Vice President of Hong Kong University of Science and Technology: Calls on the government to issue a Hong Kong dollar stablecoin in advance to challenge the dominance of the US dollar

Original Title: "Policy Recommendation: Seizing the Opportunity to Issue a Government-Supported Hong Kong Dollar Stablecoin"

Authors: Wang Yang, Wen Yizhou, Ta Kung Pao

In the previous article "Proposal for Hong Kong to Issue a Hong Kong Dollar Stablecoin Backed by Foreign Exchange Reserves," we advocated for the introduction of a stablecoin based on the Hong Kong dollar (HKDG), supported by Hong Kong's current foreign exchange reserves of up to $430 billion. We believe this initiative will bring additional liquidity to Hong Kong, invigorate the financial market, and support significant interests such as government investment projects and national development strategies.

Although the government has not provided an official response, our proposal has garnered widespread positive feedback in society. Given the rapid development in the digital asset space, particularly the tokenization of real-world assets (RWA) and major entities launching their own stablecoins, these developments highlight the urgency of issuing HKDG. In this follow-up article, we further elaborate on our position.

The Tokenization of Real-World Assets (RWA) and the Imminent Surge in Demand for Stablecoins

The tokenization of RWA, which involves converting tangible or intangible assets into digital tokens, represents a groundbreaking shift in the digital asset space, with the potential to redefine market dynamics. Through blockchain technology, RWA tokenization enhances transaction transparency, strengthens security, and broadens liquidity by enabling fractional ownership. This approach addresses the inefficiencies of the traditional financial system and narrows the gap between the digital asset space and the real economy, thereby promoting the development of Web3.

The Digital Asset Market Will Experience Explosive Growth

Currently, the market capitalization of U.S. Treasury bonds and the global real estate market stands at $240 trillion and $280 trillion, respectively, not to mention other real assets. Even if just one percent of these assets are traded through RWA tokenization, it would have a significant impact on the digital asset market. As tokenization permeates various asset classes from commodities to intellectual property, the digital asset market is bound to witness explosive growth.

It is foreseeable that due to regulatory constraints on RWA tokenization, the majority of RWA tokens on public blockchains will be traded in the form of stablecoins. Therefore, we must prepare for the rapid expansion of the market capitalization of stablecoins.

As we discussed in the previous article, Hong Kong has a unique advantage in leading this revolution. However, this prospect depends on whether Hong Kong can timely issue the HKDG stablecoin backed by foreign exchange reserves. If Hong Kong falls behind major U.S. entities that are ready to issue large amounts of U.S. dollar stablecoins, it will miss a significant opportunity.

It is worth noting that it is insufficient for commercial institutions in Hong Kong to issue their own Hong Kong dollar stablecoins. The issuance of different versions of the Hong Kong dollar stablecoin by various institutions leads to fragmentation and confusion, as these institutions do not have sufficient scale to challenge established U.S. dollar stablecoins like USDT. Without a unified issuance of the HKDG stablecoin backed by foreign exchange reserves, the individual stablecoins issued by institutions will undoubtedly become marginalized niche products, failing to pose a challenge to established U.S. dollar stablecoins. Worse still, this could foster a false sense of progress, obscuring the reality of missed opportunities.

Here, we might also consider a compromise strategy, allowing the government to authorize commercial institutions to issue a unified HKDG stablecoin. This approach may better stimulate the participation of commercial institutions, but it will also bring numerous new challenges. These challenges encompass a range of unresolved issues, including reserve management, regulatory balance of interests and risks, insurance, custody, and security.

The motivation for commercial institutions to issue stablecoins largely stems from the current high-interest-rate environment. However, once interest rates decline, these institutions will inevitably seek higher returns, potentially increasing risks. At the same time, if regulation is too stringent, these issuing institutions may not be able to profit, thus losing their motivation for sustainable development. Furthermore, under this scheme, the Hong Kong SAR government will not be able to enjoy the benefits brought by the issuance of HKDG. Therefore, we should view the government's authorization of commercial institutions to issue HKDG as a phased strategy from a holistic perspective, while continuously striving for the ultimate goal of government-issued HKDG.

Consolidating the Global Position of the Hong Kong Dollar and Challenging the Dominance of the U.S. Dollar

Although the Hong Kong dollar can be exchanged for other currencies at any time, it is rarely used in international trade or as a global reserve currency, possibly due to its peg to the U.S. dollar. If Hong Kong can seize the opportunity of RWA tokenization to issue HKDG, the potential of the Hong Kong dollar as an international currency will undoubtedly be significantly enhanced, even challenging the dominance of the U.S. dollar in certain areas.

The "Opportunity Window" Lasts Only One Year

We previously pointed out that launching HKDG could enhance the international status of the Hong Kong dollar, especially in the digital asset space. Given that both USDT and USDC stablecoins have faced credibility crises, there is a strong market demand for highly credible stablecoins. With the support of the Hong Kong SAR government's foreign exchange reserves, HKDG will enjoy unparalleled credibility. Since the Hong Kong dollar is pegged to the U.S. dollar, HKDG could become an attractive solution to challenge the dominance of U.S. dollar stablecoins.

We believe that the timely issuance of HKDG, coupled with the imminent emergence of RWA tokenization, can lay the foundation for strengthening the internationalization of the Hong Kong dollar and provide a pathway to challenge the dominance of the U.S. dollar. Although the current stablecoin market is relatively small compared to the global economy, the strong momentum of RWA tokenization will lead to a prosperous stablecoin market. If HKDG can establish a favorable position and solidify its foothold before major U.S. financial giants enter the market, it can maintain its leading position even after the stablecoin market surges. If the market capitalization of RWA tokenization reaches trillions and HKDG captures 10% of the stablecoin market, it will be a significant victory for the internationalization of the Hong Kong dollar and a substantial challenge to the dominance of the U.S. dollar.

Conclusion

We once again strongly urge the Hong Kong SAR government to take action to issue HKDG. We have a narrow opportunity window to truly transform Hong Kong into a major international hub for Web3. We anticipate that this opportunity window will remain open for about a year at most. This is an important strategic layout: it not only concerns whether Hong Kong can become a global center for digital assets and Web3 development but also relates to the national strategic goal of challenging the dominance of the U.S. dollar. We must seize this historic opportunity. Hong Kong cannot afford to wait, and neither can the national strategy.