Hong Kong Dollar Stablecoin War: Government minted vs privately issued

By Carl, Techub News

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 Hong Kong University of Science and Technology and chief scientific advisor of Hong Kong web3.0 Association, angel investor Cai Wensheng, founder of Block City Web3.0 technology company Lei Zhibin, etc. released "Policy Recommendations/ Proposal for Hong Kong to Issue Hong Kong Dollar Stablecoin Backed by Foreign Exchange Reserves" (hereinafter referred to as "Policy Recommendation") has sparked many discussions.

The article suggested that the Hong Kong government’s plan is limited to allowing and encouraging private institutions to issue Hong Kong dollar stablecoins, which is too conservative to cooperate with the SAR government’s large-scale plan to promote digital assets and the digital economy. Strongly urge the SAR government to issue a Hong Kong dollar stablecoin (HKDG) backed by Hong Kong's foreign exchange reserves.

Fang Hongjin, an expert in blockchain technology and applications and co-chairman of the Hong Kong Blockchain Association, said that Hong Kong should introduce stablecoin regulatory policies as soon as possible to encourage commercial organizations to issue compliant stablecoins, including Hong Kong dollar stablecoins and offshore RMB stablecoins.

1 Hong Kong dollar stable currency issuance can refer to USDC

At present, most of the stablecoins popular in the market are US dollar stablecoins, such as USDT and USDC, and the stablecoins anchored to other fiat currencies account for a relatively small proportion. According to coinmarketcap.com, the market capitalization of USDT and USDC are 83.3 billion and 27.7 billion U.S. dollars respectively, and their market capitalization ranks 3rd and 5th among cryptocurrencies, and together they account for over 85% of the entire stablecoin market.

The "Policy Recommendations" proposes that 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. Unable to impact the dominance of USD stablecoins. Hong Kong must have higher goals and determination on this issue. Therefore, the SAR government is strongly urged to issue a Hong Kong dollar stable currency backed by Hong Kong's foreign exchange reserves.

Dinglin Meng, partner and chief technical expert of Minimal Currency, told Techub News that it is appropriate for the Hong Kong government to launch the Hong Kong dollar stablecoin, which can solve the pain points such as SWIFT payment delays, and will give birth to a large number of new business models. The stablecoin endorsed by the government will have Greater application prospects.

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

Fang Hongjin, an expert in blockchain technology and applications and co-chairman of the Hong Kong Blockchain Association, told Techub News: "I am very much looking forward to the Hong Kong government's introduction of stablecoin regulatory policies as soon as possible, but it is not appropriate for the Hong Kong government to issue stablecoins."

Fang Hongjin believes that the Hong Kong Special Administrative Region government has the right to mint coins, and what should be issued is the digital currency form of legal currency (CBDC), that is, the digital Hong Kong dollar. "The stable currency is a digital certificate issued based on the mortgage of legal currency, which is equivalent to the commercial paper of traditional finance. It 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 the Hong Kong Financial Services and Treasury Bureau, said that the Hong Kong Monetary Authority has conducted public consultation on the launch of stablecoins, and will gradually establish a regulatory framework in the future, with the goal of launching them before the end of 2024.

In terms of technology, the Hong Kong government will also face some difficulties in issuing the Hong Kong dollar stable currency.

Fang Hongjin believes that it is not appropriate for the Hong Kong government to issue Hong Kong dollar stable coins on public chains such as Ethereum, and it is more appropriate for commercial organizations to issue them; if it is issued on a private chain, not only is it technically difficult, but also the same subject is decentralized. The Hong Kong dollar stable currency and the centralized digital Hong Kong dollar have conflicted.

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

Tang Yi, co-chairman of the Hong Kong Blockchain Association HKBA.club, told Techub News that as a Hong Kong citizen, I hope to see Hong Kong’s local compliant stable currency, which is convenient for everyone’s basic necessities. Now the stablecoins used by Hong Kong people are mainly USDT, followed by USDC, and there are few other stablecoins.

"Hong Kong dollar stablecoins have been issued by private companies, but they are not popular." Tang Yi revealed.

According to relevant media reports, in 2018, the digital banking service platform CoinBank cooperated with Cayman Anchor on the Hong Kong dollar-anchored stablecoin HKDT.

In 2019, OneCash issued the Hong Kong dollar stablecoin HKC based on TRON, ETH, PlatON and other public chains, and TrustToken issued the Hong Kong dollar-anchored stablecoin TrueHKD (THKD) based on Binance Chain.

However, these stablecoins are very low in terms of scale and market acceptance, and are hard to find in the entire cryptocurrency market.

Tang Yi said that USDC is currently one of the best stablecoins in terms of compliance, and the Hong Kong dollar stablecoin can refer to USDC to a certain extent. The New York state government of the United States issued a license to circle.com, and circle.com issued the USD stable currency USDC. American compliance auditor Grant Thornton regularly conducts financial audit reports on the asset endorsement of USDC, which is open and transparent.

Jiang Zhaosheng, a senior researcher at Okey Cloud Chain Research Institute, said that USDC is subject to the relevant laws and regulations of various states in the United States, as well as regular audits of code and finance by third-party verifiers. In the internal risk management, four sections of "risk warning", "fraud management", "monitoring plan" and "complaint management" have been established. In terms of operating mechanism, USDC deposits its mortgaged legal currency assets in the accounts of the Federal Deposit Insurance Corporation of the United States 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 Stablecoin may be complementary

The digital Hong Kong dollar may be another variable.

The "Policy Recommendations" pointed out that Hong Kong's issuance of its own stable currency can promote the progress of the digital Hong Kong dollar, improve transaction efficiency, reduce transaction costs, and improve the current payment system.

BC Technology CFO Hu Zhenbang said in an interview with the media that it is estimated that the possibility of Hong Kong dollar stable currency is not too great. The Hong Kong government has clearly stated in the white paper that it will consider developing a digital Hong Kong dollar. This path will be somewhat similar to the digital RMB. The Hong Kong dollar is stable. To some extent, the currency may compete with the digital Hong Kong dollar.

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

As early as October 2021, the Hong Kong SAR government released the white paper "e-HKD: A technical perspective" on the central bank's digital currency technology at the retail level to discuss technologies related to the digital Hong Kong dollar.

On May 18, 2023, the Hong Kong Monetary Authority announced the launch of the "Cyber Hong Kong Dollar" Pilot Program, and 16 companies including Alipay (Hong Kong), HSBC, and Bank of China (Hong Kong) were selected for the first round of trials.

Tang Yi also told Techub News that there is a certain competitive relationship between the digital Hong Kong dollar and the Hong Kong dollar stable currency.

Regarding the competitive relationship between the two, Fang Hongjin is optimistic. He believes that, in addition to the competitive relationship, the Hong Kong dollar stable currency can complement the digital Hong Kong dollar to a certain extent.

"The digital Hong Kong dollar is suitable for circulation in Hong Kong and can be used in the retail market; while the Hong Kong dollar stable currency is not subject to geographical restrictions and is more suitable for payment and settlement of cross-border trade and services. Because it does not directly represent the local legal currency, it will not involve other The country's currency sovereignty and other issues." Fang Hongjin said.

Jiang Zhaosheng, a senior researcher at the Okey Cloud Chain Research Institute, said that the Hong Kong dollar stable currency is an important infrastructure to promote the localization of Web3 in Hong Kong, and the market is very enthusiastic about the launch of the Hong Kong dollar stable currency. However, Hong Kong’s official statement has almost no expression of Hong Kong dollar stable currency, and more encourages and promotes innovative practices such as digital Hong Kong dollar and tokenized deposits. At the same time, the Hong Kong government is accelerating the formulation of stablecoin regulatory policies. In the short term, the Hong Kong government may not have a strong demand for Hong Kong dollar stablecoins, and the possibility of compliant Hong Kong dollar stablecoins appearing is not high.

3 A good time to develop Hong Kong dollar stable currency

At present, 99% of the stable coins in circulation in the market are US dollar stable coins. How Hong Kong dollar stable coins occupy the market and how to achieve the goal of de-dollarization is also the focus of attention.

The "Policy Recommendations" pointed out that as of March 2023, Hong Kong's total foreign exchange reserves will reach US$430 billion, significantly exceeding the US$120 billion market value of USDT and USDC combined. 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.

Fang Hongjin pays more attention to the liquidity and application scenarios of the Hong Kong dollar stable currency. He said that the liquidity is the most important, and everyone needs to work together to create more application scenarios of the Hong Kong dollar stable currency to make the Hong Kong dollar stable currency circulate.

In addition to the Hong Kong dollar stable currency, Fang Hongjin believes that the issuance of offshore RMB stable currency in Hong Kong may be a more important option. Since the Hong Kong dollar is pegged to the U.S. dollar, has a pegged exchange rate with the U.S. dollar, and is freely convertible in Hong Kong, the Hong Kong dollar stablecoin has little effect on "de-dollarization".

"However, if the 2 trillion offshore RMB is activated in the form of stable currency, it will play an important role in promoting cross-border payment and other fields. Under the current economic situation, cross-border trade is very difficult, and most developing countries lack the means to The US dollar for cross-border payments is a great opportunity to develop offshore RMB stablecoins. The Hong Kong SAR government should introduce stablecoin regulatory policies as soon as possible to encourage commercial organizations to issue compliant stablecoins.” Fang Hongjin said.

Jiang Zhaosheng suggested that the Hong Kong dollar stable currency should be circulated on the virtual asset trading platform licensed by the Hong Kong Securities Regulatory Commission through non-market means, and attract more institutions and users through mechanism innovation to strive for greater development space. In addition, it may be a good choice to develop an interest-bearing Hong Kong dollar stable currency, that is, to use Hong Kong dollars as collateral assets, and pay users all or part of the interest generated by collateral mortgages, so as to gain the trust and use of more institutions and users.