Author: Weilin, PANews

On July 18th, the Hong Kong Monetary Authority announced the first batch of three "sandbox" participating institutions, including JD Coin Chain Technology (Hong Kong) Limited, Circle Coin Innovation Technology Limited, and the jointly applied Standard Chartered Bank (Hong Kong) Limited, Animoca Brands Limited, and Hong Kong Telecommunications Limited.

Earlier, the Hong Kong Monetary Authority announced the launch of the stablecoin issuer "sandbox" in March of this year, and subsequently received inquiries from dozens of institutions. Some institutions with sufficient preparation submitted formal applications. After entering the "sandbox," these three institutions can test their expected business models within a specified range and communicate with the Monetary Authority on how to comply with the proposed stablecoin regulatory system in the future.

From the background, the three institutions are different. Which one has the upper hand? Jeffrey Ding, an analyst at Hashkey, said that stablecoins in Hong Kong will "blossom in many ways" and will become the world's first region to support bank-issued stablecoins. Currently, digital banks and the insurance industry have also taken action to establish more cooperation with "sandbox" participating institutions.

The Sandbox List is Released, Which Applicant is the Strongest?

From the background, 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 its main business including digital currency payment systems and blockchain infrastructure construction. According to LinkedIn, the company's CEO, Liu Peng, is currently the Vice President of JD Technology and has long been engaged in the field of financial technology, having worked for companies such as Tencent, Huawei, Ant Financial, and JD. Currently, JD Coin Chain Technology has obtained licenses from the Securities and Futures Commission (SFC) in Hong Kong for Type 1 (securities trading), Type 4 (advising on securities), and Type 9 (asset management).

Circle Coin Innovation Technology has a background in DeFi, digital payments, and financial technology. The company develops and operates various DeFi applications, providing users with decentralized trading, lending, yield farming, and other services. Through technological innovation, Circle Coin Innovation Technology provides users with digital currency payment solutions, supporting the payment and settlement services of various digital currencies. The company is actively advancing the research and issuance of the HKDR stablecoin based on the Hong Kong dollar.

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

As for Animoca Brands Limited, this well-known company headquartered in Hong Kong, a leading blockchain game and digital entertainment company, reported significant financial growth in the first quarter of 2024. The company's quarterly bookings reached $90 million, a 72% increase from the same period in 2023, of which $65 million came from digital asset advisory services, including token consulting, trading, and blockchain node operation.

Hong Kong Telecommunications Limited (HKT) is one of Hong Kong's largest integrated telecommunications service providers, established in 1925.

Adequate Reserves Must be Ensured, Fiat Stablecoins Must be Licensed to Serve Retail Users

Stablecoins are an important commitment and project to support the development of Web3 in Hong Kong.

Since January 2022, the regulatory authorities in Hong Kong 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 Financial Services and the Treasury Bureau (FSTB) and the Monetary Authority jointly issued a consultation paper on the proposed regulatory regime for stablecoin issuers, further soliciting public and industry opinions. On March 12, 2024, the Monetary Authority announced the "sandbox" policy for stablecoin issuers, allowing testing of stablecoin issuance within the regulatory sandbox. On July 17, 2024, a consultation summary was released, summarizing public opinions and feedback, and proposing legislative recommendations for implementing the stablecoin issuer regulatory regime in Hong Kong. The next stage will involve submitting the legislation to the Legislative Council for review and issuing relevant guidelines.

One of the key approvals for this "sandbox" is that applicants need to propose specific use cases and demonstrate how their stablecoin business can effectively address pain points in economic activities, bringing benefits and new opportunities to Hong Kong's economy and financial activities. The main application scenarios proposed by the first batch of "sandbox" participating institutions include payment, 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, Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, pointed out in an article that stablecoins have the opportunity to become an interface between traditional finance and the virtual asset market. If stablecoins gradually become one of the popular payment methods, digital payments and the real economy may further integrate, making the stability of stablecoins particularly important.

From the perspective of holders, if stablecoin issuers fail to maintain sufficient reserve assets to support the stable value of stablecoins, or fail to redeem stablecoins at face value within a reasonable time, it will not only cause holders to suffer financial losses but also affect their daily payment needs, disrupting economic activities. In addition, stablecoin issuers may need to sell reserve assets in the financial market to obtain cash to meet redemption requirements, which may also impact financial stability.

According to the proposed regime by the Monetary Authority, if an issuer wants to issue fiat-backed stablecoins in Hong Kong, they must apply for relevant licenses. The issuer will need to have a physical presence and management in Hong Kong and meet certain capital requirements. Licensed entities should establish effective stability mechanisms, such as maintaining reserve assets consisting of high-quality and highly liquid assets (such as bank deposits in the corresponding currency or short-term debt securities) and making proper custody arrangements to ensure that users can convert stablecoins into fiat currency at face value at any time according to their wishes. Licensed entities also need to comply with governance, risk management, and measures to combat money laundering and terrorist financing.

In addition, the Monetary Authority also plans to set regulations for other market participants interested in providing stablecoin purchase services. Among them, only fiat-backed stablecoins issued by licensed issuers can be sold to retail investors.

Considering the practical needs for the effective operation of the "sandbox," there are quite stringent requirements for entry, and only applicants who fully meet the above conditions can enter. Until the legislation is completed and the new regulations take effect, the Monetary Authority will continue to process inquiries and applications for the "sandbox."

In addition, entering the "sandbox" is not a prerequisite for applying for a stablecoin issuer license in the future. These institutions must strictly comply with the requirements of the "sandbox," such as not raising funds from the public or offering any investment products in the name of the "sandbox," and not using public funds in the initial stage.

Future Trends: Stablecoins are Expected to "Blossom in Many Ways," and Cooperation Among Institutions will Unfold

Regarding the consultation summary of the regulatory regime for stablecoin issuers issued by the Financial Services and the Treasury Bureau and the Monetary Authority in Hong Kong, Jeffrey Ding, Chief Analyst of HashKey Group, believes that Hong Kong currently has strict regulatory requirements for fiat-backed stablecoin issuers, requiring issuers to ensure full support of high-quality and highly liquid reserve assets for fiat-backed stablecoins. The current highest adoption rates of USDT and USDC raise the question of whether they can successfully transition to trading in Hong Kong in the future. Firstly, the issuer must have a physical company in Hong Kong to apply. Secondly, according to the European MiCA stablecoin regulatory policy, only issuers who support keeping reserves in banks may be recognized by the regulators in the changing situation, which may hinder some issuers.

On the other hand, Hong Kong may also see a scenario of "blossoming" stablecoins. For example, banks have their own stablecoins and exchanges have their own stablecoins. If a bank successfully launches its own stablecoin, Hong Kong will be the first place where a bank launches a stablecoin, which will serve as a demonstration for global stablecoin regulatory policies.

The launch of the sandbox has attracted the attention of industry professionals and institutions. Yao Wensong, CEO of ZA Bank, stated that they are currently in talks with nearly 10 stablecoin companies for cooperation and believes that more projects will be launched in the future. Zhang Yu, Operations Director of OneInfinity by OneDegree, a Hong Kong digital asset insurance company, stated that the company has developed customized insurance and risk management solutions to assist stablecoin issuers in managing related risks. Ma Shaohui, Senior Partner of KPMG China's Hong Kong Banking Industry, pointed out that the introduction of the regulatory regime for stablecoin issuers is expected to promote innovation and development in the practical application of stablecoins in Hong Kong.

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