Op-ed published in Ta Kung Pao: Issuance of Hong Kong Dollar Stabilized Currency to Build a New Web 3.0 Ecosystem

This article was first published in Hong Kong Ta Kung Pao

Accelerating connectivity to traditional finance

Following the issuance of the Consultation Summary, there has been significant industry interest in the issue of Hong Kong's attractiveness to international issuers such as USDT (Remark 2) or USDC (Remark 3). From the information available, it appears that the proposed regulatory framework for stablecoins in Hong Kong is more friendly to international issuers, with more openness than previously available, easing the potential burden on international issuers. For example, the consultation summary document does not limit the types of currencies in which stablecoins can be anchored, and it is also open to the deposit of reserve assets in other jurisdictions. Considering the friendliness and continuity of Hong Kong's virtual asset policy and the importance of Hong Kong in the global financial market, a future stablecoin license in Hong Kong should be attractive to international issuers.

Considering that the connection channel with fiat currency is the most worthwhile and easy to sink value scenario in the crypto ecosystem, and that stablecoin is the essential infrastructure for building the channel, we believe that more financial institutions and tech companies will participate in the issuance of Hong Kong's stablecoin. However, the biggest problem facing Hong Kong's stablecoin is not who will issue it, but who will use it. Finding the right scenario and business model is the key to the development of Hong Kong Stablecoin.

Global virtual asset compliance has been a major trend, but as of now, simple compliance regulation will not accelerate its development, but will instead create a greater burden for some virtual asset companies, which is not difficult to see from the general loss-making operation of licensed exchanges after they are licensed. In particular, as more and more regions bring virtual assets under regulation, the compliance costs that companies have to pay to meet regulatory demands will become higher and higher. Compliance is for the sake of better development, whether it is companies or regulators, if it is just for the sake of compliance, obviously does not meet the laws of the market. Both licensed virtual asset exchanges and stablecoin issuers need to explore more viable business profit models under the compliance path.

However, the demand for virtual asset trading does not make much sense to reissue USD stablecoins in Hong Kong at this stage. The penetration rate of USD stablecoin in the crypto market is already very high and the market structure is relatively solid, and it is difficult to challenge the leading position of USDT and USDC in the short term. Without sufficient scenario support, Hong Kong may not be able to establish an advantage in the stablecoin circuit by simply copying the existing USD stablecoin business model. Therefore, it is more feasible and advantageous to use Hong Kong dollar assets as the main reserve to issue stablecoins in Hong Kong, and at the same time, explore more suitable application scenarios for Hong Kong dollar stablecoins on the basis of the existing ecosystem. Looking at the current development direction of virtual assets and Web3.0 in Hong Kong, RWA (Remark 4) may be the most suitable area for Hong Kong dollar stablecoin to focus and develop.

The next phase of Web 3.0 development in Hong Kong and globally focuses on breaking down the barrier between the virtual world and the real world, so that assets and funds can flow freely between the two systems. RWA is an important innovation that breaks down the technological barriers and accelerates the integration of virtual and real worlds, which not only enhances the transparency and security with the help of blockchain technology and solves some of the problems in the traditional financial system, but also revitalizes more real assets, lowers the investment threshold and attracts a wider range of small and medium-sized investors to enter the market, thus injecting more liquidity into the development of the real industry and the digital economy.

As an international trading port and global financial center, Hong Kong has unparalleled advantages and huge market demand in the RWA field, and has accumulated rich practical experience in this field, the most widely known of which is the tokenized green bonds issued by the SAR Government. Only by focusing on a broader tokenization market, promoting the tokenization of a wider range of real assets, and gradually building a compliant, reasonable and friendly RWA ecosystem can Hong Kong truly lead the development of Web 3.0 globally.

However, building an RWA ecosystem requires not only multi-dimensional support from capital, technology and regulation, but also a new digital infrastructure to take over the asset liquidity released through digitization and tokenization, and Hong Kong Dollar Stablecoin is such an infrastructure. In the foreseeable future, the vast majority of RWA transactions in Hong Kong will be completed with a compliant Hong Kong Dollar Stablecoin as the carrier, and through the stablecoin to complete the connection and interoperability with traditional finance. Without a compliant Hong Kong Dollar stablecoin, RWA practices in Hong Kong will present significant challenges in terms of convenience and security. Therefore, the introduction of a regulatory framework for stablecoins may lay the foundation for the innovative development of Hong Kong's RWA ecosystem, and as the RWA ecosystem prospers, the role and value of Hong Kong Dollar stablecoins as a bridge for Hong Kong's Web 3.0 connectivity to the outside world will become more prominent.02

Vigilance against the risk of money-laundering fraud

In addition to the necessary fundamentals, openness, integrity and security are key to determining whether a Hong Kong dollar stablecoin can be constructed that matches the needs of the RWA ecosystem.

First, the Hong Kong dollar stablecoin should be sufficiently open. Although the Hong Kong Dollar Stablecoin is denominated in Hong Kong Dollars, it should have to go beyond the Hong Kong market in its actual issuance and operation to strengthen its connection with the Greater Bay Area and international markets, and to allow more high-quality assets to enter through RWA tokenization. Although Hong Kong is now one of the most active regions in virtual assets and Web 3.0 innovation, it must be recognized that the Hong Kong market is actually still a very small market in terms of physical concepts, and it doesn't make much sense to focus only on local demand to promote virtual assets and Web 3.0 innovation. Much of the focus on Hong Kong is also on the broader market space and development opportunities behind Hong Kong.

Therefore, when considering the layout of Hong Kong dollar stablecoin and RWA, it should be based on Hong Kong and boldly radiate outward. A theoretically feasible idea is to refer to the previous development model of Hong Kong stocks, promote the development of the RWA ecosystem by leveraging the rich real assets and trade demand in the Greater Bay Area and the mainland market, and build a token trading system and rules based on the blockchain network through the compliant Hong Kong Dollar Stablecoin, so as to attract more international assets and funds to flow into Hong Kong.

Second, it is necessary to integrate advantageous resources to consider the development of stablecoin in Hong Kong in a comprehensive manner, and to guard against the problem of fragmentation. Although different commercial organizations can theoretically issue their own stablecoins according to their own needs and create the illusion of a thriving market with many participants in the short term, in view of the reality that Hong Kong's local market is relatively small and the RWA ecosystem has not yet matured, this will further fragment the already scarce liquidity, and even lead to unhealthy competition among different stablecoins. In the early stage of market development, it is all the more important to be led by the leader in an open and diversified environment.

Previously Professor Wang Yang, one of the authors of this paper, has called for Hong Kong to conduct a unified Hong Kong Dollar stablecoin issuance by a licensed organization (including the SAR government and financial institutions such as banks, insurance, funds, etc.) through a holistic planning with a corresponding profit-sharing scheme, so that it can quickly become a mature, credible and widely-adopted financial product with the joint efforts of different commercial organizations. Within the current regulatory framework, advantageous financial and resources can be pooled to promote the development of stablecoin leaders, which in turn will lead to the blossoming of stablecoins in an open environment, the tapping of vertical advantages and free competition in the increasingly prosperous RWA ecosystem.

Finally, it is important to pay attention to the risks associated with the Hong Kong dollar stablecoin and improve its security. The United Nations previously released a report stating that stablecoins have become one of the common payment methods for money laundering and fraud in Southeast Asia. The Global Virtual Currency Crime Situation and Security Governance White Paper, jointly released by the Euclid Cloud Chain Research Institute and the Key Laboratory of the Ministry of Public Security of the Ministry of Public Security's Third Research Institute for Information Network Security, also found that more than 60% of all types of risk events related to virtual assets are related to stablecoins.

Although compliant stablecoins are more secure in terms of issuer security, problems such as various types of illegal financial activities, money laundering and terrorist financing related to stablecoins, etc., in many cases do not have a direct connection with the issuer, and even if the issuer can be found, it is very difficult to solve them. Therefore, in the development of Hong Kong dollar stablecoin, in addition to the appropriate regulatory framework, the relevant institutions can also use compliance technology to empower the ecosystem, through various technical means to enhance the ability of issuers and regulators to prevent and respond to the potential risks of Hong Kong dollar stablecoin. Only a secure and compliant Hong Kong Dollar stablecoin can lay a solid foundation for Hong Kong to build an open, orderly and dynamic RWA tokenization ecosystem, and strongly enhance Hong Kong's strength and level in digital economy and financial technology.

(Note: Wang Yang is Vice President of the Hong Kong University of Science and Technology and Chief Scientist of the Hong Kong Web 3.0 Association; Park Liang is Founder and CEO of ZeroOne Think Tank; Jiang Zhaosheng is a senior researcher of OUKE Cloudchain Research Institute)

Note 1: Web3.0 refers to the next generation of information exchange and governance in the Internet, which will be smarter, decentralized, secure, and private, while enhancing data sharing, collaboration, and interoperability.The technological foundations of Web3.0 include Blockchain, Artificial Intelligence, Machine Learning, and Internet of Things.

Note 2: USDT, known as Tether in Chinese, is a U.S. dollar stablecoin issued by Tether, the world's first and largest stablecoin by market capitalization.

Note 3: USDC, or USD Coin, is a U.S. Dollar stablecoin and is one of the most popular stablecoins on the market today.

Note 4: RWA, or Real WorldAssets, in cryptocurrency terms, refers to the tokenization of physical or tangible assets with intrinsic value in the real world, including assets such as loans, insurance contracts, and commodities and real estate, through blockchain technology, with each Token Each Token represents a share, stake or ownership of the underlying asset.