Co-chairman of Hong Kong Blockchain Association: Hong Kong government should not issue Hong Kong dollar stable currency

After listening to the live broadcast of Techub News, Fang Hongjin, co-chairman of the Hong Kong Blockchain Association, expressed different views on the Hong Kong dollar stable currency. He wrote that he did not agree with the proposal of the Hong Kong government to issue the Hong Kong dollar stable currency with foreign exchange reserves as collateral.

We believe that the truth will become clearer and clearer. Techub News now publishes the full text of Mr. Fang Hongjin’s article for readers to think about:

**Should the Hong Kong government issue Hong Kong dollar stable currency? **

——Discussion with Mr. Wang Yang, Cai Wensheng and Lei Zhibin

Mr. Wang Yang, Cai Wensheng, and Lei Zhibin recently issued a public initiative, suggesting that the Hong Kong SAR government issue Hong Kong dollar stable currency with foreign exchange reserves as collateral.

I have a completely negative opinion on this suggestion, whether it is from a financial perspective or a blockchain technology application perspective.

Before expressing my disagreement, we need to sort out two basic concepts:

First, the government with the right to mint coins issues a digital form of its legal currency (corresponding to banknotes). The standard term is Central Bank Digital Currency (abbreviated as CBDC), which is digital legal currency, such as the digital renminbi issued by the People's Bank of China;

Second, the fiat currency stablecoin is a digital certificate that the issuer anchors one or more types of fiat currency and uses it as collateral to issue 1:1. The standard term is Stable Coin. For example, USDT and USDC are both privately owned stablecoins. Issued by institutions anchoring the U.S. dollar, the two account for more than 85% of the global stablecoin issuance.

Digital legal currency and legal currency stable currency are very different in terms of issuers, anchor models, encryption technology forms, and application scenarios.

Therefore, we first ask a simple question: Will the Hong Kong SAR government issue digital Hong Kong dollars?

The answer is no. The leaders of the relevant competent departments of the Hong Kong government have repeatedly stated publicly that the Hong Kong government is actively studying the issuance of digital Hong Kong dollars.

If the Hong Kong government plans to issue a digital Hong Kong dollar, why should it issue a Hong Kong dollar stablecoin with its foreign exchange reserves as collateral?

I don’t know the specific proportion of various hard currencies in the Hong Kong government’s foreign exchange reserves, but the U.S. dollar must be the largest one. Therefore, according to the definition of fiat currency stable currency, if foreign exchange reserves are used as collateral, the issuance should also be U.S. dollar stablecoins or a basket of hard currency stablecoins (similar to the Libra stablecoins proposed by Facebook a few years ago), not Hong Kong dollar stablecoins.

The Hong Kong Special Administrative Region Government is the main issuer of the legal currency Hong Kong dollar. Hong Kong currency banknotes and digital Hong Kong dollars are the same, but the carrier form is different. It is logically unreasonable for the Hong Kong government to use its own legal currency as collateral to issue a derivative alternative, and it will definitely cause confusion in actual operation: users have both digital Hong Kong dollars and Hong Kong government Hong Kong dollar stablecoins , should it be contained in a digital wallet? Can it be converted freely? Which one should be used in which scenario? If the two can be used in common, why send two?

In a live broadcast held by Techub NEWS in Hong Kong last night (July 6), Mr. Wang Yang said that Hong Kong dollar stablecoins should be regulated by government endorsement, making it easier to achieve regulatory compliance and stability.

I think this is a fundamental misunderstanding of the role of the government in a market economy. What the government supervises must be operated by a non-government entity. It is impossible and absolutely should not be endorsed, issued, and supervised by the government by itself, and referees and athletes are responsible.

Is it still illegal for the government to issue stablecoins? Who plays the supervisory role and punishes non-compliance? Does the government punish itself?

Mr. Cai Wensheng said that the anchorage of the Hong Kong dollar to the U.S. dollar does not mean that the issuance of Hong Kong dollar stable currency is meaningless, and it will have a certain role in promoting de-dollarization.

I personally think that it is meaningful to issue Hong Kong dollar stable currency, but it should not be issued by the Hong Kong government, but by private organizations under the supervision of the Hong Kong government. As for the use of Hong Kong dollar stablecoins to promote "de-dollarization", given that the Hong Kong dollar and the U.S. dollar are linked exchange rates and can be freely interchanged in Hong Kong, the total issuance of Hong Kong dollars and the total issuance of U.S. dollars are completely incomparable. How to promote "de-dollarization"?

Mr. Lei Zhibin said: "The Hong Kong dollar stable currency may exist in a mixed system, and may not only be issued on the existing public chain."

According to the professional terminology of the industry, there is only a hybrid CBDC, that is, the central bank of the government wholesales the CBDC to private financial institutions such as commercial banks, and the private financial institutions then retail it to ordinary users. It is typical that Sweden is experimenting with this model, but it is not yet mature. to full promotion.

This model has experimental value in Hong Kong, because although the Hong Kong government has the right to mint coins, it does not have a central bank. It only authorizes HSBC, Bank of China, and Standard Chartered Bank to issue banknotes. Therefore, the Hong Kong government authorizes the Hong Kong financial management department Issuing digital Hong Kong dollars, and then wholesale them to these large commercial banks, and these commercial banks will then distribute them to ordinary users. Similar to the two-tier structure of the People's Bank of China issuing digital renminbi, it may play a more efficient role.

But this has nothing to do with the Hong Kong government issuing Hong Kong dollar stablecoins.

Mr. Lei Zhibin also said: Issuing stablecoins supported by physical resources such as carbon emissions and oil may be an opportunity.

This is another suggestion that I do not agree with, because stablecoins that anchor carbon emissions or oil are not stable compared to a specific legal currency, and you must have seen many fluctuations in international oil prices. The issuance of digital tokens anchored to the oil delivery right is essentially a digital certificate of oil futures, which has the significance of exploration, but it is definitely not a stable currency.

What's more, the Hong Kong Monetary Authority has already clearly pointed out that it will give priority to the supervision of stablecoins anchored in fiat currency, so whether it is legal for private institutions to issue stablecoins anchored in oil in Hong Kong is doubtful. How can the Hong Kong government issue such an anchored physical currency by itself? A “stablecoin” for assets?

Mr. Cai Wensheng said: The regulation of cryptocurrencies in the United States is chaotic, and Hong Kong has ushered in a good time to issue Hong Kong dollar stable currency.

In this regard, I personally think that the U.S. regulation of encryption is not chaotic at all. The recent regulatory actions of the U.S. SEC are actually very logical. They represent the traditional financial order to rectify the encryption industry and try to incorporate the encryption industry into the traditional financial regulatory system.

This is an opportunity as well as a huge challenge for Hong Kong to vigorously develop the Web3.0 and virtual asset industries. We all know that since the birth and circulation of virtual currencies such as Bitcoin, their point-to-point transfer and user anonymity are the most prominent features, and they are also the pain points that governments have been unable to effectively supervise over the years.

Hong Kong has sound financial regulatory laws and regulations and enforcement capabilities, which is why Hong Kong can become an international financial center. I personally think that if an encryption project that cannot accept US compliance supervision comes to Hong Kong, there is a high probability that it will not pass Hong Kong's existing and upcoming financial regulatory laws and regulations.

Finally, I am very grateful to Mr. Wang Yang, Cai Wensheng, and Lei Zhibin for their encouragement and encouragement for the active development of Web3.0 and the virtual asset industry in Hong Kong. I am very grateful to my colleagues in the Hong Kong Blockchain Association. Practice, let Hong Kong's digital finance and digital economy work together!

Fang Hongjin

July 7, 2023