AUG 23, 2023
Wang Yang: Issue a Government-Supported Hong Kong Dollar Stablecoin to Challenge the U.S. Dollar Status
by 吴说猫弟, WuBlockchain
Authors: Wang Yang, Wen Yizhou
Original Link: Ta Kung Pao
In our previous article titled "Proposing Hong Kong to Issue a Hong Kong Dollar Stablecoin Backed by Foreign Exchange Reserves," we advocated for the introduction of a stablecoin based on the Hong Kong Dollar (HKDG), backed by Hong Kong's current foreign exchange reserves of up to $430 billion. We believe that this move will bring additional liquidity to Hong Kong, vitalize the financial markets, and greatly benefit major government investment projects and significant national development strategies.
Although the government has not officially responded, our suggestion has drawn widespread positive reactions in society. Given the rapid development in the field of digital assets, especially the tokenization of realworld assets (RWA) and the plans of major entities to launch their own stablecoins, these developments highlight the urgency of issuing HKDG. We further elaborate on our stance in this follow-up article.
Tokenization of Real-World Assets (RWA) and Surge in Stablecoin Demand Imminent
RWA tokenization, the conversion of tangible or intangible assets into digital tokens, is a groundbreaking shift in the digital asset field with the potential to redefine the market landscape. Through blockchain technology, RWA tokenization has enhanced transaction transparency, strengthened security, and broadened liquidity by enabling partial ownership. This approach addresses the inefficiency of the traditional financial system while bridging the gap between digital assets and the physical economy, thus promoting the development of Web3.
Explosive Growth in the Digital Asset Market Anticipated
Currently, just the market values of U.S. Treasuries and the global real estate market have reached $240 trillion and $280 trillion respectively, not to mention other real-world assets. Even if only one percent of these assets are traded through RWA tokenization, it would have a significant impact on the digital asset market. As tokenization permeates various asset categories from commodities to intellectual property, the digital asset market will undoubtedly experience explosive growth.
It's foreseeable that due to regulatory constraints on RWA tokenization, the majority of RWA token flow on public blockchains will occur in the form of stablecoins. Therefore, we must prepare for a sharp expansion in the stablecoin market value.
As we argued in our previous article, Hong Kong has unique advantages to lead this revolution. However, this prospect depends on whether Hong Kong can timely issue the HKDG stablecoin backed by foreign exchange reserves. If Hong Kong falls behind major U.S. entities that are ready to issue a large number of U.S. dollar stablecoins, it will miss a golden opportunity.
It's worth mentioning that the issuance of individual Hong Kong Dollar stablecoins by commercial institutions in Hong Kong is not enough. Different institutions issuing their own versions of Hong Kong Dollar stablecoins would lead to fragmentation and confusion, as these entities lack the volume to challenge mature U.S. dollar stablecoins like USDT. Without a unified issuance of HKDG supported by foreign exchange reserves, individual institution-issued stablecoins will undoubtedly become marginalized niche products, unable to truly challenge mature U.S. dollar stablecoins. Worse, this would foster a false sense of progress, masking the reality of missed opportunities.
Here, we might consider a compromise strategy, allowing the government to authorize commercial entities to issue a unified HKDG stablecoin. This approach might better stimulate the enthusiasm of commercial entities but will also bring many new challenges. These challenges cover a range of issues to be resolved, including reserves, regulatory balance of interests and risks, insurance, custody, security, etc.
The incentive for commercial entities to issue stablecoins largely comes from the current high-interest-rate environment. However, once interest rates fall, these entities will undoubtedly pursue higher returns, potentially increasing risks. Simultaneously, if regulation is too strict, the issuing institutions may not profit, losing the momentum for sustained development. Moreover, under this scheme, the Special Administrative Region government would not enjoy the benefits brought by issuing HKDG. Therefore, we should view this phase of government authorization for commercial entities to issue HKDG from a holistic perspective, and consider the unified government issuance of HKDG as our ultimate goal, continuing to strive towards it.
Consolidating the Global Position of the Hong Kong Dollar, Challenging the Dominance of the U.S. Dollar
Although the Hong Kong Dollar can be exchanged for other currencies at any time, it may be infrequently used in international trade or as a global reserve currency, possibly due to its peg to the U.S. Dollar. If Hong Kong can seize the opportunity of RWA tokenization by issuing HKDG, the potential of the Hong Kong Dollar as an international currency will undoubtedly be significantly enhanced, even challenging the dominance of the U.S. Dollar in certain areas.
“Window of Opportunity” Lasts Only One Year
We have previously pointed out that the introduction of HKDG can elevate the international standing of the Hong Kong Dollar, especially in the digital asset arena. Given the credibility crises that have occurred with USDT and USDC stablecoins, the market demand for highly credible stablecoins is very strong. Supported by the Special Administrative Region government's foreign exchange reserves, HKDG will enjoy unparalleled credibility. Because of the Hong Kong Dollar's peg to the U.S. Dollar, HKDG could become an extremely attractive option to challenge the dominance of the U.S. Dollar stablecoins.
We believe that the timely issuance of HKDG, coupled with the imminent advent of RWA tokenization, can lay the foundation for strengthening the internationalization of the Hong Kong Dollar and provide a path to challenge the dominance of the U.S. Dollar. Although the stablecoin market is currently small compared to the global economic scale, with the robust momentum of RWA tokenization, the stablecoin market is set to flourish. If HKDG can establish a favorable position and hold its ground before major U.S. financial giants enter the market, it can maintain a leading position even after the stablecoin market surges. If the market capitalization of the RWA tokenization reaches several trillion, and HKDG can capture 10% of the stablecoin market, it will be a significant victory for the internationalization of the Hong Kong Dollar and a substantive challenge to the dominance of the U.S. Dollar.
We once again strongly urge the Special Administrative Region government to take action in issuing HKDG. We have a narrow window of opportunity to truly transform Hong Kong into a major international hub for Web3. We anticipate that this window of opportunity will remain open for no more than a year. This is a critical initiative: it relates not only to whether Hong Kong can become the world center for digital assets and Web3 development but also to the national strategic goal of challenging the dominance of the U.S. Dollar. We must seize this historic moment. Hong Kong cannot wait, and neither can our national strategy.
The authors are the Vice-Chancellor and Chief Science Advisor of the Hong Kong Web3.0 Association, respectively, and a doctoral student at the Hong Kong University of Science and Technology.