The "sandbox" for stablecoin issuers in Hong Kong has been released. Which company is the strongest contender, and what is the outlook for the sector?
From the background, the three institutions are different; which one is stronger? After entering the "sandbox," these three institutions can test their expected business models within a designated scope and communicate with the Monetary Authority about how to comply with the proposed stablecoin regulatory framework in the future.Author: Weilin, PANews
On July 18, the Hong Kong Monetary Authority announced the first batch of three "sandbox" participating institutions, including JD Coin Chain Technology (Hong Kong) Limited, Yuan Coin Innovation Technology Limited, and the joint application from Standard Chartered Bank (Hong Kong) Limited, Animoca Brands Limited, and HKT.
Previously, in March of this year, the Hong Kong Monetary Authority announced the launch of a "sandbox" for stablecoin issuers, subsequently receiving inquiries from dozens of institutions, with some well-prepared institutions submitting formal applications. After entering the "sandbox," these three institutions can test their expected business models within a designated scope and communicate with the Monetary Authority on how to comply with the proposed stablecoin regulatory framework in the future.
From a background perspective, the three institutions are quite different; which one has the stronger capabilities? Hashkey analyst Jeffery Ding stated that Hong Kong's stablecoins will "blossom in multiple ways" and will become the world's first region to support banks issuing stablecoins. Currently, digital banks and the insurance industry have also begun to take action, establishing more collaborations with "sandbox" participating institutions.
"Sandbox" List Released: Which Applicant is the Strongest?
From a background perspective, JD Coin Chain Technology's parent company, JD Technology, has an e-commerce background. JD Coin Chain Technology was officially registered in March 2024, with main businesses including digital currency payment systems and blockchain infrastructure development. According to LinkedIn, the company's CEO, Liu Peng, is currently the Vice President of JD Technology and has long been engaged in the fintech field, having worked for Tencent, Huawei, Ant Financial, JD, and other companies. Currently, JD Coin Chain Technology has obtained Class 1 (Securities Trading), Class 4 (Advising on Securities), and Class 9 (Asset Management) licenses from the Hong Kong Securities and Futures Commission (SFC).
Yuan Coin Innovation Technology has a background in DeFi, digital payments, and fintech, developing and operating various DeFi applications to provide users with services including decentralized trading, lending, and yield farming. Through technological innovation, Yuan Coin Innovation Technology offers digital currency payment solutions, supporting payment and settlement services for multiple digital currencies. The company is actively promoting the research and issuance of the HKDR stablecoin, which is based on the Hong Kong dollar.
Standard Chartered Bank (Hong Kong) Limited, Animoca Brands Limited, and HKT are joining forces. Standard Chartered Bank (Hong Kong) Limited is setting up Bitcoin and Ethereum trading desks, making it one of the first global banks to enter spot cryptocurrency trading. Additionally, Standard Chartered has launched cryptocurrency custody services in Hong Kong through its subsidiary Zodia Custody, primarily targeting institutional investors. In terms of blockchain applications, Standard Chartered (Hong Kong) has successfully completed its first pilot transaction on a cross-blockchain platform, connecting Hong Kong's eTradeConnect with the People's Bank of China's Trade Finance Platform (PBCTFP).
As for Animoca Brands Limited, a well-known leading blockchain gaming and digital entertainment company headquartered in Hong Kong, it reported significant financial growth in the first quarter of 2024. The company's booking revenue for that quarter reached $90 million, a 72% increase compared to $52 million in the same period of 2023. Of this, $65 million came from digital asset consulting services, including token consulting, trading, and blockchain node operations.
HKT is one of the largest integrated telecommunications service providers in Hong Kong, established in 1925.
Ensure Sufficient Reserves: Fiat Stablecoins Must Be Licensed to Target Retail Users
Stablecoins are one of the important commitments and projects for Hong Kong to support the development of Web3.
Since January 2022, Hong Kong regulators have been promoting the progress of stablecoin policies. The discussion process in January 2022 summarized the feedback received and clarified the preliminary direction of the regulatory framework. On December 27, 2023: The Hong Kong Financial Services and the Treasury Bureau (FSTB) and the Monetary Authority jointly released a consultation document on the proposed regulatory framework for stablecoin issuers, further soliciting public and industry opinions. On March 12, 2024: The Monetary Authority announced the "Stablecoin Issuer Sandbox" policy, allowing testing of stablecoin issuance within the regulatory sandbox. On July 17, 2024: A consultation summary was released, compiling public opinions and feedback, and proposing legislative recommendations for implementing the regulatory framework for stablecoin issuers in Hong Kong. The next stage will submit the proposal to the Legislative Council for review and issue relevant guidelines.
One of the key approvals for this "sandbox" is that applicants need to propose specific application scenarios and explain how their stablecoin business can practically address pain points in economic activities, bringing benefits and new opportunities to Hong Kong's economic and financial activities. The main application scenarios proposed by the first batch of "sandbox" participating institutions include payments, supply chain management, and capital market use cases. The participating institutions also proposed other use cases, including Web3, gaming, and virtual asset trading.
As early as December 27, 2023, the President of the Hong Kong Monetary Authority, Eddie Yue, pointed out in an article that stablecoins have the opportunity to become the interface between traditional finance and the virtual asset market. If stablecoins gradually become one of the payment methods chosen by the public, digital payments and the real economy may further integrate, making it particularly important to determine whether stablecoins truly possess "stability."
From the perspective of holders, if stablecoin issuers fail to maintain sufficient reserve assets to uphold the stable value of the stablecoin or fail to redeem the stablecoin at face value within a reasonable time, it will not only cause financial losses to holders but also affect their daily payment needs, thereby disrupting economic activities. Additionally, to meet redemption requirements, stablecoin issuers may need to sell reserve assets in the financial market to obtain cash, which could impact financial stability.
According to the proposed system by the Monetary Authority, if issuers want to issue stablecoins pegged to one or more fiat currencies ("fiat stablecoins") in Hong Kong, they must apply for the relevant licenses from the Monetary Authority. Issuers will need to have a physical presence in Hong Kong and allocate management personnel, as well as meet certain capital requirements. License holders should establish effective stabilization mechanisms, such as maintaining reserves composed of high-quality and highly liquid assets (such as bank deposits or short-term debt securities of the corresponding currency) and making proper custody arrangements to ensure that users can redeem stablecoins for fiat currency at face value whenever they wish. License holders must also comply with relevant governance, risk management, and anti-money laundering and counter-terrorism financing measures.
Furthermore, the Monetary Authority plans to set regulations for other market participants wishing to provide stablecoin purchasing services. Among these, it will require that only fiat stablecoins issued by licensed issuers can be sold to retail investors.
Considering the practical needs for the effective operation of the "sandbox," there are considerable requirements for the entry threshold; only applicants who fully meet the above conditions can "enter the box." Before the completion of legislation and the effectiveness of new laws, the Monetary Authority will continue to handle inquiries and applications for the "sandbox."
Additionally, entering the "sandbox" is not a prerequisite for future applications for stablecoin issuer licenses. These institutions must strictly adhere to the requirements of the "sandbox," such as not raising funds from the public under the name related to the "sandbox" or offering any investment products, and cannot use public funds in the initial stages.
Future Trends: Stablecoins Expected to "Blossom in Multiple Ways," Inter-Institutional Cooperation Will Unfold
In response to the consultation summary on the regulatory framework for stablecoin issuers released by the Hong Kong Financial Services and the Treasury Bureau and the Monetary Authority, HashKey Group's Chief Analyst Jeffrey Ding believes that currently, Hong Kong has a strict regulatory framework for fiat stablecoin issuers, requiring issuers to ensure that fiat stablecoins are fully backed by high-quality and highly liquid reserve assets. The future trading of the most widely adopted USDT and USDC in Hong Kong will depend on whether they can successfully transition. The first issue is that only issuers with a physical presence in Hong Kong can apply. The second issue is that, based on the European MiCA stablecoin regulatory policy, perhaps only issuers that support placing reserves in banks will receive regulatory recognition in the changing landscape, which could pose obstacles for some issuers.
On the other hand, Hong Kong may also see a scenario where stablecoins "blossom in multiple ways." For example, banks may have their own stablecoins, and exchanges may have their own stablecoins. If banks successfully launch their own stablecoins, Hong Kong will be the first place where banks issue stablecoins, which will serve as a model for global stablecoin regulatory policies.
The launch of the sandbox has attracted the attention of industry-related individuals and institutions. ZA Bank's CEO, Yao Wensong, stated that they are currently in discussions with nearly 10 stablecoin companies for cooperation, believing that more projects will be launched in the future. The Chief Operating Officer of OneInfinity by OneDegree, a Hong Kong digital asset insurance company, Zhang Yu, mentioned that the company has developed customized insurance and risk management solutions to assist stablecoin issuers in managing related risks. KPMG China's Senior Partner in the banking sector, Ma Shaohui, pointed out that the introduction of the regulatory framework for stablecoin issuers is expected to promote innovation and development in the practical application of stablecoins in Hong Kong.
