Reflection: The Fate of the HKD Stablecoin — A Monetary Delusion Through the Lens of the Impossible Trinity

In recent months, the Hong Kong Monetary Authority (HKMA) has issued stablecoin licences to Terra Payments Limited (HKDAP), led by Standard Chartered, and to HSBC. The market has erupted in applause, and the media has been busy painting blueprints of an “on-chain Hong Kong dollar.” Yet amidst the fanfare, a fundamental question has been deliberately sidestepped:

Who exactly is the HKD stablecoin solving a problem for, and what is that problem?

This article does not concern itself with technology or launch timelines. It focuses on one thing only: using macroeconomics’ most classic framework — the Impossible Trinity — to thoroughly examine the structural fate of the HKD stablecoin. The conclusion is brutal: precisely because of the choice Hong Kong made within the Impossible Trinity, the HKD stablecoin — regardless of who issues it — is destined to lack independent monetary value.

1. The Essence of Money: A Stablecoin Must Provide a “Reason to Hold That Currency”

The most fundamental function of money is to serve as a medium of exchange. Throughout history, many assets have attempted to function as money, but those that ultimately survived were always those that allowed holders to believe that “the value of this unit today will be roughly the same tomorrow.” Stablecoins exist precisely to extend this stability onto the blockchain. But stability alone is not enough — a stablecoin must make users want to hold it rather than another stablecoin.

USDT succeeded because it is the most liquid “pause button” in the crypto world. USDC succeeded because it gave regulated institutions the confidence to enter the market. XSGD succeeded because it provided institutions needing Singapore dollar exposure with an instant, compliant on-chain channel. Each of them possesses a unique value that cannot be fully replaced by a USD stablecoin.

So, what value can an HKD stablecoin offer that cannot be replaced by USDC or by traditional HKD payment systems like FPS or PayMe?

The answer, it turns out, was written long ago in Hong Kong’s choice of monetary regime.

2. The Impossible Trinity: The Fork in the Road Between Hong Kong and Singapore

The Mundell-Fleming model tells us that a country (or region) cannot simultaneously achieve all three of the following objectives: free capital flows, exchange rate stability, and an independent monetary policy (Mundell, 1963).

	Free Capital Flows	Exchange Rate Stability	Independent Monetary Policy	Real-World Regime
Hong Kong	✅ Free	✅ Stable (1 USD = 7.75–7.85 HKD)	❌ Forgone (interest rates follow Fed)	Linked Exchange Rate System (since 1983)
Singapore	✅ Free	❌ Floating (allows appreciation to fight inflation)	✅ Independent (MAS manages S$NEER)	Managed Float Regime

Since 1983, Hong Kong has chosen the combination of “free capital flows + exchange rate stability,” completely relinquishing monetary policy autonomy — a perfect illustration of the Impossible Trinity. The Hong Kong dollar is, unequivocally, a derivative of the US dollar. Its interest rates follow the United States, and its exchange rate is locked. In economic substance, holding HKD is equivalent to holding USD; its value fluctuations are almost 100% determined by the dollar.

Singapore took the opposite path: it allowed its exchange rate to float in exchange for an independent monetary policy. Over the past two decades, the Singapore dollar has appreciated by roughly 40% against the US dollar. Holding SGD represents a vote of confidence in Singapore’s economic competitiveness and the MAS’s policy framework — it is a store of value independent of the US dollar.

It is precisely this choice that has determined the vastly different fates of the two stablecoins.

3. The Original Sin of the HKD Stablecoin: A “Superfluous Digital Dollar”

Any HKD stablecoin, whether Terra Payments’ HKDAP or HSBC’s reportedly PayMe-integrated stablecoin, must adhere to a 1:1 peg with the Hong Kong dollar. And since the Hong Kong dollar is itself pegged to the US dollar, the HKD stablecoin is, in essence, a less convenient version of a USD stablecoin.

For on-chain users who need dollar exposure, the market already offers highly liquid USDC and USDT. The HKD stablecoin finds itself squeezed in between: it possesses neither USDC’s global network effects nor any independent value relative to the dollar. For a user to convert HKD into HKDAP and then enter DeFi or cross-border payments, an extra layer of friction is introduced, only to end up doing USD-denominated business anyway. For overseas users, the motivation to hold an HKD stablecoin is extremely weak.

What about domestic users? Hong Kong’s local payment infrastructure is highly developed. The Faster Payment System (FPS) is nearly instant, incurs zero fees, and covers all banks in the city. If HSBC were to embed its stablecoin into PayMe, it would certainly offer an “on-chain version of PayMe,” but would the user experience be significantly better than scanning a QR code today? Most small-value payments do not require blockchain finality, and users are unwilling to bear the risk of fluctuating on-chain gas fees. The marginal benefit of an on-chain HKD for local consumers is negligible.

In other words, the HKD stablecoin is stuck in an awkward position: for international users, it is inferior to USDC; for local users, it is no more convenient than FPS or PayMe. Its existence appears less a product of spontaneous market demand and more a product of regulatory compliance.

4. The Lesson of XSGD: Only an Independent Currency Possesses Independent Value

Contrast this with XSGD. Though it is a small-scale stablecoin (with a circulating supply of approximately 16.78 million tokens), it has accumulated over USD 22 billion in on-chain transaction volume, integrated in earnest with regional payment networks like GrabPay and HIVEX Network, and listed on Coinbase and Solana. Why? Because the currency it carries possesses independent value.

The Singapore dollar operates under a managed float and can appreciate against the US dollar. Institutions need SGD exposure in their asset allocation, regional traders need to lock in SGD exchange rates, and cross-border workers need low-cost remittances home. These needs cannot be met by USDC. XSGD fills a genuine void created by the Impossible Trinity choice: at the national level, exchange rate stability was surrendered, but at the stablecoin level, users can regain a stable “on-chain SGD” through 100% reserves.

As a stablecoin from a small, open economy, the HKD stablecoin is afforded no such luck. Because the HKD exchange rate was institutionally locked down long ago, it has no independent story to tell, and hence no independent use case to mine. The HKD stablecoin is not solving a problem; it is merely inserting a compliant version into an already over-saturated market of “dollar substitutes.”

5. “Compliance” is Not a Moat; It is a Shared Gate

Mainstream commentary likes to tout “licensed compliance” as the HKD stablecoin’s competitive edge. On 10 April 2026, the HKMA granted only two licences from a pool of 36 applicants, an approval rate of roughly 5% — a testament to the high regulatory bar. But the Impossible Trinity tells us something else: compliance is merely a ticket to the arena, not an accelerator in the race. When all players (Standard Chartered, HSBC, and potentially other licensed institutions in the future) are equally compliant, competition returns to the most primitive dimension: whose product is cheaper, faster, and more convenient?

HSBC’s stablecoin, leveraging PayMe’s existing user base, might achieve some retail penetration first. But that would simply be offering a functionally similar option to millions of users already habituated to FPS. It does not resolve the fundamental problem that the HKD stablecoin lacks independent monetary value. For most users, it would be just “another way to buy coffee with Hong Kong dollars” — and the existing ways are already good enough.

Moreover, institutions attracted by compliance will ultimately ask: can my settlement needs be met using USDC directly? If the answer is yes — and it usually is — then the HKD stablecoin is reduced to a forced transitional solution rather than long-term infrastructure.

6. A Deeper Question: Why Does Mainland China Insist on Prohibition? — The Eternal Tension Between Technological Allure and Regulatory Authority

Before we can explore the strategic significance of the HKD stablecoin further, we must confront another, deeper question: why has the mainland central bank’s prohibition on Web3 currencies not only persisted for thirteen years but grown increasingly severe?

The answer lies in a specific logic of power: stablecoins and cryptocurrencies, at a technical level, challenge the central bank’s monopoly over currency issuance and surveillance. PBOC Governor Pan Gongsheng articulated the core concern at the 2025 Lujiazui Forum: if allowed to develop unchecked, stablecoins would form a parallel payment and settlement network outside the fiat currency system, directly bypassing central bank oversight and weakening monetary policy transmission and capital control effectiveness.

The mainland’s prohibition on virtual currencies has followed an escalating path from “vigilance” to “containment” to “systematic blockade”: in 2013, a five-ministry notice defined Bitcoin as a “virtual commodity”; in 2017, a seven-ministry “94 Ban” comprehensively halted ICOs; in 2021, the “924 Notice” explicitly classified all virtual currency-related business as “illegal financial activity”; in 2025, the central bank declared that “stablecoins are a form of virtual currency”; and in February 2026, eight ministries jointly issued Document No. 42, explicitly prohibiting — for the first time — the issuance of RMB-pegged stablecoins abroad, in what the market has called the “strictest ban in history.”

Yet the harsher the ban, the more starkly it contrasts with technology’s magnetic pull.

On 26 February 2026 — the very same month — the PBOC Digital Currency Research Institute and the HKMA jointly launched a Digital RMB Cross-Border RWA Settlement Pilot Test, producing an undeniable figure: traditional cross-border settlement took 2 hours; the test compressed it to 3 minutes. Foreign exchange costs were reduced by over 20%. The pilot focused on two real-economy scenarios: cross-border infrastructure and agricultural trade. Traditional cross-border payments require passing through four to six intermediary banks; the Web3 “payment-is-settlement” model compresses this chain directly into a peer-to-peer step — this is not a quantitative change; it is a qualitative one. The parallel rollout of a ban and a pilot in the same month reveals the defining tension of this era: when technological efficiency gains become too large to ignore, a policy of complete rejection becomes unsustainable. The ban is the firewall; the pilot is the pathfinder — they are not contradictory, but represent a division of labour within a single strategy: a safe experiment under risk isolation.

7. Guessing: Not a Currency War, But an Institutional Experiment — The HKD Stablecoin’s Role as Pathfinder

Above, I have used the Impossible Trinity to argue that the HKD stablecoin is destined to lack independent monetary value. But rather than declare a fixed fate, it is better to ask: if the HKD stablecoin is destined never to become a global settlement layer, why is Hong Kong going to such lengths to build an entire licensing regime?

My guess is this: Hong Kong is meticulously constructing a complete pipeline to transform the stablecoin from a “crypto casino chip” into a “regulated financial instrument” — and the endpoint of this pipeline may well be a stablecoin narrative for RMB internationalisation.

The stringency of the Stablecoins Ordinance surpasses even that of most traditional banking products: 100% high-liquidity asset reserves, independent trust custody, a rigid redemption obligation, daily reserve statements, weekly reports to the HKMA, and monthly independent audits. At a time when global regulators are asking “how can a decentralised monetary instrument be subjected to centralised risk controls without killing its innovative gene,” Hong Kong is one of the few places in the world that simultaneously possesses three conditions: a mature common law financial system, political authorisation from the central government, and a direct technical interface with the mainland’s Digital RMB. This makes it a globally unique “Web2–Web3 docking laboratory.”

The laboratory’s most critical project is the “dual-hub” collaborative model validated by the RWA settlement test on 26 February 2026: the Digital RMB serves as the “value anchor and compliance channel,” providing sovereign credit endorsement and full-process traceability; the compliant HKD stablecoin serves as a “liquidity bridge,” leveraging 24/7 trading capability to connect with global crypto capital markets. Fan Wenzhong, Vice President of the Beijing Academy of Social Sciences, has described this model as a dual-track parallel system of “sovereign credit as anchor, market efficiency as driver,” aimed at “rapidly expanding the cross-border coverage of the Digital RMB and promoting RMB internationalisation; strengthening Hong Kong’s status as an international financial centre, and building the world’s first integrated hub of ‘CBDC + compliant stablecoin.’”

An even deeper experiment lies here: the world’s dominant stablecoins (USDT, USDC) grew up in a near-regulation-free vacuum. The HKD stablecoin represents the very first Web3 monetary experiment to be “fully embedded within a traditional financial regulatory framework from Day One.” Hong Kong is answering a genuinely disruptive question: if a stablecoin has reserve audits, on-chain KYC, and regulatory nodes built into its design from inception, can it still remain competitive in global crypto markets? The answer to this question directly determines whether the RMB internationalisation path can walk the “compliant stablecoin” road. Circle CEO Jeremy Allaire predicted in April 2026 that China could launch an RMB-backed stablecoin within three to five years — the shift from market speculation to near-policy discussion is itself a chain effect of the Hong Kong experiment.

Nobel laureate Friedrich Hayek proposed in Denationalisation of Money (1976) that once the issuance of money is freed from government monopoly, market competition itself will select the most stable money. Hayek’s theory has found an unexpected laboratory in the Web3 era — except the conductor of this experiment is not the market, but a state attempting to strike a balance between control and innovation.

Once this logic is understood, it becomes clear that mainland China’s prohibitions and Hong Kong’s licences are not a policy split, but an internal-external division of labour within a single strategy: the mainland uses “prohibition” to safeguard the baseline of financial security; Hong Kong uses “experimentation” to explore the technical pathways and institutional experience of compliant stablecoins. From this perspective, the significance of the HKD stablecoin project lies not in whether it can replace USDC or rival PayMe, but in whether it can validate a complete set of implementation processes: to verify whether the regulatory framework of licensed issuance, 100% reserves, daily disclosure, and rigid redemption can operate smoothly; to verify whether an on-chain stablecoin and the mainland’s Digital RMB system can achieve real-time exchange and clearing; to verify whether global crypto capital markets will accept a compliant stablecoin heavily constrained by traditional financial rules; and to verify whether B2B scenarios — such as RWA tokenised asset settlement and cross-border trade finance — can provide sufficient demand density for a compliant stablecoin.

The market value of the institutions involved — HSBC, Standard Chartered — matters less than the pathway they validate. Because once validation succeeds, the next to walk this path will not be an HKD stablecoin, but an offshore RMB stablecoin. The HKD stablecoin is merely the pathfinder; the main event lies ahead. On 30 April 2026, the Faculty of Business and Economics at the University of Hong Kong published research noting that the HKD stablecoin represents “a significant milestone marking the official launch of on-chain financial infrastructure in Hong Kong,” and highlighting that the “15th Five-Year Plan” outline expressly calls for consolidating and enhancing Hong Kong’s status as an international financial centre. The emergence of the HKD stablecoin, within this strategic framework, is a critical step towards laying the technical and institutional infrastructure for RMB internationalisation.

So, my current guess is this: the endgame for the HKD stablecoin is not to defeat USDC in market capitalisation, nor to replace PayMe in retail payments. It is a meticulously designed “dual experiment of institution and technology” — testing whether a sovereign monetary system can, through Web3 technology, participate in the foundational settlement of global crypto capital markets on terms that are compliant, controllable, and traceable. While the mainland comprehensively prohibits domestic crypto activities, it tacitly allows Hong Kong to roll out stablecoin licences at scale — this is not a contradiction, but a tactical division of labour under risk isolation. This is a marathon of monetary competition. And Hong Kong is running the first leg for China.

References

1. Mundell, R. A. (1963). “Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates.” Canadian Journal of Economics and Political Science, 29(4), 475–485.

2. Hong Kong Monetary Authority (2025). Stablecoins Ordinance (Ord. No. 15 of 2025, now Cap. 656), effective 1 August 2025.

3. Hong Kong Monetary Authority (2026, April 10). Grant of Stablecoin Issuer Licences under the Stablecoins Ordinance to Terra Payments Limited and The Hongkong and Shanghai Banking Corporation Limited.

4. People’s Bank of China et al., Eight Ministries (2026, February 6). Notice on Further Preventing and Disposing of Virtual Currency Related Risks (Yinfa [2026] No. 42).

5. Fan, Wenzhong (2026, January 6). “Steadily Advancing the Synergistic Innovation of the Digital RMB and Hong Kong Stablecoins.” Wen Wei Po.

6. Digital Currency Research Institute of the People’s Bank of China, Hong Kong Monetary Authority (2026, February 26). Digital RMB Cross-Border RWA Settlement Specialised Pilot.

7. Financial Services and the Treasury Bureau, Hong Kong SAR Government (2026, March 25). Legislative Council Written Reply: Progress of the Digital RMB Cross-Border Pilot in Hong Kong.

8. Allaire, J. (2026, April 16). Interview with Reuters: “China could launch yuan-backed stablecoin within 3 to 5 years.”

9. Wang, Yang (2026, April 30). “HKD Stablecoin to Facilitate Mainland Cross-Border Financial Development.” Faculty of Business and Economics, University of Hong Kong.

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11. Hayek, F. A. (1976). Denationalisation of Money: The Argument Refined. London: Institute of Economic Affairs.

12. People’s Bank of China et al., Five Ministries (2013). Notice on Preventing Bitcoin Risks (Yinfa [2013] No. 289).

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15. Pan, Gongsheng (2025, June 18). Speech at the Lujiazui Forum, noting that technologies such as blockchain, while driving the development of stablecoins, are “posing challenges to financial regulation.”

16. People’s Bank of China (2025, November 28). Meeting of the Coordination Mechanism for Combating Virtual Currency Trading and Speculation.

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18. Jinse Finance (2026, April 12). “Cracking Down Domestically, Promoting Offshore: This Operation Is Brilliant（境內嚴打虛擬幣、境外力推穩定幣，這操作絕了）.”