The Proven Hong Kong Dollar: The Hong Kong Dollar’s Role in the Cryptocurrency Market
In 1841, when Hong Kong was established as a free trade port, there was no local currency in circulation. Trade in Hong Kong is conducted in foreign currencies such as Spanish and Mexican rials, Indian rupees and Chinese coins. In the 1860s, notes issued by the British Colonial Bank, HSBC, and chartered banks in India, Australia, and China began to circulate in Hong Kong.
These notes are linked to silver, so during the international silver crisis their value dropped significantly compared to the gold-backed dollar. In 1935, Hong Kong abandoned silver and implemented a crawling peg of 16 Hong Kong dollars to 1 British pound. From this year onwards, the Hong Kong dollar emerged as an independent currency unit and became Hong Kong’s unified legal tender in 1937.
In 1972, the Hong Kong dollar was pegged to the U.S. dollar and became one of the dominant currencies of the global economy. The pegged exchange rate was originally set at HK$5.56 per US dollar, but was revised in 2005 to be between a guaranteed floor of HK$7.75 and a guaranteed ceiling of HK$7.85.
Today, Hong Kong's status as a financial center in the global economy is largely based on its decades-old peg to the U.S. dollar. The Hong Kong dollar is considered the backbone of financial stability and the overall economy, attracting investors to park their wealth in Hong Kong because of their confidence in the currency's safety and ease of exchange.
About the USD peg
The Hong Kong Monetary Authority (HKMA), effectively equivalent to Hong Kong's central bank, is responsible for maintaining the currency peg. Through the currency board mechanism, the HKMA has two main strategies to keep the HKD trading volume around 7.80.
Reserve Mechanism: At all times, the Monetary Base must hold dollar reserves based on an exchange rate of 7.80.
Flow Mechanism: Increases and decreases in the Monetary Base must be matched by Exchange Fund interventions trading against the USD in the 7.75 to 7.85 trading range.
This is why the exchange rate of the Hong Kong dollar against the US dollar is maintained at 7.75 Hong Kong dollars to 7.85 Hong Kong dollars. The reason for maintaining the peg of the Hong Kong dollar to the US dollar rather than to other currencies is that the US dollar is the most appropriate pegged currency to ensure financial stability. The U.S. dollar is fully convertible and is heavily traded in the foreign exchange market. The U.S. dollar is also used as an international reserve currency, and the Federal Reserve – the agency responsible for U.S. monetary policy – is known for its effectiveness in promoting price stability.
In addition, the Hong Kong dollar is also neck and neck with other currencies pegged to the US dollar, including the Aruban florin, the Bahraini dinar, and the Qatari riyal.
When is MAS involved?
The dollar peg has not been broken, but when the Hong Kong dollar hits its floor and ceiling, the HKMA needs to step in to maintain the peg. It is usually interest rates that affect the exchange rate, especially when local rates in Hong Kong move out of sync with U.S. rates. For example, when the U.S. Federal Reserve lowers borrowing costs and the Hong Kong dollar interbank rate (Hibor) remains high, it is more attractive for investors to buy the Hong Kong dollar against the U.S. dollar.
In 2018, when the Hong Kong dollar hit the weak side of its trading range, the HKMA stepped in to help. In order to closely link the Hong Kong dollar to the U.S. dollar, the Monetary Authority bought 9.66 billion Hong Kong dollars in the foreign exchange market within 3 trading days.
In 2020, the situation has reversed as the HKD hit the strong end of its trading range at 7.75 and the HKMA needed to defend the peg. The currency's strength was largely driven by traders taking advantage of widening interest rate differentials at a time when local rates were higher relative to the U.S. dollar, making buying Hong Kong dollars an attractive trade. Over several trading sessions, the HKMA sold 3.37 billion Hong Kong dollars to maintain the peg.
Hong Kong Dollar Stablecoin
In 2019, Bitspark launched the Sparkdex.HKD stablecoin, Hong Kong has the first stablecoin dedicated to the local currency. Prior to this, USD stablecoins had dominated the crypto market in Hong Kong, and local crypto startups saw the need to offer diversified currency products in the stablecoin space.
That same year, TrustToken, the company behind TrueUSD, launched its own Hong Kong dollar stablecoin, TrueHKD, marking the company’s first steps outside the US. They partnered with Legacy Trust as their digital asset custodian, holding the Hong Kong dollar fiat currency used to collateralize TrueHKD.
However, both Hong Kong dollar stablecoins are no longer in operation. While Sparkdex.HKD did reliably hold its currency peg and hold fiat reserves on a 1:1 basis, the new firm has since shut down. TrustToken has also withdrawn its stablecoin from the market, making Hong Kong’s local stablecoin market currently underserved.
As a trader, if you have access to a stablecoin tied to your local currency, you can move in and out of cryptocurrencies at low cost on any exchange. Most stablecoins are ERC20, which means you can go to any exchange and start trading from a familiar starting point with the cryptocurrency denominated in your local currency. Deposits and withdrawals are easier when you have a stablecoin that serves your market, making crypto markets more accessible to everyone.
