The Vice President of the Hong Kong University of Science and Technology, Wang Yang, and others published an article: suggesting that the Hong Kong government issue a Hong Kong dollar stablecoin backed by foreign exchange reserves to challenge the dominance of the US dollar

Authors: Wang Yang, Cai Wensheng, Lei Zhibin, Wen Yizhou, Ta Kung Pao

According to Ta Kung Wen Hui, Wang Yang, Vice President of the Hong Kong University of Science and Technology and Chief Scientific Advisor of the Hong Kong Web 3.0 Association, angel investor Cai Wensheng, Lei Zhibin, founder of Blockchain City Web 3.0 Technology Company, and Wen Yizhou, a PhD student at the Hong Kong University of Science and Technology, published policy recommendations in the newspaper, proposing that Hong Kong issue a Hong Kong dollar stablecoin backed by foreign exchange reserves. The following are the contents of the recommendations:

In the context of 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 stands in stark contrast to the gradually strengthening digital asset policies of other countries and regions, such as the United States and Singapore. Hong Kong demonstrates its acceptance and openness to the digital asset market to the world. In this context, stablecoins—a tool that serves as a bridge between traditional finance and the digital economy—have become an important topic in Hong Kong's advancement of digital asset development. Stablecoins play an indispensable role in the digital financial ecosystem. Issuing a stablecoin backed by its own currency will not only help consolidate Hong Kong's blockchain leadership but also promote the advancement of the digital Hong Kong dollar, enhance transaction efficiency, reduce transaction costs, improve the current payment system, and further strengthen Hong Kong's fintech capabilities. At the same time, the Hong Kong dollar stablecoin can enhance the efficiency and inclusiveness of Hong Kong's financial system, with its stability, free convertibility, high security, high openness, and cross-border liquidity supporting broader financial innovation. The launch of the Hong Kong dollar stablecoin will undoubtedly inject new momentum into Hong Kong's economy and help enhance its 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 view, this measure is too conservative and cannot align with the SAR government's large-scale plans to promote digital assets and the digital economy. A Hong Kong dollar stablecoin issued by private institutions is unlikely to achieve significant market status and may ultimately become a marginalized product. The new 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 $83 billion and $28 billion, respectively. A stablecoin of the scale of XSGD cannot impact the dominance of the US dollar stablecoin. 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 (hereinafter referred to as HKDG, where G stands for government) backed by Hong Kong's foreign exchange reserves. A government-backed Hong Kong dollar stablecoin will have dual guarantees: on one hand, benefiting from government regulation; on the other hand, benefiting 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 digital finance field.

Consolidating Hong Kong's Blockchain Leadership

As of March 2023, Hong Kong's total foreign exchange reserves reached $430 billion, significantly surpassing the combined market value of USDT and USDC at $120 billion. In contrast, the HKDG backed by the SAR government would have higher credibility and lower risk. Especially in light of the ongoing questions about USDT's credibility and the recent severe discount of USDC, HKDG has the potential to challenge the monopoly of US dollar stablecoins and become a mainstream stablecoin in the blockchain and digital asset ecosystem. In addition, issuing HKDG brings many other advantages:

Taking a substantial step towards de-dollarization: Clearly, HKDG alone cannot shake the dominance of the US dollar, but with the rapid development of the blockchain and digital asset ecosystem, a strong HKDG can challenge the US dollar's hegemony within this ecosystem, thereby achieving de-dollarization in substance. Furthermore, the success of HKDG will inevitably inspire other sovereign currencies to follow suit, further promoting the diversification of global financial markets and helping to reduce excessive reliance on the US dollar. Under proper regulation, it can also serve as a means to reshape the international strategy of the Hong Kong dollar by facilitating the stablecoin's entry into 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 new liquidity will enhance the efficiency of the financial market. The additional liquidity can be used to reduce government debt, providing more fiscal space for infrastructure and industrial development. HKDG can be utilized in the government's financial investment plans to lower project operating costs.

Realizing the digitization of Hong Kong's traditional trillion-dollar assets: HKDG can assist in the digitization of Hong Kong's traditional assets, thereby increasing the scope of traditional assets, liquidity, low-cost transactions, and transparency. Digital assets open up broader application scenarios and usage methods while driving the optimization of financial services, allowing more people to participate in trading and transactions within the financial industry. Such transformation can not only strengthen Hong Kong's position as an international financial center, enhancing its liquidity and influence, but also bring new vitality and opportunities to Hong Kong's digital economy.

Easier supervision and risk management: The government-issued HKDG is easier to monitor and manage risks compared to those issued by private institutions. Direct government oversight of the issuance and circulation of HKDG can enhance the effectiveness of monetary policy implementation and the consistency of Hong Kong's financial stability and technical standards. Additionally, the government can flexibly manage HKDG based on market conditions and policy needs to maintain its value stability. The government has the responsibility and capability to protect the interests of HKDG holders, ensuring that its value is not compromised. Compared to private institutions that may bear commercial risks, the government is better positioned to comply with relevant regulations and strictly monitor the flow of funds when addressing issues such as money laundering.

Promoting financial innovation: Government support and regulation will facilitate the development of HKDG, encourage financial innovation, and attract more blockchain and digital currency, especially Web3-related enterprises and projects to settle in Hong Kong, promoting Hong Kong as a global Web3 innovation center. HKDG can provide strong competition for the Hong Kong dollar in the global market, bringing differentiated high-quality financial services, advanced technology platforms, quality service standards, prudent regulatory environments, and fostering healthy competition. As an important free trade port and international financial center of our country, Hong Kong can significantly reduce the costs of digital asset trading and cross-border payments, providing more convenient and secure financial services for the real economy.

Enhancing Competitiveness in the Digital Economy Era

Supporting the country's important development strategies: HKDG can address trade and investment cooperation obstacles 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 reliable means 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 its open and transparent records and tracking methods can also provide greater information and trust for transactions, further attracting international investment. In the promotion and application of HKDG in countries along the "Belt and Road," its use can not only promote Hong Kong's innovative technology and related services but also enhance Hong Kong's international competitiveness.

Although the HKDG issued by the Hong Kong government has multiple advantages, we should still pay attention to its latent risks. First, legal and regulatory challenges will arise, as cross-border transactions may involve the legal and regulatory standards of multiple countries. Any association with illegal financial activities, money laundering, or terrorist financing could lead to international disputes. Technical risks, such as hacking attacks and system failures, must not be underestimated. Furthermore, large-scale redemption demands may trigger 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 the Hong Kong dollar stablecoin issued by private institutions. The government's strong financial strength and abundant foreign exchange reserves far exceed those of private institutions, and as a sovereign entity, the government has greater credibility, with more transparent motives and objectives for issuing stablecoins. 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 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 financial technology explorations such as stablecoin payment systems into the global trend of stablecoins among major powers. Considering the above risks comprehensively, the benefits of the SAR government issuing HKDG outweigh the drawbacks.

Therefore, we advocate that the SAR government should issue a Hong Kong dollar stablecoin backed by Hong Kong's foreign exchange reserves to promote fintech innovation, enhance the competitiveness of the financial market, 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.