Written by: Zhu Weisha
Introduction: The Essence of Controversies and Regulatory Evolution
There is not much debate about USD stablecoins after the implementation of Hong Kong (stablecoin regulations), but the narrowing of the issuance scope for Hong Kong dollar stablecoins has sparked much controversy. I previously pointed out in the article (Will the introduction of stablecoin legislation trigger a financial tsunami?) that ‘Hong Kong does not need to issue Hong Kong dollar stablecoins at all,’ which aligns with the cautious stance of the Hong Kong Monetary Authority. Interestingly, although the Hong Kong government adopted my suggestion at a policy group meeting to rename ‘virtual currency’ as ‘cryptocurrency,’ it ultimately chose the vague term 'digital currency'—this reflects the limitations in policymakers' understanding of the essence of crypto assets and also plants the seeds for regulatory dilemmas regarding Hong Kong dollar stablecoins. Cryptocurrency is digital currency, but digital currency is not necessarily cryptocurrency. Policymakers must recognize the characteristics of crypto assets and avoid letting old regulatory frameworks constrain new financial innovations.
This article aims to clarify three key issues:
Why does the Hong Kong dollar stablecoin have structural risks?
What kind of issuance mechanism can avoid systemic shocks?
RWA is a breakthrough for financial innovation in Hong Kong, not the Hong Kong dollar stablecoin.
1. Why does the Hong Kong dollar stablecoin have structural risks?
First of all, the Hong Kong dollar has become a de facto USD stablecoin through the linked exchange rate; issuing stablecoins on top of the Hong Kong dollar is essentially leveraging the Hong Kong dollar. The Hong Kong dollar is not a base currency; it is an application within the USD ecosystem. In other words, isn't it a joke to issue stablecoins on top of stablecoin USDT?
The allowance for multiple issuers of Hong Kong dollar stablecoins increases the risk of instability in the Hong Kong dollar and makes it more difficult for the Monetary Authority to regulate the Hong Kong dollar. If the Hong Kong dollar cannot stabilize, can the Hong Kong dollar stablecoin be stable? In the article (Will the introduction of stablecoin legislation trigger a financial tsunami?), I stated: ‘Maintaining a fixed exchange rate is very difficult; historical experience dictates that the Hong Kong government never mentions the Hong Kong dollar stablecoin. What kind of impact would issuing the Hong Kong dollar stablecoin have on the Hong Kong dollar? In fact, issuing the Hong Kong dollar stablecoin is essentially leveraging the Hong Kong dollar; if it maintains the Hong Kong dollar's peg and resolves 24-hour exchange issues, at first glance, the risks seem minor.’
‘If the market experiences an attack similar to Soros, the leverage will amplify the strength of the attack. What will the attacks under the new circumstances look like?’
‘Currently, the Hong Kong (stablecoin regulations) could become a feast for speculators, 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 GDP is small, with 407 billion USD in 2024, and its total trade volume accounts for about 2.7% of global trade, including the settlement amounts in USD and RMB, the proportions of which are not detailed. The changes in demand for the Hong Kong dollar are mainly in the financial market, where transactions need to use the Hong Kong dollar.
The market for Hong Kong dollar issuance is already monopolistic; can small enterprises enter? Similarly, in the issuance market for Hong Kong dollar stablecoins, small enterprises and small banks are also unsuitable. Small enterprises can actively participate in the application of Hong Kong dollar stablecoins, but they cannot issue them.
In summary, the USD is a base currency, and currencies such as the Hong Kong dollar, which are linked to the base currency, are not appropriate for issuing stablecoins in the same manner as the base currency.
2. What kind of issuance mechanism can avoid systemic shocks?
In the article (Will the introduction of stablecoin legislation trigger a financial tsunami?), it is stated: 'The issuance level of the Hong Kong dollar has so far 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 team in the world with over 40 years of stablecoin management experience. Why can't any bank in Hong Kong issue currency?'
Here lies the issue of trust and strength; as the issuer of the Hong Kong dollar, the USD part remains opaque, which raises trust issues regarding the three banks. Trust exists because of strength.
Similarly, the Hong Kong dollar stablecoin can be issued by these three banks without many management regulations; regulation is very simple, and the management of the Monetary Authority requires little change.
They will give the stablecoins they wish to issue equal amounts of USD to the Monetary Authority, which will provide them with Hong Kong dollar stablecoins, while the stocks in the stock market can issue corresponding cryptocurrency certificates that can be purchased with Hong Kong dollar stablecoins. Everything is feasible, perfectly expanding traditional finance into the realm of cryptocurrency.
In this way, USD deposited with the Monetary Authority can earn interest, and other financial innovation opportunities also exist. Issuing stablecoins in the same manner as the Hong Kong dollar means that Hong Kong dollar stablecoins and the Hong Kong dollar coexist, rather than being sequential; the risks are not amplified. Being under the same regulatory authority of the Monetary Authority avoids the risk of regulating Hong Kong dollar stablecoins.
3. RWA is a breakthrough for financial innovation in Hong Kong, not the Hong Kong dollar stablecoin.
Issuing Hong Kong dollar stablecoins under current regulations poses high risks; without changes, it will not serve as a breakthrough for financial innovation. Hong Kong is a global financial center, and following the U.S. path for asset tokenization is not innovative. Hong Kong's breakthrough should focus on the tokenization of real-world assets (RWA). Hong Kong has unique advantages in the fields of art, antiques, and real estate, and these assets can achieve tokenized trading through blockchain technology. For example, the scarcity and value stability of antiques are similar to Bitcoin; if transparent tokenization issuance can be realized, it could significantly enhance the attractiveness of Hong Kong's financial market. Meng Yu, chairman of the China Financial Association in Hong Kong, also suggested, ‘RWA is the key direction at the current stage,’ and the demand for Hong Kong dollar stablecoins may expand through RWA transactions, becoming a regional advantage; only then will the advantages of Hong Kong dollar stablecoins emerge. Hong Kong dollar stablecoins have great prospects. Hong Kong also has a bright future. Detailed explanation requires another article.
The most important factor affecting innovation is regulatory issues; the foundation of financial innovation lies in trust and transparency. Trust is the cornerstone of the financial market, and transparency is its lifeline.
4. Relaxing regulations to support financial innovation in cryptocurrency
In my series (Problems in Cryptocurrency Regulation) 1-4, I mentioned that because cryptocurrency is a unified market, there needs to be a unified regulatory body, rather than the current fragmented regulations.
Hong Kong's opportunity lies in ensuring that cryptocurrency policies align with reality. In the article (Will the introduction of stablecoin legislation trigger a financial tsunami?), there is a section that specifically evaluates the two regulatory bills as 'old wine in new bottles.' The article suggests that regulation should be based on transparency. In fact, whether it's fiat currency, stocks, or tokens, they are all tokens; the development history of Bitcoin proves that high transparency can reconstruct regulatory logic. Current regulations need innovation and cannot be old wine in new bottles.
Cryptocurrency has matured after 15 years of technological innovation. It is no longer the focus of competition. The current focus is on advancing applications, moving from a technical judgment of decentralization to a philosophical judgment of transparency. Outstanding politicians, financial experts, and entrepreneurs have taken the stage; mainstream capital and financial institutions have come to the forefront, and their learning ability is strong. In a short time, cryptocurrency has entered the mainstream. Ultimately, they will realize that transparency is the core point of cryptocurrency. The next step must be to use the philosophy of Web 3 transparency to guide and reconstruct transparent banks, transparent brokers, and transparent enterprises. Humanity will usher in a fairer world.
