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The current method of issuing Hong Kong dollar stablecoins needs to be restructured: Discussing RWA as a breakthrough for financial innovation in Hong Kong.
Written by: Zhu Weisha
Introduction: The Nature of Controversy and the Evolution of Regulation
The implementation of the Hong Kong "Stablecoin Regulations" has led to little debate over USD stablecoins, while the narrowing of the issuance scope for HKD stablecoins has sparked much controversy. I previously pointed out in an article titled "Will the Introduction of the Stablecoin Bill Trigger a Financial Tsunami?" that "Hong Kong has the least need to issue HKD stablecoins," a viewpoint that aligns with the cautious stance of the Hong Kong financial authorities. Interestingly, although the Hong Kong government adopted my suggestion at the Hong Kong policy group meeting to rename "virtual currency" as "cryptocurrency," it ultimately chose the ambiguous term "digital currency"—which reflects the policymakers' limited understanding of the nature of crypto assets and lays the groundwork for the regulatory dilemma surrounding HKD stablecoins. Cryptocurrency is a type of digital currency, but not all digital currencies are cryptocurrencies. Policymakers need to recognize the characteristics of crypto assets and avoid constraining new financial innovations with old regulatory frameworks.
This article aims to clarify three key issues:
Why do Hong Kong Dollar stablecoins have structural risks?
What kind of issuance mechanism can avoid systemic shocks?
RWA is a breakthrough in Hong Kong's financial innovation, not a Hong Kong dollar stablecoin.
First of all, the Hong Kong dollar has become a de facto stablecoin pegged to the US dollar through the linked exchange rate, and issuing stablecoins on top of the Hong Kong dollar is essentially leveraging it. The Hong Kong dollar is not a base currency; it is an application within the US dollar ecosystem. In other words, isn't it a joke to issue stablecoins on top of USDT?
The allowance for multiple issuers of Hong Kong dollar stablecoins increases the risk of instability for the Hong Kong dollar and complicates the Monetary Authority's ability to regulate it. If the Hong Kong dollar cannot remain stable, can the Hong Kong dollar stablecoin be stable? In my article "Will the Introduction of the Stablecoin Bill Trigger a Financial Tsunami?" I mentioned: "Maintaining a fixed exchange rate is very difficult, and historical experience has led the Hong Kong government to avoid discussing Hong Kong dollar stablecoins. What impact will the issuance of Hong Kong dollar stablecoins have on the Hong Kong dollar? In fact, issuing Hong Kong dollar stablecoins is essentially leveraging the Hong Kong dollar; if the Hong Kong dollar remains pegged and 24-hour exchanges are resolved, the initial risk does not seem significant."
"If the market experiences a Soros-style attack again, leverage will amplify the intensity of the attack. What will the attack look like in the new situation?"
"The current Hong Kong Stablecoin Regulation may become a feast for speculators and is very likely to become the starting point for a financial tsunami."
Secondly, the Hong Kong dollar is a regional currency, and its application scenarios are mainly limited to Hong Kong. Stablecoins are global currencies; what capability do you have to make the Hong Kong dollar global? Hong Kong's own GDP is quite small, at 407 billion USD in 2024, with total trade accounting for approximately 2.7% of global trade, which includes the settlement amount in USD and RMB, but detailed data on the proportion is not available. The demand for the Hong Kong dollar mainly changes with the financial market, as transactions need to be conducted in Hong Kong dollars.
The Hong Kong dollar issuance market is already a monopoly market; can small enterprises enter? Similarly, in the issuance market for Hong Kong dollar stablecoins, it is also not suitable for small businesses and small banks. Small enterprises can actively participate in the application of Hong Kong dollar stablecoins, but they cannot engage in the issuance.
In short, the US dollar is the base currency, and currencies pegged to the base currency, such as the Hong Kong dollar, are inappropriate to issue stablecoins in the manner of the base currency.
In the article "Will the Launch of the Stablecoin Act Trigger a Financial Tsunami?" it is stated: "The issuance level of the Hong Kong dollar has always been the ceiling for the issuance of sovereign stablecoins. The issuance of the Hong Kong dollar is jointly managed by the three major banks: HSBC, Standard Chartered, and Bank of China. The Hong Kong dollar operates well, and the team in Hong Kong is the only one in the world with more than 40 years of experience in stablecoin management. Why can't any bank in Hong Kong issue currency?"
There are issues of credit and strength here. As the issuer of Hong Kong dollars, the part involving US dollars remains opaque, which raises trust issues regarding the three banks. Trust comes from strength.
The same principle applies, the Hong Kong dollar stablecoin is issued by these three companies, requiring few management regulations, and the supervision is very simple, with almost no need for changes in the management of the Monetary Authority.
They will exchange the stablecoins they intend to issue for equivalent US dollars with the Monetary Authority, which will give them Hong Kong dollar stablecoins. The stocks in the stock market can issue corresponding cryptocurrency certificates, which can be purchased with Hong Kong dollar stablecoins. Everything is feasible. This perfectly expands traditional finance into the realm of crypto finance.
In this way, when US dollars are deposited in the Monetary Authority, banks can earn interest, and other financial innovation opportunities also exist. The method of issuing stablecoins in Hong Kong dollars establishes a parallel relationship between the HKD stablecoin and the HKD, rather than a serial relationship, thus not amplifying the risks. Both are regulated by the Monetary Authority, which avoids the regulatory risks associated with HKD stablecoins.
The risk of issuing Hong Kong dollar stablecoins under the current regulations is very high, and without changes, it is difficult to serve as a breakthrough for financial innovation. Hong Kong is a global financial center, and following the U.S. path on asset tokenization is not considered innovative. The breakthrough for Hong Kong should focus on real asset tokenization (RWA). Hong Kong has unique advantages in the fields of art, antiques, and real estate, and these assets can be tokenized for trading via blockchain technology. For example, the scarcity and value stability of antiques bear similarities to Bitcoin; if transparent token issuance can be realized, it could significantly enhance the attractiveness of the Hong Kong financial market. Meng Yu, chairman of the Hong Kong Chinese Financial Association, also stated, 'RWA is the key direction at this stage,' and the demand for Hong Kong dollar stablecoins may expand through RWA trading, becoming a regional advantage, which would highlight the advantages of Hong Kong dollar stablecoins. The future of Hong Kong dollar stablecoins is promising. Hong Kong also has a bright future. A detailed explanation would require another article.
The most important issue affecting innovation is regulatory problems. The foundation of financial innovation lies in trust and transparency. Trust is the cornerstone of the financial market, while transparency is its lifeline.
In the series 1-4 of "Issues in Cryptocurrency Regulation," I mentioned that because cryptocurrency is a unified market, there needs to be a unified regulatory body instead of the current decentralized regulation.
The opportunity in Hong Kong lies in the need for cryptocurrency policies to align with reality. In the article "Will the Introduction of the Stablecoin Act Trigger a Financial Tsunami?", there is a section specifically evaluating the two regulatory bills as "old wine in new bottles". The article suggests that regulation should be based on transparency. In fact, whether it is fiat currency, stocks, or tokens, they are all tokens. The development history of Bitcoin proves that highly transparent regulation can reconstruct regulatory logic. Current regulation needs innovation; it cannot be just old wine in new bottles.
After 15 years of technological innovation, cryptocurrency has matured. It is no longer the focus of competition. The current push is towards application, moving from the technological judgment of decentralization to the philosophical judgment of transparency. Excellent politicians, financial experts, and entrepreneurs have taken the stage, along with mainstream capital and financial institutions. Their learning ability is strong, and in a short period, cryptocurrency has entered mainstream acceptance. They will ultimately realize that transparency is the core concept of cryptocurrency. The next step must be to use the philosophy of transparency in Web 3 and transparent infrastructure to reconstruct transparent banks, transparent brokerages, and transparent enterprises. Humanity will usher in a fairer world.