Author: Zhu Weisha

After the introduction of the Hong Kong "Stablecoin Regulation," I pointed out in articles such as "The Current Method of Issuing Hong Kong Dollar Stablecoins Needs Reconstruction" that the current issuance mechanism has potential flaws and systematically pointed out the solutions. Some believe that the method I proposed is merely a "blockchainization" of the Hong Kong dollar peg system, which is not fundamentally different from the issuance method of Central Bank Digital Currency (CBDC). This article aims to respond to this question and clarify the essential differences between the two.

Core Viewpoint: The central bank issues base money M0, while Hong Kong dollar stablecoins belong to broad money M2. The issuer of CBDC is the central bank, while the Hong Kong dollar is issued by commercial banks. There are fundamental differences in credit basis, circulation mechanisms, and value stabilization methods between the two.

1. Differences Between Hong Kong Dollar and CBDC

1. Different Issuers

• CBDC is directly issued by the central bank (e.g., the People's Bank of China) and is a liability of the central bank, classified as legal digital currency.
• The Hong Kong dollar is issued by three commercial banks: HSBC, Standard Chartered, and Bank of China (Hong Kong) (BOCHK). The Hong Kong Monetary Authority (HKMA) only issues coins and commemorative notes of 10 HKD and below.

1. Different Credit Endorsement and Support Mechanisms

• CBDC is backed by national credit, with a legal status equivalent to cash (M0), requiring no asset collateral.
• The Hong Kong dollar relies on the peg system, where each issuance of 7.8 HKD requires the issuing bank to pay 1 USD to the HKMA as a reserve. Its credit is based on a threefold support of USD reserves, HKMA credit, and the issuing bank's credit.

1. Different Paths of Money Creation

• CBDC follows a two-tier operational system of "Central Bank → Commercial Banks → Public."
• The Hong Kong dollar is generated through "commercial banks collateralizing USD → creating deposit money → further amplifying the money supply through credit," which is essentially market-driven money creation.

1. Different Forms of Currency and Technological Foundations

• CBDC is based on blockchain or distributed ledger technology (DLT), belonging to a centralized system, supporting controllable anonymity, programmability, and offline transactions.
• The Hong Kong dollar exists in both cash and deposit forms, with cash issued by commercial banks, and deposits accounting for over 90% of the supply, circulating through electronic bookkeeping in the banking system.

2. Similarities and Differences Between Hong Kong Dollar Stablecoins and CBDC

Although both may use blockchain as the underlying technology, their issuance mechanisms are fundamentally different:

• Hong Kong dollar stablecoins are issued by licensed commercial banks or institutions, based on equivalent USD reserves and the peg system, with a market-oriented issuance process that relies on reserve assets for credit.
• CBDC is directly issued and endorsed by the central bank, representing a digital form of national legal currency.

3. The Hong Kong Dollar Issuance Model as the "Ancestor" of Legal Currency Stablecoins

The original concept of cryptocurrency was proposed by David Chaum in 1982, and he invented digital cash (DigiCash) in 1989, with the term "cash" in Satoshi Nakamoto's Bitcoin system derived from this.

At that time, cryptocurrency was still in its infancy, while the peg system has been operating as a mature system since 1983 for 42 years, reflecting the blockchain spirit of "not relying on a single authority" through its market-oriented and decentralized design. Stablecoins like USDT only emerged in 2014, and its founder Brock Pierce publicly stated that it "drew inspiration from the Hong Kong issuing bank model." It can be said that the Hong Kong dollar issuance mechanism is a pioneering system for stablecoins, with its success stemming from institutional design rather than technology, which has yet to be surpassed. The centralized regulation and management of the Hong Kong dollar have been adopted by USDT, while the blockchain spirit of "not relying on a single authority" is not reflected in USDT. USDT can essentially be seen as a castrated version of the Hong Kong dollar issuance method, unsuitable for the issuance of the vast majority of sovereign stablecoins.

4. A Reasonable Issuance Method for Hong Kong Dollar Stablecoins

If the underlying technology of the Hong Kong dollar issuance is replaced with blockchain, it would form a "Hong Kong dollar stablecoin." This model can effectively address the three core issues of stablecoin issuance: the absence of rescue, lack of credit transparency, and naming confusion, avoiding the "over-leverage" risk of repeatedly issuing stablecoins based on anchor currencies.

In this model, the Hong Kong dollar and Hong Kong dollar stablecoins can circulate in parallel without leverage concerns. Even if the exchange rate of the Hong Kong dollar or stablecoin deviates from the range of 1 USD to 7.75–7.85 HKD, it can be independently adjusted through mechanisms.

Nobel laureate Bengt Holmström pointed out in "Collateral and Liquidity" (2023) that "the collateral-arbitrage dual-track mechanism of Hong Kong's peg system is a Pareto optimal solution to currency crises." Adopting the peg system and implementing Hong Kong dollar stablecoins through blockchain is the optimal solution for current Hong Kong dollar stablecoins.

5. The HKMA's Timely Response and Unfinished Business

On July 21, I published an article titled "Will the Introduction of the Stablecoin Bill Trigger a Financial Tsunami?," pointing out the three major risks associated with stablecoin issuance, which I did not elaborate on, leaving it for those with insight. This implies that Hong Kong dollar stablecoins are at the forefront of a financial tsunami.

On August 1, the HKMA launched the "Real-name Penetration + Data Retention + T+1 Redemption" policy, which, although controversial in the market, effectively plugged most systemic risk loopholes, significantly reducing the likelihood of a financial tsunami. They excel in detail execution, but there is still room for improvement at the strategic level. For example, the Hong Kong dollar mechanism is superior to the USDT mechanism; why does the HKMA settle for less? Do they need to follow the United States? Don't they know that Sir John Henry Bremridge is the true pioneer?

Sir John Henry Bremridge, the excellent designer of Hong Kong's peg system

If the HKMA had not responded in a timely manner, I had originally planned to write an article titled "Bessent Harvesting Hong Kong: The Complete Collapse of the Hong Kong Dollar," analyzing the potential crisis in depth. This shows that financial systems and mechanism design are far more important than the technology itself.

Readers interested in "Bessent Harvesting Hong Kong: The Complete Collapse of the Hong Kong Dollar" can log on to Chainless and download the platform if it reaches 3000 users within ten days starting from August 20, and I will write this article. Although some loopholes have been plugged, it will still be rich in content and creativity, providing great insights. Bessent cannot do this, but it is uncertain for those in cryptocurrency. Of course, it is not easy to cause the collapse of the Hong Kong dollar.

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