The Rise of Digital Hong Kong Dollar: Opportunities and Challenges

Hong Kong is accelerating the construction of its financial infrastructure and legal environment. The Monetary Authority has announced the second phase of the pilot program for the digital Hong Kong dollar, and traditional financial practitioners are also actively embracing the emerging financial domain of Web3.

As a bridge between traditional finance and Web3, xWhale plans to develop its own ecosystem in this large environment. Today, we have invited James XYC, a core developer of MapProtocol, as a guest to share. James is a 2023 Forbes Blockchain Innovator and also a recipient of the Hong Kong Quality Migrant Admission Scheme.

MapProtocol is a cross-chain infrastructure protocol with no privileged roles, similar to an open-source organization.

The Development Prospects of Digital Hong Kong Dollar

The digital Hong Kong dollar is expected to form a market larger than Hong Kong stocks within 5 years. If Hong Kong can establish the digital Hong Kong dollar as a legal, anchored digital currency, its business opportunities will be immeasurable.

According to a survey conducted by James on Twitter, 58% of respondents indicated that they are willing to switch from USDC and USDT to using the digital Hong Kong dollar, showing that the majority are optimistic about the digital Hong Kong dollar and the development of Web3 in Hong Kong.

Unique Advantages of Digital Hong Kong Dollar

Compared to traditional account opening models, digital Hong Kong dollars have the following advantages:

1. Borderlessness: Anyone can enter the market circulation by simply generating an address, greatly expanding the application scenarios.

2. Value Anchoring: In the foreseeable future, fiat digital currencies will still be an important value anchor for Web3.

3. Security: Due to government endorsement, the digital Hong Kong dollar itself is non-harmful.

The Historical Context of Digital Hong Kong Dollar

There are mainly two types of digital stablecoins: fiat-backed stablecoins and algorithmic stablecoins.

In 2014, Tether(USDT) was launched, becoming a major trading medium for centralized exchanges. In 2018, Circle launched USDC, which gained widespread use in the DeFi sector. In 2019, the South Korean LUNA project issued UST, which once had a market value of up to $30 billion but later encountered a significant collapse.

In comparison, the digital Hong Kong dollar has the following advantages:

1. Endorsed by banks, higher credibility.
2. Reserve funds are stored more safely and reliably.
3. Hong Kong actively embraces Web3, promoting faster progress.

Potential Benefits of Digital Hong Kong Dollar

1. Low account opening cost: Distributed ledger technology makes the cost of opening an account almost zero.

2. Global Business Expansion: Operating in the virtual world for users worldwide, breaking geographical limitations.

3. Increase bank revenue: Users deposit fiat currency to exchange for digital Hong Kong dollars, allowing banks to obtain more funds.

4. Expanding the new customer base: Attracting Web3 users to purchase other financial products from the bank.

The potential applications of Digital Hong Kong Dollar include:

• Global Payment
• Local Digital Payment in Hong Kong
• DeFi Market
• Centralized Exchange

Issuance and Implementation of Digital Hong Kong Dollar

1. Issuance method: It may initially be issued on a private chain or consortium chain, but ultimately needs to be issued on the public chain to improve circulation efficiency.

2. System renovation: No large-scale modifications to the existing market system are required.

3. Team configuration: A team of 8-10 people is sufficient to support operations.

4. Smart Contract Security: Due to the endorsement of authoritative banks, hacker addresses can be quickly locked, and security risks are controllable.

5. Compliance Issues: Primary market requires KYC, secondary market circulation does not require bank intervention.

6. Full Chain Issuance: A new plan using USDC can be adopted, directly issued to various chains and achieving smart contract interoperability.

Potential Risks

1. Compliance Risk: The liquidity of the secondary market is difficult to control, but suspicious funds can be frozen through smart contracts.

2. Insufficient fiat currency reserves: If operators invest in high-risk assets, it may lead to difficulties in redemption.

3. Missing market opportunities: The current market size is approximately $120 billion, and it is necessary to seize the initiative.

Conclusion

The development prospects of the Digital Hong Kong Dollar are broad, but it still faces many challenges. Banks need to prudently assess risks while actively embracing new technologies to seize the enormous opportunities brought by Web3. Compared to traditional finance, issuing digital stablecoins is relatively simple on a technical level; the key lies in how to balance innovation and stability. In the future, the Digital Hong Kong Dollar is expected to become an important bridge connecting traditional finance and the Web3 world.