Exclusive Interview with OSL's Hu Zhenbang: How Hong Kong's First Licensed Crypto Exchange Views Future Regulatory Trends

Author: Jiemian News

In 2019, the Hong Kong-listed company "Brand China" chose to rename itself "BC Technology" and fully entered the digital asset and blockchain field. On December 15, 2020, OSL, the digital asset trading platform under BC Technology Group, obtained Type 1 and Type 7 licenses under the regulatory framework of the Hong Kong Securities and Futures Commission, becoming the first digital asset trading platform with a listed parent company, licensed in Hong Kong, insured assets, and audited by one of the Big Four accounting firms. After the new virtual asset policy in Hong Kong officially took effect on June 1, 2022, OSL also became one of the first crypto platforms to apply for virtual asset retail trading business.

For a long time, OSL was the only licensed and listed digital asset trading platform in Hong Kong. Benefiting from its compliance advantages, it has successively collaborated with traditional financial giants such as DBS Bank and Standard Chartered Bank in the digital asset field and received an investment of HKD 543 million from Singapore's sovereign wealth fund GIC. However, like most blockchain concept stocks that have entered the secondary market, BC Technology (HK: 863) has recently underperformed in the market. Stuck in the cryptocurrency winter of 2022, its latest financial report shows that BC Technology's revenue decreased by 64.3% in 2022, with net losses expanding to HKD 550 million. This year, BC Technology's stock price has reached a historical low.

Recently, Jiemian News interviewed BC Technology CFO Hu Zhenbang regarding the regulatory details of virtual assets in Hong Kong and the business development of OSL. Hu Zhenbang has over 16 years of experience in the financial field and has worked for several companies, including Hong Kong-listed technology firms, investment banks, and the Big Four accounting firms.

Jiemian News: The Hong Kong government has recently pressured banks in Hong Kong to open accounts for crypto platforms. Why do banks in Hong Kong have concerns when introducing cryptocurrency institutions? Is it related to the recent crisis of small and medium-sized banks in the U.S.?

Hu Zhenbang: This issue is not difficult to understand. Firstly, licensed and compliant crypto institutions have no difficulty opening bank accounts, but unlicensed and non-compliant crypto trading platforms face difficulties not only in Hong Kong but globally.

Previously, there were several crypto-friendly banks in the U.S., including Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank, which offered innovative products specifically for cryptocurrency institutions.

However, after these banks recently collapsed, many of their former clients, mostly unregulated exchanges and institutions, had to turn to traditional banks for accounts. Traditional banks have always had concerns about these crypto institutions because they do not meet the standards of general brokerages and some banks in terms of KYC, anti-money laundering, market monitoring, and whether customer assets are misappropriated. From the bank's perspective, it may not be able to earn much profit from these crypto institution clients, but it faces significant risks, including compliance and monitoring costs required to conduct this business, so they are relatively conservative in accepting cryptocurrency-related clients.

Jiemian News: BC Technology has participated in advising on Hong Kong's stablecoin policy. What do you expect from the government's regulation of crypto stablecoins? Is there a possibility that Hong Kong will launch a Hong Kong dollar stablecoin?

Hu Zhenbang: Aside from the previous white paper, the detailed content of this policy has not been further disclosed. Regarding how stablecoins should be regulated, from our perspective as practitioners, some of the most popular stablecoins in the market, including USDC and USDT, have already been used as a form of crypto payment tool, but there are significant doubts about their issuers.

As a funding platform, their financial transparency and whether they are subject to compliance regulation, as well as their solvency, are crucial. If stablecoin holders want to exchange for fiat currency, can they easily be satisfied by the issuer? I believe these are issues that regulators and investors are concerned about.

Therefore, if Hong Kong is to have stablecoin issuers, they must first have the qualifications and licenses to conduct asset management business, similar to ordinary asset management companies, with a high level of asset protection capability. Additionally, the subscription and redemption of these funds by clients must follow a normal procedure. They must also undergo audits by regulatory agencies and third parties each year to ensure that the assets reported by the institution match the actual assets.

Of course, we should not impose too many restrictions on the functions of stablecoins, or they will be difficult to become popular. Thus, we also expect that if stablecoins appear in Hong Kong, they should also have payment and wealth management functions. If these stablecoins can serve as tools like Yu'ebao that provide both wealth management and certain payment functionalities, there will definitely be market demand.

As for whether the Hong Kong government will issue a Hong Kong dollar stablecoin, stablecoins and central bank digital currencies like the digital Hong Kong dollar are two different categories. I estimate that the likelihood of a Hong Kong dollar stablecoin appearing is not very high, as the Hong Kong government has previously stated in the white paper that it will consider developing a digital Hong Kong dollar, which will follow a path similar to that of the digital renminbi. Therefore, the Hong Kong dollar stablecoin may, to some extent, compete with the digital Hong Kong dollar.

However, the international demand for US dollar stablecoins is very high. If an issuer chooses Hong Kong as the issuance location and accepts the regulation of the Hong Kong Securities and Futures Commission, it will be more secure than the current US dollar stablecoins in the market and is expected to become mainstream. Currently, the trading volume of global stablecoins may actually exceed that of many sovereign currencies in Africa, but the circulating US dollar stablecoins have not been adequately regulated.

Jiemian News: What requirements and measures do crypto trading platforms intending to operate in Hong Kong have regarding the separation and custody of client assets?

Hu Zhenbang: Under Hong Kong's regulatory environment, asset custody cannot be separated from exchange operations. The requirements of the Securities and Futures Commission have clearly stated that if one wants to operate a Type 1 and Type 7 licensed exchange, custody must also be performed and cannot be outsourced to a third party. Moreover, the client assets under custody cannot leave Hong Kong.

This is also one of the reasons why the threshold for trading licenses is so high. For example, when client assets come into the crypto platform, they are actually handled completely separately from the platform's assets. There is a dedicated client account set up in banks and brokerages, and the custody of client assets is managed by a separate subsidiary. This subsidiary is a trust company, protected by Hong Kong trust laws, and we also help it purchase insurance separately for coverage. Hot wallets are 100% insured, while cold wallets require 50% insurance. Additionally, it is necessary to maintain a cybersecurity team to prevent cyberattacks. Therefore, asset custody in Hong Kong is very secure, with 98% of assets required to be held in separate cold wallets, and only 2% of assets allowed in hot wallets. Even if the platform encounters financial issues, the worst-case scenario is that the funds from the trust subsidiary are returned to clients.

Thus, the protection of client assets is very high. Of course, to achieve this level of operation, sufficient personnel, hardware, software, insurance, and auditing are required. The more client assets there are, the higher the cost, and the annual expenditure is actually very high, though I cannot disclose that figure. The government and auditing firms will also verify on the blockchain network to ensure that these assets truly exist.

Jiemian News: OSL's previous clients were all from institutions and high-net-worth individuals. After the new policy in Hong Kong was implemented on June 1, you also applied for retail trading business. What considerations are behind this?

Hu Zhenbang: From the perspective of the cryptocurrency market, although we believe that institutional clients will account for a large proportion in the future, retail investors are still a significant component of the market today. Additionally, the Hong Kong government's relaxation of some restrictions on retail traders is also an important prerequisite.

We have previously built many features in our trading system, such as trading processes aimed at professional investors. Therefore, we can expand into a new market with just a slight modification to the existing foundation, requiring minimal investment while still performing well. However, in terms of marketing, retail and institutional clients are very different because the markets are completely different. Moreover, compared to institutional investors, the return ratio for retail investors tends to be higher, so serving these smaller transactions incurs costs. In this regard, we mainly collaborate with some local brokerages in Hong Kong to promote retail business and will also adopt some automated methods to provide services.

For retail clients, we will also launch an AI-based service model. By linking to OpenAI's infrastructure, we have developed a prototype AI robot that can handle customer service, data analysis, and execute buy and sell orders, reducing our reliance on sales personnel.

Jiemian News: OSL is one of the only two institutions in Hong Kong that can publicly conduct STO (Security Token Offering). How does STO differ from traditional securities issuance?

Hu Zhenbang: As a new type of digital asset, STO differs primarily from stock trading and bond issuance in that it eliminates many intermediary steps. Issuing bonds often requires banks, brokerages, and other intermediaries, which can be cumbersome and costly, and the products are subject to the trading hours of exchanges. If it is a private placement, it can only be traded over-the-counter (OTC). However, with STOs issued via blockchain, many intermediary steps are eliminated. For example, licensed institutions like OSL can handle everything from project design, issuance, service, and custody. After issuance, the products can be traded directly on the blockchain network 24/7, making the process more efficient. The issuance cost is also relatively lower compared to IPOs, and more importantly, issuers can reach investor groups that were previously inaccessible.

Because digital asset investors often have a significant proportion of digital assets in their wealth, they may not necessarily have brokerage accounts or traditional assets like real estate, but products like STO offer them a new diversified investment opportunity.

Jiemian News: Whether it's STO or RWA (Real World Assets), both are very cutting-edge areas in Web3, but their development is still in the early stages. What pain points do you think exist?

Hu Zhenbang: The reason STOs have not become very popular despite being around for some time is mainly that the market infrastructure is not yet ready, including the regulatory framework. Since regulatory agencies understand that it takes a long time, there are currently not many STO products on the market. The U.S. is likely the first country in the world to have STOs, but due to its recent unfriendly stance towards cryptocurrencies, the development of STOs has naturally slowed down. In some countries that have been supportive and have researched for a long time, such as Japan and Thailand, there are already some STO cases that have emerged and entered the application stage.

For instance, mainstream Japanese brokerages like Nomura Securities, in addition to doing IPOs, are now also engaged in STO business, helping real estate developers and Disney resort hotels to conduct STOs, turning their revenues into tokens to sell to their clients. Holders not only enjoy investment rights but can also stay at these hotels for a few nights and receive some souvenirs, thus gaining both economic benefits and usage rights. Japan has already moved past the validation stage in this field and is now in the application stage. The main breakthrough needed now is in compliance, specifically how regulatory agencies can efficiently approve various innovative products.

Jiemian News: As crypto assets move towards the mainstream, more and more crypto institutions are entering the secondary market, but many companies, including BC Technology, have performed poorly in terms of stock prices. What do you think are the reasons?

Hu Zhenbang: Since last year, we have seen concentrated risk events in the crypto industry, including the collapse of FTX, which has caused many investors to have concerns about the industry and to leave. Additionally, the stock market itself is not in a good cycle. Therefore, the industry needs more time to adjust, and as speculative participants exit, the entire industry can develop more healthily, which will certainly help all blockchain-related stocks.

In recent months, especially in the U.S., there have often been news reports about regulatory agencies cracking down on both compliant and non-compliant trading platforms, leading some investors to feel that the industry needs more time to consolidate. However, I have encountered a small number of investors who are willing to slowly enter the market, so I hope to give the investment market a bit more time.