The 'sandbox' for Hong Kong stablecoin issuers is released. Who is the strongest player and what are the prospects for the track?

On July 18, the Hong Kong Monetary Authority announced the first list of three "sandbox" participating institutions, including JD Coin Chain Technology (Hong Kong) Co., Ltd., Yuanbi Innovation Technology Co., Ltd., and the joint applicant Standard Chartered Bank ( Hong Kong) Limited, Animoca Brands Limited, and Hong Kong Telecommunications Limited (HKT).

Previously, the Hong Kong Monetary Authority announced the launch of a "sandbox" for stablecoin issuers in March this year. Subsequently, it received inquiries from dozens of institutions, and some well-prepared institutions submitted formal applications. After entering the "sandbox", the three institutions can test the expected business model within the designated scope and communicate with the Hong Kong Monetary Authority on how to comply with the proposed stablecoin regulatory regime in the future.

Looking at the background, the three institutions are different. Who is more powerful? Jeffery Ding, an analyst at Hashkey, said that Hong Kong’s stablecoins will “bloom in many directions” and will become the first region in the world to support banks in issuing stablecoins. At present, the digital banking and insurance industries have also taken action and will establish more cooperation with "sandbox" participating institutions.

The "Sandbox" list is announced, which applicant has the most strength?

Looking at the background, JD Technology, the parent company of JD Coin Chain Technology, has an e-commerce background. JD Coin Chain Technology Company was officially registered in March 2024. Its main business includes digital currency payment systems and blockchain infrastructure construction. According to LinkedIn information, the company’s CEO Liu Peng is currently the vice president of JD Technology. He has been deeply involved in the field of financial technology for a long time and has worked for Tencent, Huawei, Ant Financial, JD and other companies. Currently, JD Coinchain Technology has obtained Type 1 (securities trading), Type 4 (providing advice on securities) and Type 9 (asset management) licenses from the Hong Kong Securities and Futures Commission (SFC).

Yuanbi Innovation Technology has a background in DeFi, digital payment and financial technology. The company develops and operates a variety of DeFi applications, providing users with services including decentralized transactions, lending, and income farms. Through technological innovation, Yuanbi Innovation Technology provides users with digital currency payment solutions and supports payment and settlement services in multiple digital currencies. The company is actively promoting the development and issuance of the Hong Kong dollar-based stable currency HKDR.

Standard Chartered Bank (Hong Kong) Limited, Animoca Brands Limited, and HKT have joined forces. Standard Chartered Bank (Hong Kong) Ltd. is setting up a Bitcoin and Ethereum trading desk, making it one of the first global banks to enter spot cryptocurrency trading. In addition, Standard Chartered Bank launched cryptocurrency custody services in Hong Kong through its subsidiary Zodia Custody, mainly for institutional investors. In terms of blockchain applications, Standard Chartered Bank (Hong Kong) has successfully completed the first cross-blockchain platform pilot transaction, which connected Hong Kong’s eTradeConnect and the People’s Bank of China’s Trade Finance Platform (PBCTFP).

As for Animoca Brands Limited, a leading blockchain gaming and digital entertainment company headquartered in Hong Kong that is familiar to the industry, it reported significant financial growth in the first quarter of 2024. The company's booking revenue reached $90 million in the quarter, an increase of 72% from $52 million in the same period in 2023. Of this amount, US$65 million came from digital asset advisory services, including token advisory, trading and blockchain node operations.

Hong Kong Telecommunications Limited (HKT) is one of the largest integrated telecommunications service providers in Hong Kong. The company was established in 1925.

Adequate reserves must be ensured, and fiat stablecoins must be licensed before they can be used for retail users

Stablecoins are one of Hong Kong's important commitments and projects to support the development of Web3.

Since January 2022, Hong Kong regulatory authorities have been promoting the progress of stable currency policies. The discussion process in January 2022 summarized the feedback received and clarified the initial direction of the regulatory framework. December 27, 2023: Hong Kong’s Financial Services and the Treasury Bureau (Treasury Bureau) and the Hong Kong Monetary Authority jointly issued a consultation document on the proposed regulatory system for stablecoin issuers to further solicit public and industry opinions. March 12, 2024: The Monetary Authority announced the “Stablecoin Issuer Sandbox” policy, allowing testing of stablecoin issuance within the regulatory sandbox. July 17, 2024: A consultation summary was released, summarizing public opinions and feedback, and proposing legislative recommendations on the implementation of a regulatory system for stablecoin issuers in Hong Kong. The next stage will be submitted to the Legislative Council for review and relevant guidelines will be issued.

One of the keys to the approval of this "sandbox" is that applicants need to propose specific application scenarios and explain how their stablecoin business can feasibly solve the pain points in economic activities and bring benefits to Hong Kong's economic and financial activities. and new opportunities. The main application scenarios proposed by the first three institutions to participate in the "sandbox" include payment, supply chain management and capital market use cases. "Sandbox" participating institutions also proposed other use cases, including Web3, games, and virtual asset trading.

As early as December 27, 2023, Yu Weiwen, President of the Hong Kong Monetary Authority, wrote an article pointing out that stable coins have the opportunity to become the interface (note: media) between traditional finance and the virtual asset market. If stablecoins gradually become one of the payment methods chosen by the public, digital payment and the real economy may be further integrated, and it will become particularly important whether stablecoins truly meet the conditions of "stable".

From the perspective of holders, if the stablecoin issuer fails to maintain sufficient reserve assets to maintain the stable value of the stablecoin, or fails to redeem the stablecoin at face value within a reasonable time, in addition to causing the holder to The financial losses suffered by consumers will also affect their daily payment needs, thus disrupting economic activities. In addition, in order to meet redemption requirements, stablecoin issuers may need to sell reserve assets in the financial market in exchange for cash, which will also have an impact on financial stability.

According to the HKMA’s proposed system, issuers who want to issue stablecoins that reference a single or multiple legal currencies (“fiat currency stablecoins”) in Hong Kong must apply for relevant licenses from the HKMA. The issuer will need to have a physical presence and management in Hong Kong, and meet certain capital requirements. The licensee should develop an effective stabilization mechanism, such as maintaining reserve assets composed of high-quality and highly liquid assets (such as bank deposits or short-term debt securities in the corresponding currency) and making appropriate custody arrangements to ensure that users can follow Stablecoins can be exchanged for fiat currency at face value at any time at their will. Licensees are also required to comply with corresponding governance, risk management and measures to combat money laundering and terrorist financing.

In addition, the HKMA also plans to set regulations for other market participants interested in providing stablecoin purchase services. Among them, it will be required that only fiat stablecoins issued by licensed issuers can be sold to retail investors.

Considering the actual needs for the effective operation of the "sandbox", the threshold for "entering the box" has certain requirements. Only applicants who fully meet the above conditions can "enter the box". Until the legislation is completed and the new legislation comes into effect, the HKMA will continue to process inquiries and applications for the "sandbox".

In addition, entering the “sandbox” is not a prerequisite for future application for a stablecoin issuer license. These institutions must strictly abide by the requirements of the "sandbox". For example, they must not raise funds from the public or provide any investment products in the name of the "sandbox", and they cannot use public funds in the initial stage.

Future trends: Stablecoins are expected to "bloom in many directions", and inter-agency cooperation will begin

In response to the consultation summary on the regulatory system for stablecoin issuers issued by the Hong Kong Treasury Bureau and the Hong Kong Monetary Authority, Jeffrey Ding, chief analyst of HashKey Group, believes that currently Hong Kong There is a strict regulatory system for issuers of fiat currency stablecoins, which require issuers to ensure that fiat currency stablecoins are fully supported by high-quality and highly liquid reserve assets. Whether USDT and USDC, which have the highest adoption rates at present, can be traded in Hong Kong in the future depends on whether they can make a successful transition. The first problem is that only issuers with physical companies in Hong Kong can apply. Secondly, if we look at the European MiCA stablecoin regulatory policy, perhaps only issuers that support placing their reserves in banks can obtain regulatory recognition in the changing situation, which will cause obstacles to some issuers.

On the other hand, Hong Kong may also see a "multi-faceted bloom" of stablecoins. For example, banks have their own stablecoins, and exchanges have their own stablecoins. If banks successfully launch their own stablecoins, Hong Kong will be the first place where banks launch stablecoins, which will serve as a model for global stablecoin regulatory policies.

The launch of the sandbox has attracted the attention of relevant people and institutions in the industry. Yao Wensong, CEO of ZA Bank, said that he is currently negotiating cooperation with nearly 10 stable currency companies and believes that more projects will be launched in the future. Zhang Yu, operating director of OneInfinity by OneDegree, a Hong Kong digital asset insurance company, said that the company has developed customized insurance and risk management solutions to assist stablecoin issuers in managing related risks. Ma Siu-fai, senior partner in the banking industry at KPMG China in Hong Kong, pointed out that the introduction of a regulatory system for stablecoin issuers is expected to promote the innovation and development of the practical application of stablecoins in Hong Kong.

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