The Battle for Hong Kong Dollar Stablecoin: Government Issued VS Private Issued

Battle for Hong Kong Dollar Stablecoin: Govt. Issued vs. Private Issued

Author|Carl

Editor|Marco

Techub News original (ID: TechubNews)

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The Hong Kong dollar stablecoin is becoming a hot topic in the web3.0 field in Hong Kong.

On July 3, Wang Yang, Vice President of the Hong Kong University of Science and Technology and Chief Scientific Advisor of the Hong Kong Web3.0 Association, angel investor Cai Wensheng, and Lei Zhibin, founder of the Web3.0 technology company Block City, published an article titled “Policy Suggestions/Proposals for Hong Kong to Issue a Hong Kong Dollar Stablecoin Backed by Foreign Exchange Reserves” on Ta Kung Pao, triggering a lot of discussion.

The article suggests that the Hong Kong government’s plan to only allow and encourage private institutions to issue Hong Kong dollar stablecoins is too conservative and cannot be matched with the large-scale plans of the SAR government to promote digital assets and the digital economy. It strongly urges the SAR government to issue a Hong Kong dollar stablecoin (HKDG) backed by Hong Kong’s foreign exchange reserves.

Fang Hongjin, an expert on blockchain technology and applications and co-chairman of the Hong Kong Blockchain Association, said that Hong Kong should quickly formulate regulatory policies for stablecoins to encourage commercial institutions to issue compliant stablecoins, including Hong Kong dollar stablecoins, offshore RMB stablecoins, etc.

1. Hong Kong dollar stablecoin issuance can refer to USDC

At present, the popular stablecoins on the market are mostly US dollar stablecoins, such as USDT and USDC, and stablecoins anchored to other fiat currencies account for a smaller proportion. According to coinmarketcap.com, the market value of USDT and USDC is $83.3 billion and $27.7 billion, respectively, and their market value ranks third and fifth in the cryptocurrency market, accounting for more than 85% of the entire stablecoin market.

The article suggests that Hong Kong dollar stablecoins issued by private institutions are difficult to gain significant market share and may ultimately become a marginalized product. It cannot influence the dominant position of the US dollar stablecoin. Hong Kong must have higher goals and determination on this issue. Therefore, it strongly urges the SAR government to issue a Hong Kong dollar stablecoin backed by Hong Kong’s foreign exchange reserves.

Mr. Meng Dinglin, minimalist currency partner and chief technology expert, told Techub News that it is appropriate for the Hong Kong government to launch a Hong Kong dollar stablecoin, which can solve pain points such as SWIFT payment delays and create a large number of new business models. The government-backed stablecoin will have greater application prospects.

However, many people have questioned the Hong Kong SAR government’s proposal to issue a Hong Kong dollar stablecoin on social media.

Fang Hongjin, a blockchain technology and application expert and co-chairman of the Hong Kong Blockchain Association, told Techub News: “I am very much looking forward to the Hong Kong government’s early introduction of stablecoin regulatory policies, but it is not appropriate for the Hong Kong government to issue stablecoins.”

Fang Hongjin believes that the Hong Kong SAR government has the right to mint coins and should issue digital currency forms of legal currency (CBDC), namely digital Hong Kong dollars. “Stablecoins are digital certificates issued based on collateral such as legal tender, similar to traditional financial commercial bills, and should be issued by commercial institutions in Hong Kong under the supervision of the Hong Kong government.”

On June 12, Chen Haolian, Deputy Director of Financial and Treasury Bureau of Hong Kong, said that the Hong Kong Monetary Authority has conducted public consultations on the launch of stablecoins, and will gradually establish a regulatory framework with the aim of launching it by the end of 2024.

In terms of technology, the Hong Kong government’s issuance of Hong Kong dollar stablecoins will also face some difficulties.

Fang Hongjin believes that if the Hong Kong government issues Hong Kong dollar stablecoins on public chains such as Ethereum, it is not appropriate and it is more appropriate for commercial institutions to issue them; if they are issued on private chains, not only is the technical difficulty very high, but the conflict between decentralized Hong Kong dollar stablecoins and centralized digital Hong Kong dollars issued by the same entity arises.

Previously, several Hong Kong dollar stablecoins have been issued by private institutions.

Tang Yi, co-president of the Hong Kong Blockchain Association HKBA.club, told Techub News that as a Hong Konger, he hopes to see compliant stablecoins in Hong Kong that make it convenient for people to live. Currently, Hong Kong people mainly use USDT stablecoins, followed by USDC, and other stablecoins are rare.

“Private companies have issued Hong Kong dollar stablecoins, but they are not popular,” Tang Yi revealed.

According to related media reports, in 2018, digital banking service platform CoinBank and Cayman Anchor company cooperated to launch the Hong Kong dollar-anchored stablecoin HKDT.

In 2019, OneCash launched the Hong Kong dollar stablecoin HKC based on public chains such as TRON, ETH, and PlatON, and TrustToken issued the TrueHKD (THKD) stablecoin anchored to the Hong Kong dollar based on the Binance chain. However, both the scale and market acceptance of these stablecoins are very low, and they are hard to find in the entire cryptocurrency market.

Tang Yi said that USDC is one of the stablecoins that currently does the best in compliance, and Hong Kong dollar stablecoins can refer to USDC to some extent. The US dollar stablecoin USDC is issued by circle.com, which has been granted a license by the New York State government, and is audited by the US compliance auditor Grant Thornton regularly for financial endorsement, which is open and transparent.

Jiang Zhaosheng, a senior researcher at the Euro-Chain Research Institute, said that USDC is subject to relevant legal supervision in various states in the United States, and third-party verifiers conduct regular audits of its code and financial aspects. In terms of internal risk management, it has established four sections: “risk warning,” “fraud management,” “monitoring plan,” and “complaint management.” In terms of operating mechanism, USDC stores its collateralized fiat assets in accounts of the Federal Deposit Insurance Corporation and other institutions for decentralized storage, all of which are stored in independent accounts designated “for the benefit of USDC holders.”

2. Digital Hong Kong dollar and Hong Kong dollar stablecoins may complement each other

The digital Hong Kong dollar may be another variable.

The “Policy Recommendations” point out that the issuance of stablecoins denominated in their own currency can promote the progress of digital Hong Kong dollars, improve transaction efficiency, reduce transaction costs, and improve the current payment system.

BC Technology CFO Hu Zhenbang previously stated in an interview with the media that the likelihood of the emergence of Hong Kong dollar stablecoins is not too high. The Hong Kong government has clearly stated in its white paper that it will consider developing digital Hong Kong dollars, which will be similar to the path of digital RMB. Hong Kong dollar stablecoins may have a competitive relationship with digital Hong Kong dollars to some extent.

BC Technology is a Hong Kong-listed company, and its digital asset trading platform OSL obtained Type 1 and Type 7 licenses under the supervision framework of the Hong Kong Securities and Futures Commission in 2020.

As early as October 2021, the Hong Kong SAR government released the technical white paper “e-HKD: A technical perspective” on central bank digital currency technology at the retail level, exploring the technology related to digital Hong Kong dollars.

On May 18, 2023, the Hong Kong Monetary Authority announced the launch of the “Digital Hub Dollar” pilot program, with 16 companies including Alipay (Hong Kong), HSBC, and Bank of China (Hong Kong) selected for the first round of testing.

Tang Yi also told Techub News that there is a certain competitive relationship between the digital Hub Dollar and the Hong Kong Dollar stablecoin.

Regarding the competitive relationship between the two, Fang Hongjin holds an optimistic attitude, believing that in addition to competition, the Hong Kong Dollar stablecoin and the digital Hub Dollar can complement each other to a certain extent.

“The digital Hub Dollar is suitable for circulation within Hong Kong and can be applied to the retail market; while the Hong Kong Dollar stablecoin is not restricted by geography and is more suitable for cross-border trade and service payment settlement, because it does not directly represent the local fiat currency, it will not involve issues such as the currency sovereignty of other countries.” Fang Hongjin said.

Jiang Zhaosheng, senior researcher at Euclid Cloud Chain Research Institute, said that the Hong Kong Dollar stablecoin is an important infrastructure for promoting the localization of Web3 in Hong Kong, and the market has a high enthusiasm for launching the Hong Kong Dollar stablecoin. However, there is almost no mention of the Hong Kong Dollar stablecoin in the official statement of the Hong Kong government, and more encouragement is given to promote the digital Hub Dollar and innovative practices such as tokenized deposits. At the same time, the Hong Kong government is accelerating the formulation of stablecoin regulatory policies, and the short-term demand of the Hong Kong government for Hong Kong Dollar stablecoin may not be strong, so the possibility of compliant Hong Kong Dollar stablecoin appearing is not high.

3. The right time to develop the Hong Kong Dollar stablecoin

Currently, 99% of stablecoins circulating in the market are US dollar stablecoins. How to occupy the market with Hong Kong Dollar stablecoins and achieve the goal of de-dollarization is also a focus of attention.

The “Policy Proposal” pointed out that as of March 2023, Hong Kong’s foreign exchange reserves totaled as much as US$430 billion, which is significantly higher than the total market value of USDT and USDC of US$120 billion. Compared with this, HKDG endorsed by the SAR government will have higher credibility and lower risk. Especially when the reputation of USDT is still in doubt, and USDC has recently experienced serious discounts, HKDG has the potential to challenge the monopoly position of the US dollar stablecoin and become the mainstream stablecoin in the blockchain and digital asset ecosystem.

Fang Hongjin values the liquidity and application scenarios of the Hong Kong dollar stablecoin. He said that liquidity is the most important and everyone needs to work together to create more application scenarios for the Hong Kong dollar stablecoin to circulate.

In addition to the Hong Kong dollar stablecoin, Fang Hongjin believes that issuing an offshore RMB stablecoin in Hong Kong is a more important option. Due to the Hong Kong dollar being pegged to the US dollar and having a linked exchange rate with the US dollar, as well as being freely convertible with each other in Hong Kong, the role of the Hong Kong dollar stablecoin in “de-dollarization” is not significant.

“However, if 2 trillion offshore RMB can be activated in the form of stablecoins, it will play an important role in promoting cross-border payments and other fields. In the current economic situation, cross-border trade is very difficult, and most developing countries lack US dollars for cross-border payments. This is a great opportunity to develop offshore RMB stablecoins. The Hong Kong SAR Government should promptly introduce regulatory policies for stablecoins and encourage commercial institutions to issue compliant stablecoins.” Fang Hongjin said.

Jiang Zhaosheng suggested that the Hong Kong dollar stablecoin be circulated on the virtual asset trading platform licensed by the Hong Kong Securities and Futures Commission through non-market means, and attract more institutions and users through mechanism innovation to strive for greater development space. In addition, developing interest-bearing Hong Kong dollar stablecoins may be a good choice, that is, using Hong Kong dollars as collateral assets and paying all or part of the interest generated by the collateral to users to gain more trust and usage from more institutions and users.

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