Why is DigiByte not a stablecoin, yet still considered as the “backbone” and support between fiat and virtual assets?
Why isn't DigiByte a stablecoin, but still serves as the "backbone" linking fiat and virtual assets?
Published by | Ouke Cloud Chain Research Institute
Author | Jason Jiang
As June approaches, Hong Kong is becoming more active in the virtual asset and Web3 fields. According to Bloomberg, Hong Kong will announce that retail investors can trade cryptocurrencies under its new industry rules, and it is expected that individual investors will be able to trade tokens such as BTC and ETH with appropriate safeguards starting in June. This move will mark an important step for the Hong Kong government in opening up cryptocurrency trading and embracing the Web3 innovation field. In addition, the Hong Kong Monetary Authority announced on May 18 the launch of the “Digital Hong Kong Dollar” pilot program, which has also received widespread attention.
In the digital age, we urgently need a variety of new financial infrastructure that matches digital innovation, and currency digitization is one of the inevitable trends. Although the underlying technology of virtual assets can solve the problem of automatic execution of transactions without credible authorization, the risks inherent in virtual assets cannot be ignored, and they cannot be widely used as payment tools or to expand financial inclusion. Therefore, currency innovations such as Digital Hong Kong Dollar have entered the public eye. Digital Hong Kong Dollar is not only the “backbone” and pillar connecting fiat currency and virtual assets, but will also become a new digital financial infrastructure that is necessary for the development of the Hong Kong Web3 ecosystem and digital economy.
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Digital Hong Kong Dollar = Hong Kong Dollar Stablecoin? No, there are at least 7 differences between the two
Before central banks around the world develop CBDCs, stablecoins are the most popular type of digital currency in the traditional financial market. Because CBDCs and stablecoins have certain similarities in some aspects, such as being stable asset types, having almost no price fluctuations, and having obvious advantages over other virtual assets; they can also be used as a new type of payment tool, affecting or even changing the current payment pattern. Therefore, the two are often confused in the early days. This situation is once again “staged” on Digital Hong Kong Dollar and Hong Kong dollar stablecoin.
Figure: The position of stablecoins and CBDCs in the current monetary system
Chart: Ouke Cloud Chain Research Institute
With the Hong Kong Monetary Authority accelerating the development of digital HKD, many people are now actively or passively confusing digital HKD with HKD stablecoins. However, in fact, digital HKD and HKD stablecoins are two completely different forms of digital currency.
From the perspective of issuance mechanism, operation mode, and technical characteristics, there are at least 7 differences between digital HKD and HKD stablecoins:
- Issuer. This is also the most important difference between digital HKD and HKD stablecoins. Digital HKD will be issued by the Hong Kong Monetary Authority, while HKD stablecoins can theoretically be issued by various private institutions or commercial banks. The HKMA’s regulatory document on stablecoins previously stated that bank institutions can issue their own stablecoins as long as they comply with the corresponding regulatory requirements.
- Issuance purpose. The HKMA first launched CBDC development at the wholesale level, and later began to study digital HKD at the retail level due to the increasing international attention to how CBDC can improve cross-border payments and remittances. Its purpose is mainly to explore how to use the latest technology to effectively respond to current and future evolving payment needs. The main purpose of issuing HKD stablecoins at present should be to accelerate the development of the Hong Kong Web3 industry and strengthen Hong Kong’s voice in the virtual asset field.
- Credit source. Hong Kong adopts the banknote issuing system, and HKD is issued by three issuing banks. Regardless of whether digital HKD ultimately adopts the “coin scheme” (that is, the Hong Kong Monetary Authority is responsible for issuing digital HKD, and commercial banks collect US dollars and exchange them for digital HKD) currently used to issue HKD coins and HKD 10 paper bills, or adopts the “paper scheme” (that is, the bank collects US dollars to exchange for debt certificates, and then the bank issues debt) currently used for paper bills (except for HKD 10 paper bills), digital HKD is a direct liability of the Hong Kong Monetary Authority, and its value is endorsed by HKD and the credit of the Hong Kong government. HKD stablecoins generally cannot be regarded as central bank liabilities, and their credit mainly comes from the credit penetration of the US dollar-HKD and the commercial credit of the issuing institution itself.
- Legal status. Digital HKD is essentially a digital version of HKD cash and will have the same legal tender status as existing HKD. The Hong Kong Monetary Authority will push for the revision of relevant laws at an appropriate time to ensure that all forms of Hong Kong currency are issued on a consistent legal basis. However, HKD stablecoins issued by private institutions clearly cannot obtain the legal currency status of digital HKD, and in the short term, they will still exist as a payment tool or a type of digital asset.
- Technical framework. The Hong Kong Monetary Authority is open to blockchain technology for digital HKD and has proposed DLT-based technical architecture and design options. From the potential use case analysis revealed by the pilot plan, blockchain technology may play an important role in the issuance and settlement of digital HKD in the future, but it is still uncertain whether digital HKD will eventually adopt public or consortium blockchain technology. However, considering that digital HKD mainly targets retail scenarios and the limited processing capacity of current blockchain technology for high concurrency, combined with the dual-operation architecture that the HKMA previously revealed may be used, the author speculates that alliance chain technology that is more secure and controllable may be selected for digital HKD in the early stage of issuance, and Layer2-like ideas may be used to solve the availability problem of digital HKD: that is, the HKMA and the relevant issuers and operators of digital HKD will build a digital HKD alliance as the main body, responsible for the on-chain issuance and settlement of digital HKD, while transaction and payment-related business links may be conducted off-chain. Referring to the issuance and operation mode of mainstream US dollar stablecoins such as USDT and USDC in the market, HKD stablecoins in the future may still be based on public blockchain technology and network for on-chain issuance and circulation.
Figure: Global CBDC Project Progress
Source: Citigroup
- Anonymity and traceability. As multiple Hong Kong FinTech researchers analyzed for Eureka Cloud Chain Research Institute, considering many practical requirements such as balancing user privacy and anti-money laundering, the digital Cyberport Dollar (CPD) will not directly adopt the issuance model similar to stablecoins and other virtual assets, but will adopt a “centralized management” plus “distributed ledger” approach to achieve a balance between safety and efficiency. CPD is expected to refer to digital RMB and adopt a layered account model to achieve controllable anonymity, that is, small payments can be anonymous, but KYC is required after reaching a certain limit. Li Yinlin, Managing Director of the Investment Research Department of Locke Capital, also believes that the technical characteristics of CPD’s traceability will help Hong Kong better deal with various crimes and anti-money laundering activities. While the Hong Kong Dollar stablecoin can theoretically achieve effective anonymity on the chain and will not be restricted in transaction amounts, we believe that stablecoins issued by private institutions, including the Hong Kong Dollar stablecoin, need to use regulatory technology such as On-Chain AML to achieve a balance between safety and innovation.
- Scope of use. CPD will mainly be used in retail scenarios and, due to legal and regulatory restrictions, will mainly be circulated in Hong Kong and related partner regions in the future; while the Hong Kong Dollar stablecoin naturally has global attributes and will circulate freely in public chain networks, it can be applied to many scenarios in the Web3 ecosystem, although it may also be subject to regulation in other countries and regions.
Figure: Retail CBDC and Wholesale CBDC Leading the Global CBDC Index
Source: PwC
Can CPD Coexist with Hong Kong Dollar Stablecoin?
Based on the seven differences described earlier, we believe that CPD and the Hong Kong Dollar stablecoin are not only not equivalent, but will also have a certain potential competition in the short term. However, the possibility that CPD will completely replace the function of the Hong Kong Dollar stablecoin is not high, because the utilization rate, expansibility, and friendliness of the Hong Kong Dollar stablecoin in the virtual asset market will far surpass CPD, while CPD will be in a leading position in terms of value support and reliability. Both have obvious advantages and disadvantages, and the development of CPD is a complex systematic work. Referring to the overall progress of digital RMB and other retail CBDCs, we believe that it will take at least 3-5 years before it is truly launched. During this process, in a friendly Web3 development environment, Hong Kong may take the lead in the issuance of one or even several Hong Kong Dollar stablecoins led by commercial banks and private institutions, pegged to the value of the Hong Kong Dollar, and applied to practical scenarios such as cross-border payments and tokenized asset settlement.
However, even if the HKD stablecoin was launched earlier than the digital HKD, it would not affect the original plan and schedule for the HKMA to launch the digital HKD. After the digital HKD is launched, the digital HKD and the HKD stablecoin can also maintain coordination and cooperation in competition. Possible ways of cooperation include, but are not limited to:
Integration of the digital HKD with existing HKD stablecoins. After integration, the digital HKD will become a synthetic central bank digital currency (sCBDC), issued by private institutions and responsible for private institutions, but supported by the HKMA with full reserves. The IMF has previously mentioned sCBDCs in its reports and believes that this public-private partnership model allows central banks to focus more on their core functions, which is better than CBDCs that are completely centralized and controlled by central banks.
Figure: Issuance path of sCBDC
The digital HKD and HKD stablecoins share resources and complement each other’s advantages. After the digital HKD is launched, it can choose to use the HKD stablecoin system that has already been established for testing and promotion, accelerating its popularity and application range. The Libra Association had pointed out in the second edition of the Diem white paper that after central banks launched CBDCs, they directly integrated with the Libra network to replace other stablecoins in the Libra network with more compliant and secure CBDCs.
These existing forms of cooperation will create room for imagination for the coexistence of the digital HKD and HKD stablecoins in the future. More importantly, cooperation and coexistence with HKD stablecoins will also help the digital HKD better adapt to the development of Web3 and make it a “backbone” and pillar between fiat currency and virtual asset markets.
Looking at the relationship between the digital HKD and the virtual asset market from the pilot program
Earlier, the HKMA announced the launch of the digital HKD pilot program, and the 16 selected companies will study potential use cases of the digital HKD in six categories, including comprehensive payment, programmable payment, offline payment, tokenized deposits, Web3 transaction settlement, and tokenized asset settlement.
Figure: List of selected companies and proposed use cases for the digital HKD pilot program
After the launch of the Sandbox Scheme, it has attracted widespread attention. Fu Rao, a senior researcher at the Hong Kong International New Economy Research Institute, believes that the launch of the Sandbox Scheme is a sign that Cyberport has clearly entered the trial phase. After carefully studying the participating institutions and potential use cases of the Sandbox Scheme, the Ouke Cloud Chain Research Institute believes that the following three points are worthy of attention:
Firstly, the types of enterprises selected for this Sandbox Scheme are very diverse, with half of them being commercial banks, and payment giants such as AliBlockingy, MasterCard and Visa also playing important roles. The selection of Ripple Labs, a well-known blockchain project, also fully demonstrates the inclusiveness and openness of the Hong Kong Monetary Authority in exploring Cyberport. Referring to the trial stage of other CBDC projects such as the digital RMB, the author believes that more types of technology companies and payment institutions will participate in the research and development pilot process of Cyberport in the future.
Secondly, from the distribution of selected Sandbox Scheme cases, potential use cases related to payments are the main direction of this exploration. This is mainly related to the basic positioning and future applications of Cyberport. However, considering the diversification of payment methods in Hong Kong, even if Cyberport is officially launched, it will not have a significant impact on the Hong Kong payment industry and user consumption habits in the short term. Some more vertical or currently uncovered scenarios of digital payment methods may be where Cyberport’s opportunities lie.
In addition, in the six categories of the Sandbox Scheme, tokenized deposits, Web3 transaction settlement, and tokenized asset settlement are all closely related to the virtual asset and Web3 industries. Among them, tokenized deposits are considered by the internationally renowned rating agency Moody’s as an alternative solution to solve the shortcomings of stablecoins; Web3 transaction settlement is the use case closest to virtual assets, and may bridge the connection channel between Cyberport and virtual assets; tokenized asset settlement is expected to accelerate the development of Hong Kong’s RWA track, and the Ouke Cloud Chain Research Institute has previously proposed that RWAs will break the barrier between the crypto world and the real world in the next few years, allowing more financial and economic activities to migrate to the chain, and become the most important and anticipated track in the development of Hong Kong’s Web3. These three potential use cases with high Web3 relevance not only prove that the Hong Kong Monetary Authority is open and forward-looking in the future development direction of Cyberport, but also accelerate the integration of Cyberport with the Web3 token economy.
Figure: Future growth space of tokenized assets
Source: Boston Consulting Group
Conclusion
Since ancient times, currency has been the core of all economic and social activities and is a financial infrastructure with social inclusiveness. From the development process of currency, we can see the changing path of financial infrastructure in different periods. Nowadays, the virtual asset industry is booming, and emerging technologies such as artificial intelligence, blockchain, cloud computing, and big data are advancing. The innovation of Web3 is just in time, and the development of the digital economy has ushered in a new stage. The digital financial infrastructure also needs continuous iteration of change.
Cyberport Dollar is an important financial infrastructure for Hong Kong to embrace the development of Web3 and the digital economy. It will not only connect the virtual asset market with the real world, but also improve the business capabilities and service efficiency of the existing financial system. More importantly, as a digital financial infrastructure, Cyberport Dollar has the potential to become the adhesive and catalyst of other digital financial infrastructures, strengthen the connection of various financial infrastructure systems, and enable different financial infrastructures to achieve interconnection.
We should not overestimate the role of Cyberport Dollar in the next three years, but we should not underestimate its long-term value for the development of digital finance in Hong Kong and even the world in the next ten to twenty years.
