Original title: "Web3.0 Insights / Issuing Hong Kong Dollar Stablecoin to Build a New Web3.0 Ecosystem"
Author: Wang Yang, Bai Liang, Jiang Zhaosheng
Source: Ta Kung Pao Wen Wei
Hong Kong is accelerating the establishment of a regulatory system for stablecoin issuers and recently released a public consultation summary on stablecoin regulation. From the consultation summary, it can be seen that Hong Kong's proposed stablecoin regulatory system maintains greater flexibility and openness on many issues while ensuring effectiveness and leadership, in an effort to strike a balance between effective investor protection and providing greater innovation space for potential issuers.
Bringing stablecoins under regulation is another important measure for Hong Kong to continuously improve its regulatory framework and vigorously promote the development of virtual assets. Hong Kong has made positive progress in the compliance of virtual asset trading platforms (VATPs), tokenization, and exchange-traded funds (ETFs) in the past two years, but the overall pace of building a crypto ecosystem is still slow. We understand that the premise for Hong Kong to develop virtual assets is security and compliance, but at a time when global competition is becoming increasingly fierce, Hong Kong needs to accelerate its layout in the Web3.0 field, not only to explore compliance in financial transactions, but also to go deep into the Web3.0 ecosystem and try more innovations from the asset side.
The introduction of a stablecoin regulatory framework will provide Hong Kong with a new opportunity to accelerate the promotion of real-world assets (RWA) and tokenization practices with the help of stablecoins in a compliant environment. This may bring more innovative vitality and space to Hong Kong's virtual asset ecosystem, helping it to truly gain a voice in the global Web3.0 competition.
Accelerating the connection with traditional finance
After the consultation summary was issued, the industry was very concerned about Hong Kong's attractiveness to international issuers such as USDT or USDC. From the information available, Hong Kong's proposed stablecoin regulatory framework is relatively friendly to international issuers, with more open measures than before, which alleviates the potential burden on international issuers. For example, the consultation summary document does not restrict the types of anchor currencies for stablecoins, and is open to the storage of reserve assets in other regions. Considering the friendliness and continuity of Hong Kong's virtual asset policies, as well as Hong Kong's importance in the global financial market, Hong Kong's stablecoin licenses should be attractive to international issuers in the future.
At the same time, considering that the connection channel with legal currency is the most worthy of development and the easiest to accumulate value in the crypto ecosystem, and stablecoins are currently an indispensable infrastructure for building channels, we believe that more financial institutions and technology companies will participate in the issuance of Hong Kong stablecoins. However, the biggest problem facing Hong Kong stablecoins is not who will issue them, but who will use them. Finding suitable scenarios and business models is the key to the development of Hong Kong stablecoins.
The compliance of virtual assets around the world is an inevitable trend, but at present, simple compliance supervision cannot accelerate its development. Instead, it will impose a heavy burden on some virtual asset companies. This can be easily seen from the general loss-making operation of licensed exchanges after obtaining licenses. In particular, as more and more regions bring virtual assets under supervision, the compliance costs that companies have to pay to meet regulatory requirements will become higher and higher. Compliance is for better development. Whether it is a company or a regulator, if it is only for compliance, it is obviously not in line with market laws. Whether it is a licensed virtual asset exchange or a stablecoin issuer, it needs to explore a more feasible business profit model under the compliance path.
However, regarding the trading needs of virtual assets, it does not make much sense to re-issue US dollar stable coins in Hong Kong at this stage. The penetration rate of U.S. dollar stablecoins in the crypto market is now very high and the market structure is relatively stable. The leading positions of USDT and USDC will be difficult to challenge in the short term. Without sufficient scenario support and simply copying the existing US dollar stablecoin business model, it may be difficult for Hong Kong to establish an advantage in the stablecoin track. Therefore, it is feasible and advantageous to issue stablecoins in Hong Kong with Hong Kong dollar assets as the main reserve. At the same time, we should explore more suitable application scenarios for Hong Kong dollar stablecoins based on the existing ecosystem. Looking at the current development direction of virtual assets and Web3.0 in Hong Kong, RWA may be the most suitable area for Hong Kong dollar stablecoins to focus and develop.
The next phase of development of Web3.0 in Hong Kong and even the world is to break the barriers 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 technical barriers and accelerates the integration of virtual and real world. RWA can not only improve transparency and security with the help of blockchain technology and solve some problems in the traditional financial system, but also fundamentally activate more physical assets, lower investment thresholds, and attract a wider range of small and medium-sized investors to enter the market, thereby injecting more liquidity into the development of the real industry and the digital economy.
As an international trade port and global financial center, Hong Kong has unparalleled advantages and huge market demand in the field of RWA, and has accumulated rich practical experience in this field, the most well-known of which is the tokenized green bonds issued by the SAR government. Only by focusing on the broader tokenization market, promoting the tokenization of a wider range of physical assets, and gradually building a compliant, reasonable and friendly RWA ecosystem can Hong Kong truly lead the development of the global Web3.0.
However, building an RWA ecosystem requires not only multi-dimensional support from capital, technology, and regulation, but also a new digital infrastructure to undertake the asset liquidity released through digitization and tokenization. The 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 compliant Hong Kong dollar stablecoins as the carrier, and the connection and interoperability with traditional finance will be completed through stablecoins. Without compliant Hong Kong dollar stablecoins, Hong Kong RWA practices will face huge challenges in terms of convenience and security. Therefore, the introduction of a stablecoin regulatory framework may lay the foundation for the innovative development of Hong Kong's RWA ecosystem, and with the prosperity of the RWA ecosystem, the role and value of the Hong Kong dollar stablecoin as a bridge for Hong Kong's Web3.0 to connect to the outside world will become more prominent.
Beware of money laundering fraud risks
In addition to the necessary basic conditions, openness, integrity and security are the key to determining whether a Hong Kong dollar stablecoin can be built that matches the needs of the RWA ecosystem.
First of all, the Hong Kong dollar stablecoin should be open enough. Although the Hong Kong dollar stablecoin is denominated in Hong Kong dollars, it should go beyond the Hong Kong market in the actual issuance and operation process, strengthen the connection with the Greater Bay Area and the international market, and allow more high-quality assets to enter through RWA tokenization. Although Hong Kong is now one of the most active regions for virtual assets and Web3.0 innovation, it must be admitted that the Hong Kong market is actually a very small market in physical terms. It does not make much sense to only focus on local demand to promote virtual assets and Web3.0 innovation. The outside world pays attention to Hong Kong, and a big reason is that they are paying attention to the broader market space and development opportunities behind Hong Kong.
Therefore, when considering the layout of Hong Kong dollar stablecoins and RWA, we should base on Hong Kong and boldly radiate outward. A theoretically feasible idea is to refer to the previous development model of Hong Kong stocks, use the rich physical assets and trade demand in the Greater Bay Area and the mainland market to promote the development of the RWA ecosystem, and build a token trading system and rules based on the blockchain network through compliant Hong Kong dollar stablecoins to attract more international assets and funds to flow into Hong Kong.
Secondly, we should integrate advantageous resources to comprehensively consider the development of Hong Kong stablecoins and be wary of fragmentation. Although different commercial institutions can theoretically issue their own stablecoins according to their own needs and create a false illusion of prosperity with many market participants in the short term, the actual situation of Hong Kong's small local market and immature RWA ecosystem will further disperse the already scarce liquidity and even trigger vicious competition among different stablecoins. In the early stages of market development, in an open and diverse environment, leading role is more needed.
Previously, Professor Wang Yang, one of the authors of this article, called on Hong Kong to adopt an overall plan, and for licensed institutions (including the SAR government and financial institutions such as banks, insurance, and funds) to issue a unified Hong Kong dollar stablecoin, and to provide a corresponding profit distribution plan, so that it can quickly become a mature, reliable and widely used financial product under the joint promotion of different commercial institutions. Within the current regulatory framework, we can concentrate advantageous finance and resources to promote the development of stablecoin leaders, thereby driving stablecoins to flourish in an open environment, explore vertical advantages and compete freely in the increasingly prosperous RWA ecosystem.
Finally, we should pay attention to the risks related to Hong Kong dollar stablecoins and improve their security. A report previously released by the United Nations pointed out that stablecoins have become one of the commonly used payment methods for money laundering and fraud in Southeast Asia. The "White Paper on Global Virtual Currency Crime Situation and Security Governance" jointly released by OKLink Research Institute and the Key Laboratory of Information Network Security of the Ministry of Public Security of the Third Research Institute of the Ministry of Public Security also found that among all kinds of virtual asset-related risk events, more than 60% are related to stablecoins.
Although compliant stablecoins are more secure in terms of issuer security, various illegal financial activities, money laundering, and terrorist financing related to stablecoins are often not directly related to the issuer, and even if the issuer can be found, it is difficult to solve. Therefore, in the development of Hong Kong dollar stablecoins, in addition to an appropriate regulatory framework, relevant institutions can also use compliant technology to empower the ecosystem and use various technical means to enhance the ability of issuers and regulators to prevent and respond to potential risks of Hong Kong dollar stablecoins. Only a safe and compliant Hong Kong dollar stablecoin can lay a solid foundation for Hong Kong to build an open, orderly, and vibrant RWA tokenization ecosystem, and effectively enhance Hong Kong's strength and level in digital economy and financial technology.
(Note: Wang Yang is the vice president of the Hong Kong University of Science and Technology and the chief scientist of the Hong Kong Web3.0 Association; Bai Liang is the founder and CEO of Zero One Think Tank; Jiang Zhaosheng is a senior researcher at OKLink Research Institute)