Hong Kong’s “Sandbox” for Stablecoin Issuers Released: What are the prospects for the track?

Author: Weilin, PANews

On July 18, the Hong Kong Monetary Authority announced the first three "Sandbox" participating institutions, including JD CoinChain Technology (Hong Kong) Co., Ltd., Yuanbi Innovation Technology Co., Ltd., and the joint applicants Standard Chartered Bank (Hong Kong) Co., Ltd., Animoca Brands Limited, and Hong Kong Telecom Limited (HKT).

Previously, the Hong Kong Monetary Authority announced the launch of the "Sandbox" for stablecoin issuers in March this year, and subsequently received consultations from dozens of institutions, and some institutions with more adequate preparations submitted formal applications. After entering the "Sandbox", the three institutions can test the expected business model within the specified scope and communicate with the HKMA on how to comply with the proposed stablecoin regulatory system in the future.

From the perspective of background, the three institutions are different. Who is more powerful? Hashkey analyst Jeffery Ding said that Hong Kong's stablecoin will "bloom in many aspects" and will become the world's first region to support banks to issue stablecoins. At present, 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 is the most powerful?

From the perspective of background, JD Technology, the parent company of JD Coin Chain Technology, has an e-commerce background. JD Coin Chain Technology was officially registered in March 2024. Its main businesses include digital currency payment systems and blockchain infrastructure construction. According to LinkedIn's 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. At present, JD CoinChain Technology has obtained the Type 1 (Securities Trading), Type 4 (Providing Opinions on Securities) and Type 9 (Asset Management) licenses from the Securities and Futures Commission (SFC) of Hong Kong.

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

Standard Chartered Bank (Hong Kong) Limited, Animoca Brands Limited and HKT have joined 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. In addition, Standard Chartered Bank has launched a cryptocurrency custody service 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 connects Hong Kong's eTradeConnect and the People's Bank of China's Trade Finance Platform (PBCTFP).

As for Animoca Brands Limited, the industry-familiar leading blockchain game and digital entertainment company headquartered in Hong Kong, reported significant financial growth in the first quarter of 2024. The company's booking revenue in the quarter reached US$90 million, an increase of 72% compared to US$52 million in the same period of 2023. Among them, US$65 million came from digital asset consulting services, including token consulting, trading and blockchain node operations.

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

Adequate reserves must be guaranteed, and legal currency stablecoins must be licensed before they can be sold to retail users

Stablecoin is one of Hong Kong's important commitments and projects 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 initial direction of the regulatory framework. December 27, 2023: The Financial Services and the Treasury Bureau (FSTB) and the HKMA jointly released a consultation document on the proposed regulatory regime for stablecoin issuers to further solicit public and industry opinions. March 12, 2024: The HKMA announced the "Stablecoin Issuer Sandbox" policy, allowing the testing of stablecoin issuance within the regulatory sandbox. July 17, 2024: The consultation summary was released, summarizing public opinions and feedback, and proposing legislative proposals for the implementation of a regulatory regime for stablecoin issuers in Hong Kong. The next stage will be submitted to the Legislative Council for deliberation and relevant guidelines will be issued.

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

As early as December 27, 2023, Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, wrote an article pointing out that stablecoins have the opportunity to become the interface (note: medium) 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 be further combined, and whether stablecoins truly have the conditions of "stability" will become particularly important.

From the perspective of holders, if the issuer of stablecoins fails to maintain sufficient reserve assets to maintain the stable value of stablecoins, or fails to redeem stablecoins at par within a reasonable time, in addition to causing holders to suffer monetary losses, it will also affect their daily payment needs, thereby disrupting economic activities. In addition, in order to meet redemption requirements, the issuer of stablecoins may need to sell reserve assets in the financial market in exchange for cash, which will also have an impact on financial stability.

Under the HKMA's proposed regime, issuers who wish to issue stablecoins in Hong Kong that reference a single or multiple fiat currencies ("fiat stablecoins") must apply to the HKMA for a relevant license. Issuers will need to have a physical presence and management in Hong Kong and meet certain capital requirements. Licensees should develop effective stabilization mechanisms, such as maintaining reserve assets consisting of high-quality and highly liquid assets (such as bank deposits or short-term debt securities in the corresponding currency) and making proper custody arrangements to ensure that users can exchange stablecoins for fiat currencies at par at any time according to their wishes. Licensees must also comply with corresponding governance, risk management and anti-money laundering and terrorist financing measures.

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

Taking into account the actual needs of the effective operation of the "Sandbox", there are considerable requirements for the "Entry" threshold, and only applicants who fully meet the above conditions can "Enter the Box". Before the legislation is completed and the new law comes into effect, the HKMA will continue to handle 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 abide by the requirements of the "Sandbox", such as not raising funds or providing any investment products to the public in the name of the "Sandbox", and not using public funds in the initial stage.

Future Trends: Stablecoins are expected to "bloom in many directions", and inter-institutional cooperation will be launched

In response to the consultation summary of 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 Hong Kong currently has a strict regulatory system for fiat stablecoin issuers, requiring issuers to ensure that fiat stablecoins are fully supported by high-quality and highly liquid reserve assets. Whether USDT and USDC, which are currently the most adopted, can be traded in Hong Kong in the future depends on whether they can successfully transition. The first problem is that issuers who have physical companies in Hong Kong can apply. Second, if we look at the European MiCA stablecoin regulatory policy, perhaps only issuers who support placing reserves in banks can be recognized by regulators in the changing situation, which will hinder some issuers.

On the other hand, Hong Kong may also see a scenario where stablecoins "bloom in many directions". 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 industry insiders and institutions. Yao Wensong, CEO of ZA Bank, said that he is currently negotiating cooperation with nearly 10 stablecoin companies 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, said 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 a regulatory system for stablecoin issuers is expected to promote innovation and development in the practical application of stablecoins in Hong Kong.