Hong Kong is one of few economies in the world, the U.K. being another, to have private banks issue official banknotes. In fact, three banks are licensed by Hong Kong Monetary Authority (HKMA) today to print HKD notes, while most countries issue notes exclusively via a single central bank or a government issuing authority.

This public-private partnership model arguably provides Hong Kong with greater system credibility as it is broadly accepted that legally enforced government monopolies are less efficient than privatized models for optimizing the provision of goods and services to the public. It also offers clues as to how virtual assets might be integrated into the city’s financial system in the near future. 

Hong Kong’s regulators have been progressive in developing the Web3 and virtual assets industry. Since Hong Kong FinTech Week in 2022, where HKMA and Hong Kong’s Securities and Futures Commission (SFC) announced plans to adopt formal policies encouraging the development of digital assets, the city capitalized on the positive sentiment and intent on virtual assets, including cryptocurrencies.

Meanwhile, the city’s historically smooth operation of the decentralized HKD issuance model suggests greater potential for close collaboration between regulators, traditional finance and virtual asset native firms. This only serves to spur more rapid virtual asset market development as the government has made repeated statements of intent for Hong Kong to lead the region in the digital asset market. In fact, Hong Kong is the only jurisdiction where a regulator has given a directive to operating banks to onboard and serve crypto firms. Even the U.S. during the height of the bull run did not have its regulators put out a strong signal of intent. 

Clarity has been the name of the game from Hong Kong’s regulators in its ambitions to rapidly grow the city’s virtual asset sector. Crypto exchanges have been afforded little ambiguity with the requirement to be fully licensed by the SFC from June 1 this year, in order to operate legally in Hong Kong. Removing ambiguity is critical for the digital asset frontier land, something that the U.S. severely lacked

This has triggered a raft of positive responses and market entries by digital asset firms and a healthy build-up of ecosystem enablers all eager to align and work with the regulatory regime. This contrasts starkly with the “them versus us” separation that is apparent between U.S. regulators and crypto protagonists.

If the HKD issuance model is any indication of how things may unfold, market players will find more and more natural areas of market and regulatory collaboration. We can expect to see collective shaping of future policies and regulations, plus joint market education efforts such as the recent HKMA tie-up with local banks and companies to target credit card fraud. 

Hong Kong has long been a pioneer in financial markets, and so far government-led initiatives like the recent tokenized green bonds are further proof of public-private partnership success stories. HKMA and the Hong Kong Government successfully rolled out the world’s first tokenized green bond issued by a government, with HK$800 million of tokenized green bonds offered. The tokenized green bonds were carefully structured and issued together with a number of different banks.  

The city is also targeting more explicit licensing arrangements for stablecoins by 2024, among other measures to make the regulatory environment as clear cut as possible for operators. 

Stablecoins, which are cryptocurrencies pegged to the value of a widely recognized fiat currency, such as the U.S. or Hong Kong dollar, are a potential game-changer. They provide the missing bridge between traditional financial markets and the emerging digital economy by facilitating seamless and efficient digital transactions. 

A recent policy paper proposing HKD-pegged stablecoin was co-authored by Wang Yang — the vice chancellor of the Hong Kong University of Science and Technology and chief scientific advisor of the Hong Kong Web3 Association — angel investor Cai Wensheng, BlockCity founder Lei Zhibin and Ph.D. student Wen Yizhou. It suggested numerous benefits that could emerge from such an instrument, ranging from financial inclusiveness, boosting transaction efficiency, reducing costs, improving payment systems and strengthening the city’s fintech capabilities.

The public-private partnership theme continues with the government’s current thinking to allow private institutions to issue stablecoins. This proposed model would potentially provide greater diversity in the stablecoin ecosystem than a model based on purely the public sector. From a pure scale perspective, a HKD-pegged stablecoin would benefit from the city’s huge foreign exchange reserves totaling US$430 billion, providing a significant market capitalization edge over even the current USDT and USDC stablecoin offerings.

Either way, the current discussions taking place and the noises generated are significant positive indicators that Hong Kong is ready and willing to take the next step. With history on its side of making public-private partnerships work successfully in building up world-class financial systems, the city’s future in digital assets looks to have a clear and progressive path forward.