A spokesperson for the Hong Kong Monetary Authority (HKMA) stated that as of August 31, a total of 77 institutions have expressed their intention to apply for a stablecoin license, covering various entities such as banks, tech companies, securities firms, and payment institutions. This data reflects the market’s high level of attention to Hong Kong’s stablecoin regulatory framework and also foreshadows the accompanying regulatory challenges.
I. The Regulatory Dilemma
77 institutions submitting applications is undoubtedly a positive signal. These companies have clearly studied the relevant regulations and are willing to issue stablecoins in compliance, indicating that Hong Kong’s policy direction is correct.
However, approving all applications would put immense pressure on regulatory resources; if only a few are approved, yet the unapproved ones also meet the statutory conditions, it could impact Hong Kong’s reputation for the rule of law. Solving this problem requires introducing a classification management mechanism in the implementation rules of the bill. Different types of stablecoin issuers should be managed based on their nature.
II. The Opportunity for HKMA to Lead the Issuance of a USD Stablecoin (USHK)
The Hong Kong stablecoin bill does not limit issuance to HKD stablecoins only; it also allows for the issuance of USD, RMB, or other currency stablecoins. This provides Hong Kong with room for diversified development. The characteristics of the USD, HKD, and RMB are vastly different: the USD has strong global liquidity, the HKD is pegged to the USD requiring maintenance of the linked exchange rate system, while the RMB is influenced by exchange rate controls. The issuance mechanisms need to be adjusted accordingly to avoid a “one-size-fits-all” approach.
1. Practical Constraints of HKD Stablecoins
It is impractical for multiple institutions to issue HKD stablecoins simultaneously. The HKD operates under a Linked Exchange Rate system, pegged to the USD with fluctuations controlled within 1%, necessitating market adjustments by the HKMA. Furthermore, the HKD also serves the function of maintaining the stability of local financial and real economy transactions. If multiple enterprises were allowed to issue HKD stablecoins, including speculators exploiting price differences between USD, HKD, and stablecoins for arbitrage, it would introduce uncontrollable risks.
Therefore, as pointed out in my articles such as “[The Current Method of Issuing HKD Stablecoins Needs Restructuring]”, the current issuance mechanism has potential flaws, and I have systematically suggested solutions. It is recommended that the HKMA, leveraging the Linked Exchange Rate system, designate the three note-issuing banks (HSBC, Standard Chartered, Bank of China (Hong Kong)) to issue HKD stablecoins. This approach would maximize the use of the existing system while bringing the credit and stability of stablecoins under the HKMA’s management purview.
2. The Opportunity of Issuing a USD Stablecoin (USHK)
The issuance of a USD stablecoin (USHK) is different. The stability of the USD itself is the responsibility of the Federal Reserve; the HKMA only needs to ensure the peg between USHK and the USD. The issuance mechanism could be analogous to that of HKD stablecoins, but the issuing entities could be expanded to multiple qualified institutions, not limited to the three banks. This represents a significant development opportunity for the HKMA and Hong Kong as a whole.
The HKMA could be likened to Tether, the company issuing USDT, focusing on maintaining stability between USHK and the USD. Since the backing asset is the USD, its value is guaranteed by the Fed, and the HKMA does not bear the risk of the USD itself. Conversely, issuing USHK could enhance the scale and liquidity of the HKMA’s USD assets. This business has a clear profit model and is relatively straightforward to operate. Given the HKMA’s credibility and experience, it should be able to perform better than Tether.
From a geopolitical perspective, the United States, as a country governed by the rule of law, is unlikely to interfere with Hong Kong’s Linked Exchange Rate system or the issuance of USDT-like products, thus the launch of USHK possesses international legitimacy.
3. Implementation Path for USHK
The HKMA’s credit strength far surpasses that of Tether and should promote the issuance of USHK under a model combining blockchain with transparency centralization:
1) Issuing institutions must comply with the Hong Kong stablecoin regulations. Issuance conditions could be greatly simplified but must be redefined in detailed rules. Key clauses must meet bank-level KYC (Know Your Customer), AML (Anti-Money Laundering), and CFT (Countering the Financing of Terrorism) standards.
2) Prioritize Ethereum as the issuance chain. Although transaction fees are higher, its consensus mechanism is stable, highly transparent, market-tested, and the team’s operations are relatively transparent, making it suitable for large-volume transactions. Consortium chains or other public chains should not be adopted, and building a proprietary chain is even less advisable.
3) Simultaneously, the HKMA should establish a transparent centralized database based on Ethereum to mitigate Ethereum’s technical risks. While open-source programs are transparent, they inherently carry ongoing uncertainty risks. A separate backup mechanism is needed.
The centralized database would synchronize data and same on-chain addresses; it could be publicly verifiable, enhancing operational transparency and strengthening AML/CFT controls. This database could be designed as an Ethereum Layer 2 solution to reduce fees and improve efficiency, thereby facilitating better integration with traditional finance.
4. Advantages of USHK
1) Profit Mechanism: The HKMA could distribute part of the interest earned from its holdings of US Treasury bonds to issuing institutions. This offers significant attractiveness compared to Tether (which pays no interest) and institutions restricted by the US “Genius Act”. Users could also benefit indirectly, even using USHK for yield farming in crypto markets or exchanging it for “digital US Treasury bonds”. The combined yield, even just 1% more, is a huge attraction for large capital.
2) Credit Transparency: Tether’s reserve transparency has always been questioned, whereas the HKMA has 42 years of accumulated credibility, with mature and transparent audit and operational processes, giving it a clear credit advantage. Next steps could involve using cryptocurrency on-chain audit technology to further enhance public trust.
3) Unified Brand Effect: Using a unified USHK brand, rather than disparate stablecoins from various providers in the market, is more conducive to scale effects and international acceptance. It better represents the characteristics of Hong Kong as a financial center.
5. Implementation Mechanism Summary
Asset Backing: Backed by USD assets, the Federal Reserve bears responsibility for USD stability.
Regulatory Framework: Follow the Hong Kong stablecoin ordinance, formulating specialized implementation rules.
Technical Implementation: Issue based on the Ethereum public chain, while establishing a centralized transparent database for dual assurance.
Risk Management: Establish a transparent database synchronized with Ethereum addresses to strengthen AML/CFT controls.
Compliance Risk: The above issuance method does not constitute a violation of the US “Genius Act”.
III. Considerations for Issuing a RMB Stablecoin (CNHK)
A similar mechanism could be applied to the issuance of a RMB stablecoin (CNHK), but it should be strictly limited to the offshore RMB market, with controllable scale (approximately 3 trillion), not affecting mainland financial stability. If attempting to use this to promote RMB internationalization, it would be constrained by the reality of the RMB not being freely convertible, making the above method inapplicable.
Some suggest introducing gold backing for a RMB stablecoin, but I believe this idea is outdated and short-sighted, lacking understanding of cryptocurrencies born in the internet era.
IV. The Essence of Stablecoin Competition is Competition Between Nations
1. Different Nature of Fiat Currencies
Fiat currencies can be divided into three categories: standard currencies (e.g., USD, EUR), pegged currencies (e.g., HKD), and sovereign currencies (e.g., JPY, RMB). The rise of USD stablecoins poses a challenge to all sovereign currencies; many weaker sovereign currencies may gradually exit the market. Fortunately, the HKD, as a USD-pegged currency, will not be impacted and may even benefit if handled well. Due to its underlying sovereign credibility and financial foundation, it has the potential to attract other small economies to adopt USHK. This is a major historical opportunity for Hong Kong.
2. The Role of Entrepreneurs in Resolving Financial Crises
Historically, the resolution of financial crises has often been driven by entrepreneurs. The current situation in the US, where a group of entrepreneurs is effectively in governance, is not accidental; history has reached a turning point. The “Genius Act” is a forward-looking measure enacted in this context to address financial crises. For details, see my article “[Stablecoins – America’s Path to Defending Financial Hegemony].”
The fiat currency system itself also originated from innovative solutions by entrepreneurs during government crises.
In 1694, the British government faced a fiscal crisis due to war. William Paterson, a Scottish entrepreneur and financier, and a foundational figure in the modern pound sterling banknote system, among others, proposed a scheme: they would form the Bank of England to provide the government with a large loan (1.2 million pounds). they received the charter to issue banknotes, the earliest pound sterling notes.
Although the Bank of England was owned by private shareholders, from its inception it undertook the function of the “government’s bank”. The banknotes it issued were gradually accepted and became the national currency.
Similarly, the birth of Hong Kong’s Linked Exchange Rate system was a decisive measure taken to address a severe crisis. In 1983, Hong Kong experienced a currency crisis.
To restore market confidence, stabilize the currency’s value, and curb capital flight, the heavy responsibility fell on the then Financial Secretary, John Bremridge. He was a person with an entrepreneurial spirit. Bremridge’s journey from grassroots sales to company leadership demonstrated his business acumen and problem-solving abilities. Under his leadership, the Linked Exchange Rate system was officially implemented on Monday, October 17, 1983, laying the foundation for Hong Kong’s financial center.
3. Lessons from History: Calling for Entrepreneurial Spirit
The Federal Reserve is also a private bank that similarly plays the role of the “government’s bank”. It can be seen as evolving from the Bank of England. Understanding this clarifies that HKD stablecoins should inherit the Linked Exchange Rate system.
Today, professional managers hold financial power in Hong Kong. In stable market conditions, professional managers, as executors of the system, may be superior to entrepreneurs. However, when facing major decisions, they often tend to be cautious and lack entrepreneurial spirit. Judging from the exchange and stablecoin documents they have published, attention to detail and rigor is evident, but they cannot be called holistic solutions.
Hong Kong is currently in a very good position with excellent external conditions. Hong Kong needs to balance risk control and innovative vitality, which relies on entrepreneurial spirit. Only the combination of both can seize the historical opportunity presented by stablecoin development. I sincerely hope Hong Kong does not miss this opportunity.
Recommended Reading
A single article cannot address all issues. If you wish to understand the details of related discussions further, please visit the [Chainless Website] to read my following related articles:
1. FinWill Introduction of the Stablecoin Act Trigger a ancial Tsunami?
2. Stablecoins – America’s Path to Defending Financial Hegemony
3. When Stablecoins Tear Down Banks’ Interest Margin Moats
4. The Current Method of Issuing HKD Stablecoins Needs Restructuring
5. Conceptual Confusion Caused by Hong Kong’s Stablecoin Regulations and Clarification Thereof
6. The Regulation of Cryptocurrency 1-4
10. Openness and Transparency: The True Cornerstone of Bitcoin
11. Reading Notes – Review of Zhou Xiaochuan’s “A Multi-Dimensional Examination of Stablecoins”
12. How to Solve the Problems Raised by Changpeng Zhao for Hong Kong
13. Hong Kong’s Financial Regulation Urgently Needs to Adapt to New Trends of the Crypto Era
