A New Stablecoin in Town? Hong Kong Proposes Creation of HKD Stablecoin

Hong Kong has wasted no time in exploring new opportunities since opening its doors to the crypto industry last month. A recent proposal put forward by academics aims to create a Hong Kong Dollar (HKD) stablecoin that would compete with popular USD-denominated stablecoins such as Tether (USDT) and Circle (USDC).

The proposal, penned by Vice President Cai Wensheng of Hong Kong University of Science and Technology, along with Wang Yang, Lei Zhibin, and Wen Yizhou, highlights the vision of developing a local currency stablecoin that can challenge the dominance of existing stablecoins. While the proposal has not been endorsed by the Hong Kong government, it carries potential implications for solidifying Hong Kong's position as a leader in blockchain.

According to Chinese journalist Wu Blockchain, the issuance of an HKD stablecoin could provide several benefits, including boosting the local currency, improving transaction efficiency, reducing costs, enhancing payment systems, and further strengthening Hong Kong's fintech capabilities. The stablecoin's stability, freedom of exchange, high security, openness, and cross-border liquidity could also support a wider range of financial innovations.

The proposal acknowledges the government's current approach of allowing private institutions to issue HKD stablecoins but deems it too conservative. Instead, the academics recommend that the government itself issue a stablecoin called HKDG, backed by Hong Kong's substantial foreign exchange reserves, which stood at approximately US$430 billion as of March 2023. Additionally, the introduction of a local stablecoin could contribute to the process of de-dollarization.

However, the proposal raises concerns about the potential control and surveillance that could accompany a central bank-issued asset, given the oversight and control exerted by China over Hong Kong. While Hong Kong recently introduced regulations for virtual asset service providers and is working on establishing a regulatory framework for stablecoins, it is important to carefully navigate the balance between innovation and regulatory control.

While Hong Kong is currently leading the way in crypto regulations in Asia, other countries in the region are also making significant strides. Japan has been strengthening its crypto regulations and Know Your Customer (KYC) policies as it competes to become a regional hub for digital assets. South Korea recently passed the Virtual Asset User Protection Act, and Singapore's central bank has proposed new rules for crypto exchanges to ensure the protection of customer assets.