Author: Wang Yangwen Yizhou
Original Title: Policy Recommendations / Seize the opportunity to issue a government-backed Hong Kong dollar stablecoin
In the previous article "Proposing that Hong Kong issue a Hong Kong dollar stable currency backed by foreign exchange reserves" , we advocated the introduction of a Hong Kong dollar-based stable currency (HKDG), supported by Hong Kong's current foreign exchange reserves of US$430 billion. We believe that this move will bring additional liquidity to Hong Kong, activate the financial market, and support government investment projects and important national development strategies and other major benefits.
Although there was no official response from the government, our suggestions aroused widespread positive responses in society. Given the rapid development in the digital asset space, particularly the tokenization of real world assets (RWA) and plans by major entities to launch their own stablecoins, these developments highlight the urgency of issuing HKDG, and we are also in this follow-up article To further elaborate on our position.
Real World Asset (RWA) Tokenization and Stablecoin Demand Is About to Surge
RWA tokenization, which converts tangible or intangible assets into digital tokens, is a breakthrough change in the field of digital assets and has the potential to redefine the market landscape. Through blockchain technology, RWA tokenization increases transaction transparency, enhances security, and broadens liquidity by enabling fractional ownership. This approach not only solves the inefficiency of the traditional financial system, but also narrows the gap between the digital asset field and the real economy, thereby promoting the development of Web3.
The digital asset market will explode
At present, the market value of U.S. debt and the global real estate market alone have reached US$240 trillion and US$280 trillion respectively, not to mention other real assets. Even if only 1% of these assets are traded through RWA tokenization, will have a significant impact on the digital asset market. The digital asset market is set to explode as tokenization permeates various asset classes, from commodities to intellectual property.
It is foreseeable that due to regulatory restrictions on RWA tokenization, most of the flow of RWA tokens on public blockchains will occur in the form of stablecoins. Therefore, we must be prepared for a sharp expansion of the stablecoin market cap.
As we argued in our previous article, Hong Kong is uniquely positioned to lead this revolution. However, this prospect depends on Hong Kong's ability to issue a stable currency HKDG backed by foreign exchange reserves in a timely manner. Hong Kong will miss out if it lags behind major U.S. entities that are already preparing to issue large amounts of U.S. dollar stablecoins.
It is worth mentioning that it is not enough for commercial institutions in Hong Kong to issue their own Hong Kong dollar stablecoins. Different institutions issuing their own versions of Hong Kong dollar stablecoins have led to fragmentation and confusion, because these institutions do not have enough scale to challenge mature U.S. dollar stablecoins such as USDT. Without a unified layout to issue the stablecoin HKDG supported by foreign exchange reserves, the independent issuance of stablecoins by institutions will undoubtedly become a marginalized niche product, which will not form a U.S. dollar stablecoin mature for climate challenges. Worse, it promotes a false sense of progress and masks the reality of missed opportunities.
Here we can also consider adopting a compromise strategy, which is to allow the government to authorize commercial institutions to issue a unified HKDG stable currency. This kind of scheme may stimulate the enthusiasm of commercial organizations to participate more, but it will also bring many new challenges. These challenges cover book preparation, regulatory balance of benefits and risks, insurance, custody, security and a series of unresolved issues.
The motivation for commercial institutions to issue stablecoins largely comes from the current high interest rate environment. However, once interest rates fall, these institutions will inevitably pursue higher returns, potentially increasing risks. At the same time, if regulation is too strict, these issuers may not be able to profit from it, thus losing the motivation for continued development. In addition, under this plan, the SAR government will not be able to enjoy the benefits brought by the issuance of HKDG. Therefore, we should look at this phased strategy of the government authorizing commercial institutions to issue HKDG from a global perspective, and take the unified issuance of HKDG by the government as our ultimate goal and continue to work hard for this.
Strengthen the Hong Kong dollar's global status and challenge the US dollar's dominance
While the Hong Kong dollar is readily exchangeable for other currencies, it is rarely used in international trade or as a global reserve currency, perhaps because of its peg to the U.S. dollar. If Hong Kong can seize the opportunity of RWA tokenization and issue HKDG, the potential of the Hong Kong dollar as an international currency will be greatly enhanced, and it can even challenge the dominance of the US dollar in some areas.
The "window of opportunity" is only one year
We have previously pointed out that the launch of HKDG can enhance the international status of the Hong Kong dollar, especially in the field of digital assets. In view of the credibility crisis that both USDT and USDC stablecoins have experienced, the market demand for high-credibility stablecoins is very strong. With the support of the 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 proposition 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 way to challenge the dominance of the US dollar. Although the stablecoin market is currently small relative to the global economy, it will prosper with the strong momentum of RWA tokenization. If HKDG can gain a favorable position early and gain a firm foothold before major U.S. financial giants enter the market, HKDG can maintain its leading position even after the stablecoin market surges. If the market value of the RWA tokenization market reaches trillions, and HKDG can occupy 10% of the stablecoin market, this will be a major victory for the internationalization of the Hong Kong dollar and a substantial challenge to the dominance of the US dollar.
Summarize
We once again strongly call on the SAR government to take action to issue HKDG. We have a narrow window of opportunity to truly establish Hong Kong as a major international hub for Web3. We expect this window of opportunity to be open for about a year at most. This is an important layout: not only related to whether Hong Kong can become a world center for digital assets and Web3 development, but also related to the national strategic goal of challenging the dominance of the US dollar. We must seize this historical opportunity. Hong Kong cannot afford to wait, and the national strategy cannot afford to wait.
The authors are Vice President of the Hong Kong University of Science and Technology and Chief Scientific Advisor of the Hong Kong Web3.0 Association.
PhD student at Hong Kong University of Science and Technology
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