HKUST Vice-President and Others Jointly Propose: Hong Kong Issue Foreign Exchange-Reserve-Backed HKD Stablecoin
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HKUST Vice-President and Others Jointly Propose: Hong Kong Issue Foreign Exchange-Reserve-Backed HKD Stablecoin
Launching a Hong Kong dollar stablecoin will undoubtedly inject new momentum into Hong Kong's economy and help enhance its competitiveness in the digital economy era.
Navigating Web3 tides with focused insightsAuthors: Wang Yang, Cai Wen-sheng, Lei Zhi-bin, Wen Yizhou
As the global digital asset market grows rapidly, the Hong Kong Special Administrative Region government is actively promoting the development of digital assets and the digital economy. This effort stands in sharp contrast to other jurisdictions such as the United States and Singapore, where regulatory frameworks for digital assets are gradually being strengthened. Hong Kong is demonstrating to the world its openness and acceptance toward the digital asset market. In this context, stablecoins—financial instruments that serve as a bridge between traditional finance and the digital economy—have become a key topic in Hong Kong's advancement of digital assets. Stablecoins play a significant role in the digital financial ecosystem. Issuing a Hong Kong-dollar-pegged stablecoin would not only help consolidate Hong Kong’s leadership in blockchain technology but also advance the progress of the digital Hong Kong dollar (e-HKD), enhance transaction efficiency, reduce transaction costs, improve existing payment systems, and further strengthen Hong Kong’s fintech capabilities. At the same time, a HKD-backed stablecoin could boost the efficiency and inclusiveness of Hong Kong’s financial system. Its stability, free convertibility, high security, open-source nature, and cross-border liquidity can support broader financial innovation. Launching a Hong Kong-dollar stablecoin will undoubtedly inject new momentum into Hong Kong’s economy and enhance its competitiveness in the digital economy era.
However, the current government plan is limited to allowing and encouraging private-sector institutions to issue HKD-pegged stablecoins. In our view, this approach is too conservative and fails to align with the SAR government’s broader ambitions for advancing digital assets and the digital economy. Stablecoins issued by private entities are unlikely to achieve significant market presence and may ultimately remain marginalized products. The Singapore Dollar (XSGD) stablecoin issued by Xfers serves as an example—its market capitalization stands at only USD 6.6 million, compared to USDT and USDC, which have market caps of USD 83 billion and USD 28 billion respectively. A stablecoin on the scale of XSGD cannot challenge the dominance of dollar-denominated stablecoins. Hong Kong must aim higher and demonstrate greater resolve on this front.
Therefore, we strongly urge the SAR government to issue a Hong Kong-dollar stablecoin backed by Hong Kong’s foreign exchange reserves (hereafter referred to as HKDG, with "G" standing for Government). A government-backed HKD stablecoin would offer dual safeguards: first, through governmental regulation; second, through the information transparency and immutability provided by blockchain smart contracts. This innovative policy direction would significantly bolster Hong Kong’s leadership position in digital finance.
Consolidating Hong Kong’s Leadership in Blockchain
As of March 2023, Hong Kong’s total foreign exchange reserves reached USD 430 billion, far exceeding the combined market cap of USDT and USDC at USD 111 billion. By comparison, a government-backed HKDG would enjoy higher credibility and lower risk. Especially given ongoing concerns about USDT’s reliability and recent instances of USDC trading at significant discounts, HKDG has the potential to challenge the monopoly of dollar-pegged stablecoins and emerge as a mainstream stablecoin within the blockchain and digital asset ecosystem. Beyond this, launching HKDG offers numerous additional advantages:
A Substantive Step Toward De-Dollarization: Clearly, HKDG alone cannot overturn U.S. dollar hegemony. However, as the blockchain and digital asset ecosystem expands rapidly, a robust HKDG could challenge dollar dominance within this domain, achieving de-dollarization in practice. Moreover, the success of HKDG is likely to inspire emulation by other sovereign currencies, further diversifying global financial markets and reducing excessive reliance on the U.S. dollar. Under proper regulation, HKDG could also serve as a strategic tool to extend the reach of the Hong Kong dollar internationally by channeling stablecoins into other economies.
Providing Additional Liquidity to Support Government Investment Projects: The issuance of HKDG can generate substantial additional liquidity and further expand Hong Kong’s foreign exchange reserves. This increased liquidity would enhance the efficiency of financial markets. The extra funds could be used to reduce government debt and create more fiscal space for infrastructure development and industrial growth. HKDG could be integrated into government financial investment programs to lower project operating costs.
Digitalizing Hong Kong’s Traditional Quadrillion-Dollar Asset Base: HKDG could facilitate the digitization of Hong Kong’s traditional assets, thereby expanding their business scope, improving liquidity, enabling low-cost transactions, and increasing transparency. Digitized assets open up broader application scenarios and usage models, while driving optimization in financial services and enabling wider public participation in financial trading. Such transformation would not only reinforce Hong Kong’s status as an international financial center, enhancing its liquidity and influence, but also bring new vitality and opportunities to Hong Kong’s digital economy.
Enhanced Supervision and Risk Management: A government-issued HKDG is easier to monitor and manage from a risk perspective than those issued by private institutions. Direct government oversight over the issuance and circulation of HKDG would improve the effectiveness of monetary policy implementation, as well as ensure consistency in financial stability and technical standards across Hong Kong. Furthermore, the government can flexibly adjust management strategies based on market conditions and policy needs to maintain value stability. The government bears both the responsibility and capability to protect HKDG holders’ interests and safeguard their value. Compared to private entities exposed to commercial risks, the government is better positioned to comply with anti-money laundering regulations and strictly supervise fund flows.
Promoting Financial Innovation: Government backing and regulatory support will foster the development of HKDG, encourage financial innovation, and attract more blockchain, cryptocurrency, and especially Web3-related enterprises and projects to establish operations in Hong Kong—positioning the city as a global hub for Web3 innovation. HKDG can strengthen the competitiveness of the Hong Kong dollar in global markets by offering differentiated, high-quality financial services supported by advanced technological platforms, superior service quality, prudent regulation, and healthy competition. As China’s major free port and international financial center, Hong Kong can dramatically reduce the cost of digital asset transactions and cross-border payments, delivering more convenient and secure financial services to the real economy.
Enhancing Competitiveness in the Digital Economy Era
Supporting National Strategic Development Initiatives: HKDG can help overcome obstacles in international cooperation caused by monetary policies and trade restrictions. One potential use case is providing a simpler, more efficient, and reliable method of capital flow for the Belt and Road Initiative, improving capital utilization efficiency. Blockchain technology eliminates redundant processes in traditional transactions, reduces costs, and enhances trust through transparent record-keeping and traceability—further attracting international investment. Promoting and applying HKDG along Belt and Road countries can not only drive Hong Kong’s innovation technologies and related services but also elevate Hong Kong’s international competitiveness.
Although government-issued HKDG offers multiple advantages, we must also acknowledge potential risks. First, legal and regulatory challenges may arise, particularly in cross-border transactions involving multiple jurisdictions’ laws and standards. If linked to illegal financial activities such as money laundering or terrorist financing, it could trigger international disputes. Technical risks—including cyberattacks and system failures—must not be underestimated. Additionally, large-scale redemption demands could cause short-term volatility in the Hong Kong dollar exchange rate.
Nevertheless, despite these risks, the risks associated with a government-issued HKDG are significantly lower than those posed by privately issued HKD stablecoins. The government’s strong fiscal capacity and vast foreign exchange reserves far exceed those of any private entity. As a sovereign issuer, the government enjoys greater credibility, and its motives and objectives in issuing a stablecoin are more transparent. Moreover, a government-backed HKDG would encourage participation from Hong Kong’s private and non-state-owned enterprises in the stablecoin market, enriching application scenarios and integrating collaborations between state-owned financial institutions and non-state fintech innovators into the global trend of national stablecoin development. After weighing all factors, the benefits of the SAR government issuing HKDG clearly outweigh the risks.
We therefore advocate that the SAR government issue a Hong Kong-dollar stablecoin fully backed by Hong Kong’s foreign exchange reserves—to promote fintech innovation, enhance the competitiveness of financial markets, optimize the use of foreign reserves, and take a substantive step toward de-dollarization. Only in this way can Hong Kong maintain its competitive edge in the digital economy era.
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