Hong Kong's Stablecoin Ordinance will take effect on August 1. Initially, only a few licenses may be launched, and unlicensed stablecoin promotion will be convicted

Author: Weilin, PANews

Hong Kong's "Stablecoin Ordinance" will take effect on August 1 (next Friday). The Hong Kong Monetary Authority plans to publish a summary of the "Stablecoin Issuer Licensing System" next week (July 28). Applicants will receive more detailed guidance to clarify the specific requirements of stablecoin issuers in terms of anti-money laundering, reserves, information disclosure, etc.

Against the backdrop of a sharp rise in the stock market around stablecoin concept stocks, on July 23, Hong Kong Monetary Authority Chief Executive Yu Weiwen wrote an article "Stablecoins for a Long Term Journey", proposing to "avoid excessive speculation", that is, to guard against excessive conceptualization and bubble trends. At the same time, Chief Executive Yu Weiwen reminded to strictly guard against financial risks.

Currently, there are three groups of testers in the stablecoin sandbox, namely Yuanbi Innovation Technology Co., Ltd.; JD CoinChain Technology (Hong Kong) Co., Ltd.; and a joint venture established by Standard Chartered Bank (Hong Kong), Animoca Brands, and Hong Kong Telecom (HKT). Recently, according to senior industry insiders in Hong Kong, there are currently 50 to 60 companies interested in applying for Hong Kong stablecoin licenses, including both central enterprises and financial institutions in mainland China, as well as Internet giants.

Call for vigilance against speculation, initially only a few stablecoin licenses may be approved, and unlicensed promotion will be convicted

Hong Kong Monetary Authority Chief Executive Eddie Yue pointed out in the article that in view of the heated discussion on stablecoins in the market and society over the past month, the cooling efforts still need to be strengthened. It is necessary to guard against excessive speculation in the market and public opinion.

“First, it is over-conceptualization. Once we move from the virtual to the real, from the conceptual and theoretical level to the application scenarios and specific arrangements, there will be a clear gap. Taking the experience of Hong Kong as an example, dozens of institutions have actively contacted the HKMA team. Some have clearly expressed their intention to apply for stablecoin licenses, and some are just preliminary explorations. Summarizing the experience of these contacts, many of them are only at the conceptual stage, such as proposing to improve cross-border payment efficiency, support the development of Web3.0, and improve the efficiency of the foreign exchange market. Not to mention the awareness and ability to control risks.”

He pointed out, “Some institutions that can provide application scenarios lack the technology to issue stablecoins and the experience and ability to control various financial risks. There are many modes for participating in stablecoins. For such institutions, the more practical approach seems to be to cooperate with other stablecoin issuers to provide application scenarios, rather than pursuing to be the issuer.”

He also said that what is more worthy of attention is the bubble trend. "With the recent hot speculation of the stablecoin concept, the market has become overly excited. Some listed companies, regardless of whether their main business is related to stablecoins or digital assets, have "turned stones into gold" as long as they declare their intention to develop stablecoin business. Their stock prices have risen, stock trading volume has increased, and the company's reputation has also been greatly improved. In fact, we have made it clear earlier that at most only a few stablecoin licenses will be approved in the initial stage." He added, "Hong Kong regulators have noticed that there have been scams under the promotion of digital assets and stablecoins recently, causing losses to the public. The Stablecoin Ordinance came into effect on August 1. According to the provisions of the ordinance, from the effective date, it is illegal to promote any unlicensed stablecoin to the Hong Kong public." At the same time, Hong Pi-ching, Director of the Hong Kong Financial Services Commission, also said at the recent annual report press conference that stablecoins should not be the object of speculation. The digitalization of asset markets is a long game. Stablecoins should play a stabilizing role and should not be short-sighted. I believe that Hong Kong is currently developing faster than other financial centers. Hong Pizheng also revealed that stablecoins are one of the links in the digitalization of Hong Kong's financial market, allowing trading currency intermediaries to be tokenized. It is believed that different assets will be tokenized in the next step, but the development process takes time and will not be fully tokenized for the time being.

Analysis: It may be arranged by invitation application system to form a dual-track regulatory structure

On July 19, according to Caixin, two sources pointed out that the license for stablecoin issuers will not be issued by applicants downloading forms and submitting written applications on their own, but will be arranged in a similar invitation application system. A source explained that at the practical level, the Hong Kong Monetary Authority, which is responsible for supervising and issuing licenses, will communicate with interested stablecoin license applicants in advance to understand whether the other party meets the basic application qualifications. Only when basic recognition is obtained in the pre-communication will the HKMA issue the application form.

On July 23, according to the Hong Kong Wen Wei Po, Ping An Securities released a stablecoin report pointing out that Hong Kong may form a dual-track regulatory pattern of "US dollar stablecoins connecting to the international market + Hong Kong dollar stablecoins connecting to the mainland", which not only consolidates the financial attributes of the Hong Kong dollar, but also provides a "test field" for the internationalization of the RMB. Hong Kong's definition of the scope of stablecoins is relatively broad and is not limited to a certain type of legal currency stablecoins. With the rapid development of Hong Kong's stablecoin market, it is expected that the market share of non-US dollar stablecoins will gradually increase, and it is expected to promote the establishment of a unified international regulatory system in the future.

In addition, the Ping An Securities report also mentioned that the stablecoin business activities regulated by Hong Kong's jurisdiction include not only the issuance of specified stablecoins in Hong Kong, China, but also the issuance of stablecoins anchored (or partially anchored) to the Hong Kong dollar outside Hong Kong. China's active layout of the stablecoin market can inject new impetus into the internationalization of the RMB and break the monopoly of the US dollar stablecoin.

Banks compete to be custodians

According to 21st Century Business Herald, some institutions that intend to apply for licenses have already finalized custodians: ZhongAn Bank and Deutsche Bank have been selected by institutions; Standard Chartered Bank and Airstar Bank are also potential custodians; HSBC has recently launched new virtual asset-related services; in addition, Chinese banks in Hong Kong are also actively deploying, and China Merchants Bank's China Merchants Bank Wing Lung Bank has increased its promotion of stablecoin custody business.

Banks can use their custodian status to expand distribution and trading businesses and further enrich their sources of income. For the Hong Kong banking industry, reserve custody business is an ideal light-asset business in a low-interest environment.

Industry insiders estimate that the industry average level of custody fees is 0.1%-0.5%. Taking Circle, the "first stablecoin stock", as an example, it needs to pay hundreds of millions of dollars in custody fees to custodians every year. Although the custody business has broad prospects, supervision is tightening. The Hong Kong Treasury Department and the Hong Kong Securities and Futures Commission have launched a joint public consultation on legislative proposals for the licensing system for digital asset trading and custody service providers, aiming to strengthen the supervision of crypto asset custody business and streamline the relevant licenses to several licenses such as VATP, VAOTC, and VA Custody.

According to Caixin, some stablecoin concept stocks took the opportunity to carry out rights issue financing. Zhongan Online, which started this round of investment boom in stablecoin concept Hong Kong stocks, announced on June 26 that it plans to issue 220 million shares at HK$18.25 per share, and completed the rights issue on July 4, raising another HK$3.92 billion; Lianlian Digital, which stated that it is evaluating the feasibility of applying for stablecoin licenses in Hong Kong and Singapore, also entered into a share placement agreement on July 12, intending to issue 38.4 million shares at HK$10.25 per share, raising HK$393.6 million.

In general, with the Stablecoin Ordinance officially taking effect on August 1, Hong Kong's stablecoin market will usher in a new pattern. As the market gradually matures, stablecoins are expected to play a more important role in cross-border payments and digital asset markets in the future. However, strict supervision in the short term will also ensure that market participants have sufficient technical and risk management capabilities to effectively prevent financial risks. PANews will pay close attention to subsequent developments.