Author: Zhu Weisha

Introduction: The Essence of Controversy and the Evolution of Regulation

After the implementation of Hong Kong's "Stablecoin Regulation," there has been little debate regarding USD stablecoins, while the narrowing scope of HKD stablecoin issuance has sparked considerable controversy. I previously stated in the article "Will the Introduction of the Stablecoin Bill Trigger a Financial Tsunami?" that "Hong Kong does not need to issue HKD stablecoins," a view that aligns with the cautious stance of Hong Kong's financial authorities. Interestingly, although the Hong Kong government adopted my suggestion to rename "virtual currency" to "cryptocurrency" during a policy group meeting, it ultimately chose the vague term "digital currency"—this reflects policymakers' limited understanding of the nature of crypto assets and lays the groundwork for the regulatory dilemmas surrounding HKD stablecoins. Cryptocurrency is a type of digital currency, but not all digital currencies are cryptocurrencies. Policymakers need to recognize the characteristics of crypto assets and avoid letting outdated regulatory frameworks stifle new financial innovations.

This article aims to clarify three key questions:

1. Why does HKD stablecoin have structural risks?
2. What issuance mechanisms can avoid systemic shocks?
3. RWA is the breakthrough for Hong Kong's financial innovation, not HKD stablecoin.

1. Why does HKD stablecoin have structural risks?

Firstly, the HKD has become a de facto USD stablecoin through a linked exchange rate, and issuing stablecoins on top of HKD effectively leverages the HKD. The HKD 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 USDT?

The allowance for multiple issuers of HKD stablecoins increases the risk of HKD instability and complicates the Monetary Authority's ability to manage the HKD. If the HKD cannot remain stable, how can HKD stablecoins be stable? In my article "Will the Introduction of the Stablecoin Bill Trigger a Financial Tsunami?," I mentioned: "Maintaining a fixed exchange rate is very difficult; historical experience has led the Hong Kong government to avoid mentioning HKD stablecoins. What impact would issuing HKD stablecoins have on the HKD? In fact, issuing HKD stablecoins is leveraging the HKD. If the HKD remains pegged and resolves 24-hour convertibility, the initial risk may not seem significant."

"If the market experiences a Soros-style attack again, the leverage will amplify the force of the attack. What would an attack look like in the new circumstances?"

"The current Hong Kong 'Stablecoin Regulation' may become a feast for speculators and is very likely to be the starting point for a financial tsunami."

Secondly, the HKD 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 HKD global? Hong Kong's GDP is relatively small, projected at $407 billion in 2024, with total trade accounting for about 2.7% of global trade, which includes USD and RMB settlement amounts, the proportion of which is not detailed. The demand for HKD primarily comes from the financial market, where transactions require HKD.

The HKD issuance market is already a monopolistic market; can small enterprises enter? Similarly, the HKD stablecoin issuance market is also unsuitable for small enterprises and banks. While small enterprises can actively participate in the application of HKD stablecoins, they cannot feasibly issue them.

In summary, the USD is a base currency, and it is inappropriate to issue stablecoins in the same manner as a currency like the HKD, which is pegged to a base currency.

2. What issuance mechanisms can avoid systemic shocks?

In the article "Will the Introduction of the Stablecoin Bill Trigger a Financial Tsunami?," I stated: "The issuance level of HKD remains the ceiling for sovereign stablecoin issuance. The issuance of HKD is jointly managed by the three major banks: HSBC, Standard Chartered, and Bank of China. The HKD operates well, and Hong Kong's team is the only one in the world with over 40 years of stablecoin management experience. Why can't any bank in Hong Kong issue currency?"

This raises issues of credit and strength; as the issuer of HKD, the USD portion remains opaque, leading to trust issues regarding the three banks. Trust arises from strength.

Similarly, HKD stablecoins should be issued by these three banks, requiring minimal management regulations, making supervision very simple, and almost no changes are needed for the Monetary Authority's management.

They would issue the stablecoins equivalent to USD to the Monetary Authority, which would then provide them with HKD stablecoins, while stock market shares could issue corresponding cryptocurrency certificates, purchasable with HKD stablecoins. Everything is feasible. This perfectly expands traditional finance into the realm of crypto finance.

In this way, USD deposited with the Monetary Authority allows banks to earn interest, and other financial innovation opportunities also exist. Issuing stablecoins using the HKD issuance method means that HKD stablecoins and HKD exist in parallel rather than in series, thus not amplifying risk. Being under the same supervision of the Monetary Authority avoids the regulatory risks of HKD stablecoins.

3. RWA is the breakthrough for Hong Kong's financial innovation, not HKD stablecoin

Issuing HKD stablecoins under the current regulations carries high risks, and without changes, it is difficult to serve as a breakthrough for financial innovation. Hong Kong is a global financial center, and asset tokenization should follow the path of the United States, which 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 be tokenized for trading through blockchain technology. For example, the scarcity and value stability of antiques are similar to Bitcoin; if transparent tokenization issuance can be achieved, it could significantly enhance the attractiveness of Hong Kong's financial market. Meng Yu, chairman of the China Financial Association in Hong Kong, also stated, "RWA is the key direction at this stage," and the demand for HKD stablecoins may expand through RWA transactions, becoming a regional advantage, thus revealing the advantages of HKD stablecoins. HKD stablecoins have great potential. Hong Kong also has a bright future. A detailed explanation would require 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, while transparency is its lifeline.

4. Relaxing regulation to support cryptocurrency financial innovation

In my series of articles "Problems with Cryptocurrency Regulation" 1-4, I mentioned that because cryptocurrency is a unified market, there should be a unified regulatory body rather than the current fragmented regulation.

Hong Kong's opportunity lies in ensuring that cryptocurrency policies align with reality. In the article "Will the Introduction of the Stablecoin Bill Trigger a Financial Tsunami?," there is a section that evaluates the regulation of two bills as "old wine in new bottles." The article suggests that regulation should be based on transparency. In fact, whether it is fiat currency, stocks, or tokens, they are all tokens. The history of Bitcoin's development proves that high transparency can reconstruct regulatory logic. Current regulation needs innovation; it 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 emphasis is on advancing applications, with the concept shifting from a technical judgment of decentralization to a philosophical judgment of transparency. Excellent politicians, financial experts, and entrepreneurs have taken the stage, and mainstream capital and financial institutions have entered the arena; their learning ability is strong, and in a short time, they have brought cryptocurrency into the mainstream. They will ultimately realize that transparency is the core concept of cryptocurrency. The next step will certainly be to use the transparent philosophy of Web3 and transparent infrastructure to reconstruct transparent banks, transparent brokerages, and transparent enterprises. Humanity will usher in a fairer world.

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