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

Authors: Wang Yang, Cai Wensheng, Lei Zhibin, Wen Yizhou; Article Source: Dagong Wenhui

With the rapid growth of the global digital asset market, the Hong Kong SAR government is vigorously promoting the development of digital assets and the digital economy. This effort is in stark contrast to other countries and regions, such as the United States and Singapore, which have gradually strengthened their digital asset policies. Hong Kong has shown the world its acceptance and openness to the digital asset market. In this context, stable currency, a tool that acts as a bridge between traditional finance and the digital economy, has become an important issue in Hong Kong's promotion of digital asset development. Stablecoins play a role that cannot be ignored in the digital financial ecosystem. **Hong Kong’s issuance of its own stable currency will not only help consolidate Hong Kong’s leading position in the blockchain, 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 strength. At the same time, the Hong Kong dollar stable currency can improve 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 innovation. The launch of the Hong Kong dollar stable currency will undoubtedly inject new impetus into Hong Kong's 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 opinion, this measure is too conservative to match the SAR government's large-scale plan to promote digital assets and the digital economy. It is difficult for Hong Kong dollar stablecoins issued by private institutions to gain an important market position, and may eventually become a marginal product. Singapore’s Xfers-issued stablecoin (XSGD) is an example, with a market capitalization of just $6.6 million, compared to USDT and USDC’s market caps of $830 billion and $28 billion, respectively. A stablecoin the size of XSGD cannot have an impact on the dominance of USD stablecoins. 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 backed by Hong Kong’s foreign exchange reserves (hereinafter referred to as HKDG, where G represents the government). **The Hong Kong dollar stable currency endorsed by the government will have double guarantees: on the one hand, it will benefit from the government's supervision; on the other hand, it will benefit from the information transparency and non-tamperable modification brought by the blockchain contract. **This innovative policy direction will provide strong support for Hong Kong's leadership in digital finance.

Consolidate Hong Kong's blockchain leadership

As of March 2023, Hong Kong's foreign exchange reserves totaled as high as US$430 billion, significantly exceeding the combined market value of USDT and USDC of US$120 billion. In contrast, HKDG endorsed by the SAR government will have higher credibility and lower risks. Especially when the credibility of USDT is still being questioned, and USDC has recently experienced a serious discount, HKDG has the potential to challenge the monopoly of USD stablecoins and become a mainstream stablecoin in the blockchain and digital asset ecosystem. Apart from this, issuing HKDG brings many other advantages:

**A substantive step towards de-dollarization: **Obviously, it is impossible to shake the hegemony of the US dollar by relying on HKDG alone, but with the rapid development of blockchain and digital asset ecology, the powerful HKDG can challenge in this ecology Dollar hegemony, thus de-dollarizing in essence. In addition, the success of the HKDG will surely lead to the imitation of other sovereign currencies, further promoting the diversification of the global financial market and helping to reduce the excessive dependence on the US dollar. Under proper supervision, it can also serve as a role in reshaping the Hong Kong dollar's international strategy to deliver stablecoins to other countries.

**Provide additional liquidity to help 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 new liquidity will further enhance the efficiency of financial markets. Additional working capital 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.

**Achieving the digitization of Hong Kong's traditional billions of assets: **HKDG can assist Hong Kong's traditional assets to 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, so that more people have the opportunity to participate in transactions and transactions in the financial industry. Such changes can not only strengthen Hong Kong's status 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 monitor and manage risks: **HKDG issued by the government is easier to monitor and manage risks than those issued by private institutions. The government directly supervises the issuance and circulation of HKDG, which can improve the implementation efficiency of monetary policy and the consistency of Hong Kong's financial stability and technical regulations. In addition, the government can manage flexibly 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 take 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.

**Promote 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 Hong Kong, so as to promote Hong Kong to become a global Web3 Innovation Hub. 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 my country, Hong Kong can greatly 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 trade and investment cooperation obstacles caused by monetary policy, trade restrictions and other factors in international cooperation. A possible application scenario is that HKDG can provide a simpler, more convenient and reliable method of capital circulation and improve the efficiency of capital utilization for the "Belt and Road". Blockchain technology can not only eliminate redundant links in traditional transactions and reduce transaction costs, but its open and transparent recording and tracking methods can also give transactions greater information and trust, and further attract 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 multiple advantages, we should still pay attention to its potential risks. **First, the legal and regulatory aspects will meet challenges, such as cross-border transactions may involve the legal and regulatory standards of multiple countries. If there are any issues related to illegal financial activities, money laundering and terrorist financing, it may lead to international disputes. Technical risks, such as hacking and system failures, must not be taken lightly. In addition, large-scale conversion demand may cause short-term fluctuations in the Hong Kong dollar exchange rate.

However, despite these risks, HKDG issued by the government still carries significantly less risk than Hong Kong dollar stablecoins issued by private institutions. The government's strong financial strength and abundant foreign exchange reserves far exceed that of private institutions, and, as a sovereign entity, the government has more credibility, and the motivation and goals of issuing stablecoins are more transparent. At the same time, the HKDG endorsed by the government 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 companies as well as the stablecoin payment system and other financial institutions. Tech explores the stablecoin trend that incorporates global powers. Considering the above risks comprehensively, the advantages of HKDG issued by the SAR government 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.