Title: "Policy Proposal: Seizing the Initiative to Issue Government-Supported Hong Kong Dollar Stablecoin"

Authors: Wang Yang, Wen Yizhou, Ta Kung Pao

In the previous article "Proposal for Hong Kong to Issue Hong Kong Dollar Stablecoin Backed by Foreign Exchange Reserves," we advocated the introduction of a stablecoin based on the Hong Kong dollar (HKDG), supported by Hong Kong's current high foreign exchange reserves of up to 430 billion US dollars. We believe that this measure will bring additional liquidity to Hong Kong, revitalize the financial market, and support government investment projects and major national development strategies.

Although the government has not officially responded, our proposal has received widespread positive feedback in society. Given the rapid development in the field of digital assets, especially the tokenization of real-world assets (RWA) and the plans of major entities to launch their own stablecoins, these developments highlight the urgent need to issue HKDG. In this follow-up article, we further elaborate on our position.

Tokenization of Real-World Assets (RWA) and the Growing Demand for Stablecoins

The tokenization of RWA, the conversion of tangible or intangible assets into digital tokens, represents a breakthrough in the field of digital assets and has the potential to redefine market dynamics. Through blockchain technology, RWA tokenization enhances transaction transparency, strengthens security, and broadens liquidity by enabling partial ownership. This approach not only addresses the inefficiencies of traditional financial systems but also narrows the gap between the digital asset field and the real economy, thereby driving the development of Web3.

Explosive Growth in the Digital Asset Market

Currently, the market value of just US bonds and the global real estate market alone reaches 240 trillion and 280 trillion US dollars, respectively, not to mention other real assets. Even if only one percent of these assets were to be traded through RWA tokenization, it would have a significant impact on the digital asset market. As tokenization penetrates various asset categories, from commodities to intellectual property rights, the digital asset market is bound to experience explosive growth.

It is foreseeable that due to regulatory restrictions on RWA tokenization, the majority of RWA token transactions on public blockchains will occur in the form of stablecoins. Therefore, we must be prepared for the rapid expansion of the stablecoin market value.

As we discussed in the previous article, Hong Kong has a unique advantage in leading this revolution. However, this prospect depends on whether Hong Kong can timely issue HKDG supported by foreign exchange reserves. If Hong Kong lags behind major US entities that are ready to issue large amounts of US dollar stablecoins, Hong Kong will miss a great opportunity.

It is worth noting that it is not sufficient for commercial institutions in Hong Kong to issue their own Hong Kong dollar stablecoins. The issuance of various versions of Hong Kong dollar stablecoins by different institutions would lead to fragmentation and confusion, as these institutions do not have enough scale to challenge mature US dollar stablecoins like USDT. If HKDG is not issued with the support of unified foreign exchange reserves, the separate issuance of stablecoins by institutions will undoubtedly only become a marginalized niche product, unable to pose a challenge to mature US dollar stablecoins. Worse still, this would foster a false sense of progress, masking the reality of missed opportunities.

Here, we can also consider adopting a compromise strategy, which is to authorize commercial institutions to issue a unified HKDG stablecoin. This approach may be more conducive to stimulating the participation of commercial institutions, but it will also bring many new challenges. These challenges encompass a series of unresolved issues such as reserves, regulatory balance of interests and risks, insurance, custody, security, and so on.

The motivation for commercial institutions to issue stablecoins largely stems from the current high interest rate environment. However, once interest rates decline, these institutions will inevitably seek higher returns, potentially increasing risks. At the same time, if the regulation is too stringent, these issuing institutions may not be able to profit from it, thereby losing the motivation for sustainable development. In addition, under this scheme, the SAR government will not be able to enjoy the benefits of issuing HKDG. Therefore, we should take a holistic view of the interim strategy of authorizing commercial institutions to issue HKDG and continue to strive for the SAR government's unified issuance of HKDG as our ultimate goal.

Consolidating the Global Status of the Hong Kong Dollar and Challenging the Dominance of the US Dollar

Although the Hong Kong dollar can be exchanged for other currencies at any time, it is rarely used in international trade or as a global reserve currency, possibly due to its peg to the US dollar. If Hong Kong can seize the opportunity of RWA tokenization to issue HKDG, the potential of the Hong Kong dollar as an international currency will undoubtedly be greatly enhanced, and it may even challenge the dominance of the US dollar in some areas.

"Opportunity Window" Lasts Only One Year

We have previously pointed out that the launch of HKDG can enhance the international status of the Hong Kong dollar, especially in the field of digital assets. Given the credibility crises that have occurred with stablecoins such as USDT and USDC, there is a strong market demand for highly credible stablecoins. With the support of the SAR government's foreign exchange reserves, HKDG will enjoy unparalleled credibility. As the Hong Kong dollar is pegged to the US dollar, HKDG may become an attractive solution to challenge the dominance of US dollar stablecoins.

We believe that the timely issuance of HKDG, coupled with the imminent emergence of RWA tokenization, can lay the foundation for strengthening the internationalization of the Hong Kong dollar and provide a pathway to challenge the dominance of the US dollar. Although the stablecoin market is relatively small compared to the global economy at present, with the strong momentum of RWA tokenization, the stablecoin market will prosper. Before major US financial giants enter the market, if HKDG can take an advantageous position early and establish a firm foothold, even after the explosive growth of the stablecoin market, HKDG will still maintain a leading position. If the market value of the RWA tokenization market reaches trillions and HKDG can capture 10% of the stablecoin market, this will be a significant victory for the internationalization of the Hong Kong dollar and a substantial challenge to the dominance of the US dollar.

Conclusion

We once again strongly urge the SAR government to take action to issue HKDG. We have a narrow window of opportunity to truly establish Hong Kong as a major international hub for Web3. We expect this window of opportunity to remain open for at most about a year. This is a crucial layout: it not only concerns whether Hong Kong can become the world center for the development of digital assets and Web3 but also relates to the strategic goal of challenging the dominance of the US dollar. We must seize this historic opportunity. Hong Kong cannot wait, and the national strategic goal cannot wait either.

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