Case Study: HKD - A Paper Stablecoin?

The Hong Kong dollar's peg to the U.S. currency is a beacon of stability.

Pegged to the US dollar for nearly four decades, the currency in the Asian financial center is a stablecoin, albeit of the paper variety. Most days it relies — just like UST — on arbitrage to hold its value at 7.8 to the dollar.

The Hong Kong Monetary Authority runs a pure currency board. All of HKMA’s monetary base is backed 110% by US dollar assets. And while fixing the exchange rate, the authority deliberately lets interest rates float freely to absorb pressures on the peg. When the local currency gets sold off, there’s a capital flight from Hong Kong. But that automatically raises interest rates enough to lure buyers back.