To predict Hong Kong's future in crypto, just read its money

Hong Kong stands out among global economies, along with the United Kingdom, for its unique practice of allowing private banks to produce official banknotes. Remarkably, the Hong Kong Monetary Authority (HKMA) grants licenses to three banks currently for the production of HKD notes. This is in contrast to most nations, where banknotes are solely issued by a single central bank or a government authority.

The collaboration between the public and private sectors can be seen as a way to enhance Hong Kong's reputation in terms of its system's trustworthiness. It is widely acknowledged that government monopolies, which are bound by legal obligations, are less effective compared to privatized models when it comes to efficiently delivering goods and services to the public. Moreover, this partnership model could potentially shed light on how virtual assets could be integrated into the financial system of the city in the coming years.

The regulators in Hong Kong have shown forward-thinking in the advancement of the Web3 and virtual assets sector. Ever since the occurrence of Hong Kong FinTech Week in 2022, during which the HKMA and Hong Kong's Securities and Futures Commission (SFC) declared their intentions to implement official policies that promote the growth of digital assets, the city has taken advantage of the favorable attitude towards virtual assets, such as cryptocurrencies.

In the meantime, the well-established decentralized system for issuing HKD in the city indicates that regulators, traditional financial institutions, and virtual asset native companies have the opportunity to work closely together. This will likely accelerate the growth of the virtual asset market, as the government has repeatedly expressed its desire for Hong Kong to be a leader in the digital asset market within the region. Interestingly, Hong Kong is the only place where regulators have instructed operating banks to include and serve crypto firms. Even during the peak of the bull market, the US did not see such a clear signal of intent from its regulators.

Hong Kong's regulators have made it clear that they want to develop the city's virtual asset sector quickly. They have set a clear rule for crypto exchanges: they must obtain a license from the SFC by June 1st to operate legally in Hong Kong. This clarity is crucial for the digital asset market, an area where the U.S. has struggled with uncertainty.

This has sparked a wave of favorable reactions and the entrance of digital asset companies into the market, along with a strong growth of supporters who are enthusiastic about collaborating with the regulatory system. This stands in stark contrast to the divide between U.S. regulators and cryptocurrency supporters, which is characterized by an "us versus them" mentality.

If the method of issuing HKD is a sign of what may happen, people involved in the market will discover increasing opportunities for collaboration in both market and regulatory areas. We can anticipate the development of policies and regulations together, as well as joint efforts to educate the market, like the recent partnership between HKMA, local banks, and companies to combat credit card fraud.

For a long time, Hong Kong has been at the forefront of financial markets. The recent introduction of tokenized green bonds, led by the government, is yet another example of successful collaboration between the public and private sectors. The Hong Kong Monetary Authority (HKMA) and the government of Hong Kong have successfully implemented the world's first tokenized green bond issued by a government. A total of HK$800 million worth of tokenized green bonds were made available. These bonds were thoughtfully structured and issued in partnership with various banks.

The urban area is also focusing on implementing more precise licensing agreements for stablecoins by 2024, in addition to other strategies aimed at ensuring the regulatory landscape is straightforward for operators.

Stablecoins, which refer to digital currencies that are linked to the value of well-accepted national currencies like the United States or Hong Kong dollar, have the potential to revolutionize the game. They fill the gap that exists between conventional financial markets and the growing digital realm by enabling smooth and effective digital transactions.

A newly published document recommending a stablecoin connected to the Hong Kong Dollar was written by Wang Yang, the deputy head of Hong Kong University of Science and Technology and the primary scientific advisor for the Hong Kong Web3 Association. Wang Yang worked on the paper with angel investor Cai Wensheng, Lei Zhibin who founded BlockCity, and Wen Yizhou, a Ph.D. student. The paper outlined several advantages that could result from this digital currency, including making financial services more accessible to people, enhancing the speed and effectiveness of transactions, lowering expenses, enhancing payment systems, and strengthening Hong Kong's abilities in financial technology.

The concept of public-private partnership remains intact with the current ideas of the government, which involve granting private organizations the permission to introduce stablecoins. This suggested approach could potentially enhance the variety within the stablecoin ecosystem, surpassing the current model that solely relies on the public sector. In terms of size alone, a stablecoin backed by Hong Kong dollars would greatly benefit from the city's substantial foreign exchange reserves of US$430 billion. This advantage would give it a much larger market capitalization compared to existing stablecoin options like USDT and USDC.

Regardless of the situation, the ongoing talks and attention created are important signs that Hong Kong is prepared and eager to move forward. Having the advantage of a track record in effectively establishing collaborations between the public and private sectors to develop exceptional financial systems, Hong Kong appears to have a distinct and forward-looking trajectory in the realm of digital assets.

Vincent Chok holds the position of Chief Executive Officer at First Digital Trust, a company based in Hong Kong that is fully compliant with regulations. This establishment offers trustworthy services for a wide range of clients, including individuals, corporations, and institutions, who have dealings with digital assets. Prior to establishing First Digital Trust in 2017, Vincent held the position of CEO at Legacy Trust Company. Additionally, he has experience in managing mortgage financing and raising funds for commercial real estate in the Canadian Exempt Securities market.