (hereinafter referred to as HKDG, where G stands for the government) backed by Hong Kong's foreign exchange reserves. The government-backed Hong Kong dollar stablecoin will have dual protections: on the one hand, it will benefit from government supervision; on the other hand, it will benefit from the information transparency and immutability brought by blockchain contracts. This innovative policy direction will provide strong support for Hong Kong's leadership in the field of digital finance.

Strengthening Hong Kong’s blockchain leadership

As of March 2023, Hong Kong's total foreign exchange reserves reached 430 billion US dollars, significantly exceeding the combined market value of USDT and USDC of 120 billion US dollars. 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 the mainstream stablecoin in the blockchain and digital asset ecosystem. In addition, issuing HKDG also brings many other advantages:

Taking a substantial step towards de-dollarization: Obviously, HKDG alone cannot shake the hegemony of the US dollar, but with the rapid development of the blockchain and digital asset ecosystem, a powerful HKDG can challenge the hegemony of the US dollar in this ecosystem, thereby achieving de-dollarization in essence. In addition, the success of HKDG will inevitably lead to the imitation of other sovereign currencies, further promote the diversification of the global financial market, and help reduce excessive dependence on the US dollar. Under proper supervision, it can also serve as a role in reshaping the international strategy of the Hong Kong dollar and delivering stablecoins 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 improve 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.

Digitize Hong Kong's trillion-dollar traditional assets: HKDG can help Hong Kong's traditional assets go digital, thereby increasing the business scope, liquidity, low-cost transactions and transparency of traditional assets. Digital assets have opened up a wider range of application scenarios and usage methods, while driving the optimization of financial services, allowing more people to have the opportunity to participate in transactions and sales 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.

Easier to supervise and manage risks: HKDG issued by the government is easier to monitor and manage risks than those issued by private institutions. The government's direct supervision of the issuance and circulation of HKDG can improve the effectiveness of monetary policy implementation and the consistency of Hong Kong's financial stability and technical specifications. 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 its value is not infringed. Compared with private institutions that may bear commercial risks, the government can 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 supervision will help the development of HKDG, encourage financial innovation, and attract more blockchain, digital currency, especially Web3-related companies and projects to enter Hong Kong, so as to promote Hong Kong to become 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 healthy 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 safer financial services for the real economy.

Enhance competitiveness in the digital economy era

Supporting important national development strategies: HKDG can solve obstacles to trade and investment cooperation caused by monetary policy, trade restrictions and other factors in international cooperation. One possible application scenario is that HKDG can provide a simpler, more convenient and more reliable way of capital circulation and improve the efficiency of capital utilization for the "Belt and Road". Blockchain technology can not only eliminate the redundant links of traditional transactions and reduce transaction costs, but its open and transparent record and tracking methods can also give transactions more information and trust, further attracting international investment. In the promotion and application of countries along the "Belt and Road", 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 many advantages, we should still pay attention to its potential risks. First , there will be challenges in terms of law and regulation. For example, cross-border transactions may involve the laws 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, 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 HKDG issued by the government are still significantly lower than those of Hong Kong dollar stablecoins issued by private institutions. The government's strong financial strength and abundant foreign exchange reserves far exceed those of private institutions. Moreover, as a sovereign entity, the government has more credibility and its motivation and goals for issuing stablecoins are more transparent. At the same time, the government-backed HKDG will help attract private and non-state-owned enterprises in Hong Kong 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 financial technology exploration such as stablecoin payment systems into the stablecoin trend of global powers. Taking the above risks into consideration, the advantages 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 financial market competitiveness, 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.