The autonomous territory in southeast China, Hong Kong, has been urged to issue its own stablecoin to compete with popular stablecoins such as Tether (USDT) and USD Coin (USDC).
A recent policy proposal highlighted the benefits of a government-backed stablecoin pegged to the Hong Kong dollar, which could potentially reduce costs, improve payment systems, contribute to de-dollarization efforts, and strengthen the region’s fintech capabilities.
Summary
The policy proposal urging the government of China to make Hong Kong compete with the Tether and USD Coin stablecoins
The paper, co-authored by prominent figures such as Wang Yang, vice chancellor of the Hong Kong University of Science and Technology and chief scientific advisor of the Hong Kong Web3 Association, along with angel investor Cai Wensheng, BlockCity founder Lei Zhibin and PhD student Wen Yizhou, outlines the benefits of a stablecoin pegged to the Hong Kong dollar, called HKDG.
Stablecoins play a crucial role as a bridge between traditional finance and the digital economy, and the authors believe that an HKDG stablecoin would further increase financial inclusiveness, increase transaction efficiency, reduce costs, improve payment systems, and strengthen Hong Kong’s fintech capabilities.
The proposal also questions the current approach of allowing private institutions to issue stablecoins, suggesting that it could result in limited market share.
Citing the example of Singapore‘s XSGD stablecoin issued by Xfers, which has a market capitalization of $6.6 million compared to the combined market capitalization of more than $110 billion for USDT and USDC, the authors argue that Hong Kong’s aspirations should be more ambitious.
One of the main advantages of a government-backed stablecoin is its credibility and lower risk compared to privately issued stablecoins.Â
With Hong Kong’s foreign exchange reserves amounting to about $430 billion as of March, exceeding the combined market capitalization of USDT and USDC, a government-backed HKDG stablecoin would offer greater credibility and lower risk to users.
Moreover, the issuance of an HKDG stablecoin is in line with Hong Kong’s efforts to strengthen its position as a leading fintech hub in the region.
By embracing emerging technologies and promoting innovation, the government can establish Hong Kong as a pioneer in the digital economy.
The potential risks of creating a stablecoin
However, the proposal also raises issues and challenges that the government should address before implementing a stablecoin.
Regulatory considerations, security measures and ensuring compliance with international standards are some of the key factors that need to be carefully examined.
In addition, competition from established stablecoins such as USDT and USDC cannot be taken lightly. These stable currencies have gained considerable traction and enjoy wide global acceptance.
The Hong Kong government should develop a comprehensive strategy to incentivize users to adopt the HKDG stablecoin and build a strong ecosystem around it.
While the proposal highlights the potential benefits of issuing a government-backed stablecoin, it also recognizes some risks that need to be considered.
Legal and regulatory challenges are a significant concern, as the evolving nature of cryptocurrencies and stablecoins requires clear guidelines and frameworks to ensure compliance and protect consumers.Â
Technical risks, such as vulnerabilities in the underlying blockchain technology or potential hacking attempts, should also be carefully addressed to safeguard the stability and security of the HKDG stablecoin.
However, the authors argue that the risks associated with a government-issued stablecoin such as the HKDG would be relatively lower than those of stablecoins issued by private institutions.
Government regulation and oversight can provide a level of assurance and accountability that may be lacking in the private sector.
In addition, the transparency provided by blockchain technology can increase trust and enable stakeholders to monitor transactions and ensure the integrity of the stablecoin.
The potential benefits of a Hong Kong-based stablecoin
In addition to mitigating risks, the proposal highlights several potential benefits that HKDG could bring to Hong Kong’s financial landscape. One significant benefit is the possibility of advancing de-dollarization efforts.
By offering an alternative stablecoin pegged to the Hong Kong dollar, the government can reduce reliance on the US dollar in the cryptocurrency ecosystem, thereby diversifying the region’s currency exposure and increasing financial sovereignty.
In addition, the HKDG could provide additional liquidity for the government’s investment projects.
By digitizing assets and taking advantage of blockchain technology, stablecoin could facilitate the efficient flow of funds for infrastructure development, utilities, and other government initiatives.
The introduction of HKDG could also promote Hong Kong’s financial innovation and competitiveness. By embracing digital currencies and fostering a supportive ecosystem, the region can attract talent, investment and technological advances.
This would further strengthen Hong Kong’s position as a global fintech hub and enhance its reputation as an innovative and forward-looking financial center.
Finally, the proposal suggests that the issuance of HKDG would increase the transparency of financial transactions.
The immutable nature of blockchain records ensures that all transactions can be publicly verified, minimizing the risk of fraud and improving accountability.
This transparency could potentially improve trust in Hong Kong’s financial systems and attract businesses and investors who value integrity and transparency.
Hong Kong’s recent efforts to establish a web3 task force and build a thriving cryptocurrency ecosystem demonstrate its commitment to re-establishing itself as a global hub for the cryptocurrency industry.
The potential issuance of HKDG is in line with these aspirations and can serve as a catalyst for the region’s growth and development in the digital economy.
