14 hours ago
Hong Kong's stablecoin moment eclipses dollar peg debate
As global markets obsess over Hong Kong's 42-year-old currency peg to the US dollar, Financial Secretary Paul Chan seems more intrigued by the next four decades for the city's economy.
The currency speculators testing the Hong Kong monetary authority have a point, of course. The Hong Kong dollar is experiencing extreme volatility as the US exchange rate gyrates amid questions about Donald Trump's tariffs and the direction of US Federal Reserve policy.
To be sure, there is no serious discussion about Hong Kong abandoning its current 7.75–7.85 fixed rate band to the US dollar anytime soon. But the Trump 2.0 era financial chaos is straining the peg as rarely before. That has Hong Kong policymakers and markets alike wondering if there is a better currency framework for the city.
But the real intrigue in Chan's office lies in implementing Hong Kong's new stablecoin legislation. By expanding its cryptocurrency licensing regime and embracing an 'open model' system for digital assets, Chan's administration hopes to morph Hong Kong into a crypto hub.
The plan is to encourage overseas institutions to issue such cryptocurrencies in Hong Kong. Not only might it boost competitiveness, but it also offers the city a first-mover advantage over the US and Singapore in global payments.
Chan puts the global market value of stablecoins at about US$240 billion, with trading volume topping $20 trillion in 2024.
As the Hong Kong Monetary Authority puts it, the bill will 'enhance Hong Kong's existing regulatory framework on virtual-asset activities, thereby fostering financial stability and encouraging financial innovation.'
Hong Kong was early to the space. In 2023, regulators launched a virtual asset licensing regime. It requires crypto firms that officially operate in Hong Kong to obtain licenses and meet certain standards to ensure the protection of retail investors.
'Hong Kong's new stablecoin policy sets a global benchmark by mandating full reserve backing, strict redemption guarantees and HKMA oversight,' YeFeng Gong, risk and strategy director of HashKey OTC, tells CNBC.
The idea is that once there are global payments systems on blockchain for companies and consumers, the impacts of sanctions, tariffs and other kinds of trade curbs will be mitigated.
In theory, average citizens may be able to use HK dollar stablecoins to settle overseas purchases through apps like Alibaba Group's Alipay as early as next year, with the exchange rate difference dropping to zero.
It's the nightmare moment many banks have been dreading. The US, too, presumably.
In March, US Treasury Secretary Scott Bessent said the US would use stablecoins to ensure the US dollar hegemony in payments and protect its reserve-currency status. 'As President Trump has directed,' Bessent said, 'we are going to keep the US dollar the dominant reserve currency in the world, and we will use stablecoins to do that.'
Of course, the US is having enough trouble with 'fiat' money. A 'lackluster' auction of US Treasury securities fueled worries about disappearing demand while the supply of new debt increases.
This came amid Moody's Investors Service's downgrading of the US's AAA credit rating as national debt heads toward $37 trillion. Ray Dalio, founder of Bridgewater Associates, says Washington's fiscal trajectory is a bigger-than-acknowledged.
Mark Haefele, chief investment officer at UBS Global Wealth Management, says that 'while the selling of US Treasuries in the immediate aftermath of the Moody's downgrade was relatively modest, Treasury yields have climbed steadily since the end of April as budget negotiations have come to the fore.'
Could stablecoins help address the problem? In a May 2025 study, Sang Rae Kim, economist at Kyung Hee University, looked at how reserve-backed stablecoins affect the Treasury markets and credit intermediation. Kim found that large stablecoin 'issuance events induce statistically significant increases in Treasury prices.'
Yet as Chan's team plans for the future, current economic dislocations are creating challenges. Not least of which is being caught between a brawling US and China. Even so, it's worth remembering that Hong Kong's currency peg is the ultimate 'widow maker' trade.
For more than two decades, hedge fund managers, George Soros most famously, have tested the HKMA. The peg endured years later, even as speculative investors like Kyle Bass, founder of Hayman Capital Management, and Bill Ackman, chairman of hedge fund Pershing Square Capital Management, bet against it.
Through assertive market intervention and fancy footwork, the HKMA has preserved the roughly 7.8 exchange rate established in 1983.
For generations, Hong Kong's iron-clad link to the world's reserve currency served the economy well. Stability affords investment banks, exporters and entrepreneurs confidence to headquarter Asian operations in the city. It has long been touted as Hong Kong's secret weapon.
The most famous such assault came in 1997 and 1998 from Soros, who 'broke' the British pound. After attacking the Malaysian ringgit and Thai baht, Soros targeted Hong Kong's peg and stocks. He lost. The HKMA overwhelmed Soros and his acolytes with a $15 billion show of force.
In targeting Hong Kong in recent years, hedge fund players like Bass tested Chinese leader Xi Jinping's mettle. One big worry is control. Hence, economist Zhou Luohua of Renmin University of China calls the peg the economy's 'Achilles' heel.'
'If property and stock prices start to fall, the Hong Kong Monetary Authority can't provide sufficient liquidity like the Federal Reserve or other central banks as its money supply capacity is determined by the size of its US dollar reserves,' Zhou explains. 'If asset prices are plunging, it would trigger an exodus of funds at the same time, translating into a 'double hit' for the Hong Kong economy.'
In April 2018, former HKMA head Joseph Yam argued it's time to scrap the peg so that Hong Kong can protect itself in times of turmoil. As China reduces capital controls, Yam worried 'small' Hong Kong risks getting swamped by 'huge' mainland money flows.
There are some options, of course. The most obvious: soften the peg by establishing a Singapore-style basket of currencies. If the HKMA has greater flexibility, it could more easily vanquish the Soros's and Bass's of the world as well as property hoarders.
Maintaining the status quo, Yam cautions, means even less affordable housing. It also makes Hong Kong more of an arbitrage vehicle between US and Chinese investors than a place that shares its fruits with middle-class households.
Still, odds are that the peg is not going anywhere anytime soon. The protests in recent years challenging China's influence came as Trump's tariffs – both from 2017 to 2021 and now – throw Xi's economy off balance. China might decide that now isn't the time for experimentation with the dollar peg.
Yet there is experimentation in the digital asset space that could render these 'old economy' concerns moot. And help Hong Kong get its financial groove back in short order.
Follow William Pesek on X at @WilliamPesek
