“A Hong Kong dollar-pegged stablecoin can cement Hong Kong’s position in the blockchain industry and accelerate the progression of a digital Hong Kong dollar,” stated the report.
A recent report authored by crypto and blockchain proponents urges the Hong Kong government to launch a stablecoin linked to the local currency, a move that could disrupt the hegemony of Tether and USD Coin.
A report from July 3, translated into English by Chinese cryptocurrency journalist Colin Wu, reveals that four individuals connected to financial innovation are pushing for the creation of an HKDG (Hong Kong Dollar Government) stablecoin. This move is seen as a step towards reinforcing the region’s position in the digital economy. The report is co-authored by Wang Yang, Vice President for Institutional Advancement at the Hong Kong University of Science and Technology; Cai Wensheng, Meitu’s smartphone software firm founder; Lei Zhibin, Honorary Chair of the Hong Kong Blockchain Association; and doctoral student Wen Yizhou.
The report emphasizes that launching a stablecoin associated with the Hong Kong dollar will “solidify Hong Kong’s standing in the blockchain field and expedite the evolution of a digital Hong Kong dollar, which will increase transaction efficiency, decrease transaction costs, enhance existing payment systems, and augment Hong Kong’s fintech prowess.” The report further states, “Moreover, a Hong Kong Dollar stablecoin could optimize the efficiency and inclusiveness of Hong Kong’s financial system. Its stability, freedom of exchange, high security, openness, and cross-border liquidity can facilitate a broader spectrum of financial innovations.”
Yang, Wensheng, Zhibin, and Yizhou assert that the government’s strategy of promoting private institutions to launch stablecoins pegged to the Hong Kong dollar is “too conservative” given its aspirations of advancing crypto and blockchain. According to the report, Hong Kong’s foreign exchange reserves stood at approximately $430 billion as of March 2023, significantly overshadowing the combined market capitalization of Tether USDT $1.00 and USD Coin USDC $1.00, which amounted to roughly $120 billion.
An HKDG backed by the SAR (special administrative region) government, the authors argue, would command greater credibility and present lower risk, particularly given the persisting doubts surrounding USDT’s credibility and USDC’s recent deep discounts.
The authors identify potential benefits of launching the HKDG, including challenging the dominance of the U.S. dollar, providing additional liquidity for government initiatives, and enabling officials to monitor and assess risks more effectively. However, potential risks include legal and regulatory obstacles, international disputes over transactions potentially associated with illicit financing, and cyber-attacks.
The report asserts, “The risks shouldered by the government-issued HKDG are notably lower than those associated with a Hong Kong Dollar stablecoin issued by private entities.”
In recent developments, the Hong Kong government disclosed in June that it had assembled a task force to supervise the development of Web3. As of March, over 80 companies involved in digital assets or blockchain reportedly contemplated establishing a presence in the SAR, in addition to the nearly 800 fintech firms already operating in Hong Kong.
Potential Impact on the Cryptocurrency Market
The proposed HKDG could significantly reshape the cryptocurrency market dynamics. By providing a government-backed stablecoin, it might offer a higher level of security and confidence for investors, particularly in volatile market conditions. It could also enhance the robustness and depth of the cryptocurrency market in the region.
The Broader Significance of Government-Backed Stablecoins
Government-backed stablecoins like the proposed HKDG represent a significant development in the merging of traditional finance and digital assets. They might pave the way for central bank digital currencies (CBDCs), providing practical insights into how digital currencies can coexist with traditional financial systems. With governments worldwide exploring CBDCs, the launch of HKDG could position Hong Kong at the forefront of this emerging trend.