The crypto market is hot, and JD.com wants to get a piece of the pie?
On July 24, according to Cailianshe, JD Technology's JD CoinChain Technology (Hong Kong) will issue a cryptocurrency stablecoin pegged 1:1 to the Hong Kong dollar in Hong Kong, which has sparked widespread discussion in the market.
Due to well-known regulatory reasons, domestic large companies quickly withdrew after entering the encryption field in the early years. Currently, they focus on industrial blockchain or indirectly participate in encryption projects as investors. Even after the release of the Hong Kong policy, there are very few domestic Internet giants participating in it.
JD.com's move is indeed surprising.
01. Origin: Hong Kong Stablecoin Issuer Sandbox
When talking about the origin of JD.com’s stablecoin, we also need to trace back the exploration process of Hong Kong’s stablecoin regulatory policy.
As far as stablecoin regulation is concerned, Hong Kong has a long history. As early as January 2022, Hong Kong began to pay attention to this key infrastructure linking traditional finance and the crypto field. At that time, the HKMA issued a discussion paper on stablecoins, clarifying the initial direction of the regulatory framework.
In the sensational virtual asset declaration in October 22, Hong Kong clearly stated that it would formulate policies to regulate stablecoins. "Stablecoins are another focus of ours. Given that stablecoins are said to be able to maintain value stability and their increasing use, such as as a medium of exchange for cryptocurrencies and legal tender, they also have the potential to be interconnected with traditional financial markets (such as payment systems). Drawing on the experience of the recent crisis in the virtual asset market (crypto winter), there is an international consensus that appropriate regulation must be established for different aspects of stablecoins, including governance, stability and redemption mechanisms."
Then in December 2014, the Hong Kong Monetary Authority once again released a consultation document on the proposed regulatory regime for stablecoin issuers, launching a second round of public discussion. In March of this year, the HKMA announced the sandbox policy for stablecoin issuers, allowing the testing of stablecoin issuance within the regulatory sandbox.
On July 17, the Hong Kong Treasury Department and the Hong Kong Monetary Authority jointly issued a consultation summary on the legislative proposal for implementing a regulatory system for issuers of legal currency stablecoins in Hong Kong, explaining the corresponding issuer qualifications, reserve management and stabilization mechanisms in stablecoins. If nothing unexpected happens, the next stage will be the Legislative Council's review, which is expected to be completed by the end of the year.
In the nearly two years of exploration, the most closely related to JD.com is the "Sandbox Policy for Stablecoin Issuers". In layman's terms, Hong Kong will select suitable testers within a certain regulatory gray range to explore the feasibility of stablecoin issuance. On July 18, Hong Kong announced the list of five stablecoin issuers' "Sandbox" participants, namely JD.com Coinlink Technology (Hong Kong) Co., Ltd., Yuanbi Innovation Technology Co., Ltd., Standard Chartered Bank (Hong Kong) Co., Ltd., Anmi Group Co., Ltd., and Hong Kong Telecom (HKT) Co., Ltd.
After the list was released, CoinChain disclosed its stablecoin information on its official website, stating that JD Stablecoin is a stablecoin based on a public chain and pegged to the Hong Kong dollar (HKD) at a 1:1 ratio. It will be issued on a public blockchain and emphasized that each JD Stablecoin can be redeemed at a 1:1 ratio. Its reserves are composed of highly liquid and credible assets, which will be safely stored in independent accounts of licensed financial institutions. The integrity of the reserves will be strictly verified through regular disclosures and audit reports. In terms of supervision, JD Stablecoin also stated that it will actively cooperate with global regulators and comply with existing and evolving legal and regulatory standards.
02. Fermentation: Will big companies’ entry into encryption end up badly?
If we only talk about the large companies entering the blockchain, it is not surprising. The peak period was around 2015. At that time, under the influence of the blockchain wave of foreign hyperledger, R3, etc., Baidu and Tencent established blockchain R&D teams in 2015, and Alibaba's Ant Financial established an interest group. Ping An and JD.com both announced the establishment of blockchain research departments later in 2016. Soon after, Tencent Blockchain, Ant Chain, Baidu Super Chain, JD.com Zhizhen Chain, etc. sprang up, and established the strategic cornerstone of blockchain for large companies.
To date, my country's Internet giants have also occupied the first echelon of the blockchain industry, covering all categories from infrastructure to product applications and even expanded services. The BaaS platform service end is the key area for many large companies to exert their strength in blockchain. In 2022, the market share of China's blockchain BaaS vendors was divided among seven units, namely Ant (26.6%), Tencent Cloud (16.3%), Huawei Cloud (11.4%), China Unicom Digital Technology (7.5%), Funchain (6.8%), Inspur (6.7%) and Zero Technology (5.4%), accounting for 80.7% of the market share.
But when it comes to the field of encryption, big companies tend to avoid it. In the encryption craze of 2018, big companies led by Tencent, Alibaba, and Xunlei almost all participated in encryption projects. At that time, DePin was particularly popular among big companies. However, due to regulatory reasons, big companies turned around and cut ties after making a small profit, and only made a slight splash in the digital collections in 2021. At present, most of the digital collection platforms of big companies have already announced their withdrawal. Except for Ant's Whale Tan, which is still in operation, Lingxi, a subsidiary of JD.com, and Ai Xunyu, a subsidiary of Baidu, have disappeared. Tencent wisely chose to turn around at the peak, shut down Huanhe, and gradually withdrew from all digital collection businesses of its subsidiaries.
Today, under strict supervision, large companies’ participation in cryptocurrencies has become more circuitous. They either secretly set up overseas institutions to divide their businesses, such as Bilibili’s promotion of NFT overseas, or complete their layout as investors, such as Tencent’s investment in Immutable X and Chainbase. Most of them have taken a different approach and actively become shovel sellers, focusing their business on how to promote cloud services and infrastructure in the crypto field, such as Ant Chain’s new brand ZAN for Hong Kong and overseas markets.
Back to JD.com itself, overall, JD.com's market share in my country's blockchain is relatively limited. However, with its strong retail advantages, it still has a strong market foundation in the direction of traceability and evidence storage. The number of users disclosed by the official website exceeds 3 million, and the data on the chain has reached 1.4 billion. Well-known consumer brands such as Wyeth, Yili, and Nestle are all its blockchain customers. However, in the field of encryption, JD.com is relatively conservative and has not been involved much. In search engines, there is almost no correlation between JD.com and encryption business.
03. Vision: Targeting the most profitable payment business
Because of this, CoinChain’s bold announcement of the launch of a stablecoin under the name of JD.com has undoubtedly caused heated discussions in the market. Is the entry of large companies a sign of the ducks knowing when the water in the river is warm in spring?
This issue needs further investigation, but if we dig deeper into JD Coin Chain, its determination to target the payment business is evident.
Judging from the time of its establishment, the company was only recently established and was officially registered in March this year. Its main businesses cover digital currency payment systems and blockchain infrastructure. The current CEO is Liu Peng, vice president of JD Technology.
Although it was established less than 5 months ago, the company's licenses are quite sound. According to the information disclosed by the Hong Kong SFC, JD CoinChain Technology has obtained the No. 1 and No. 4 licenses for securities trading and the No. 9 license for asset management. From the perspective of licenses, CoinChain has not submitted the No. 7 license and VASP application for the core of virtual asset business, indicating that there is no plan to enter virtual asset trading for the time being, but the coverage of the payment business license still reflects the clear business clarity. Of course, it does not rule out the possibility of being involved in the encryption platform in the future.
Looking at the current CEO, he calls himself "WeChat Pay Co-founder" on LinkedIn and mentions his 8 years of experience in WeChat Pay. He said that as the co-founder and product director of WeChat Pay, he created the WeChat Pay product from scratch and created the phenomenal WeChat red envelope product as a core product personnel. In 2018, he joined Huawei as the head of global mobile payment product operations and director of the aggregation operations department.
Until May 2022, Liu Peng joined JD.com and served as the vice president of JD Logistics Group. In 2023, he began to be responsible for overseas financial technology business and founded JD Coin Chain this year. Overall, the payment experience of No. 1 is also quite rich.
It can be seen that the company was established with the goal of digital currency payment. As for why it chose stablecoin as the entry point instead of a more direct encrypted trading platform, the answer is quite simple - the money-making effect.
The most direct manifestation of crypto business in Hong Kong is virtual asset exchanges, and this field is obviously not optimistic for the time being. Due to strict compliance and supervision, coupled with the small local market, even with a relatively impressive user conversion rate, the number of users is very limited. Hong Kong's local virtual asset exchanges are inevitably facing the dilemma of profitability and survival. The head exchange Hashkey only achieved monthly positive cash flow for the first time since it was licensed in January this year, and OSL was previously sold to Bitget by BC Group, reflecting the difficulty of the current business situation.
As for ETFs, the profits of issuers are also visible to the naked eye. The total transaction volume of Bitcoin and Ethereum ETFs in the two months since they were launched was less than 30 million US dollars, which is only satisfactory. In comparison, the trading volume of the US Ethereum spot ETF on the first day of listing exceeded 1 billion US dollars.
But the situation is quite different in the payment market of stablecoins. Data shows that the quarterly transfer volume of stablecoins has increased seventeen times in the past four years, reaching $4 trillion in the second quarter of this year. On July 17, 2024, the total transaction volume of the entire cryptocurrency market was $94.8 billion, and stablecoins accounted for 91.7% of the market transaction volume, reaching $87 billion. The market is huge.
Taking USDT as an example, the parent company Tether is making a lot of money. By issuing stablecoins at a marginal cost close to zero to obtain risk-free interest rates and investment gains, its net profit in 2023 is as high as US$6.2 billion. The total number of employees in the company is only 100, and it is not an exaggeration to describe the speed at which it makes money as a money printing machine.
In addition, since the business lines are clear and simple, the operation is not as complicated as the securities business involved on the platform side. In other words, the regulatory costs are more controllable and consistent. In this context, as a digital currency payment company, it is reasonable to target the most profitable and easiest to enter stablecoin business.
04. Current situation: Worth a try under the constraints of practical difficulties
Judging from the current situation, JD Coin Chain obviously also intends to imitate, focusing on infrastructure payment, and then expanding its business after gaining the first-mover advantage. However, although the idea is good, the actual implementation is also difficult.
Attracted by the rich cake, many well-known institutions have entered the stablecoin field in recent years, but most of them have failed. The core reason is that the head effect of stablecoins is too prominent. In the stablecoin market, the three major stablecoins occupy 90% of the market share, especially USDT, which almost presents a monopoly. More than 110 billion yuan of the total market value of 160 billion US dollars is USDT. Take Paypal, a world-renowned payment giant, as an example. Although the number of payment users and brand awareness are both at the forefront, the stablecoin PYUSD issued by it in August last year is tepid, with a total issuance of only 349 million US dollars. However, it is already ranked seventh in the stablecoin field.
For JD.com, the environment is even worse. The implicit result of the concentration of the US dollar stablecoin market is the restriction of other fiat stablecoin markets. Compared with the scale of the Hong Kong crypto market, whether the Hong Kong dollar stablecoin can stand out remains to be seen, and local regulation will also hinder JD.com's development in this field.
From the perspective of local regulatory requirements, Hong Kong has made relatively clear regulations on issuers, and the high compliance costs are obvious. Regarding the qualifications of issuers, the Treasury Department requires that only licensed fiat stablecoin issuers, banks, licensed corporations, and licensed virtual asset trading platforms can sell fiat stablecoins in Hong Kong or actively promote related services to the Hong Kong public. For existing stablecoin issuers, the Treasury Department has set up a transitional period arrangement.
In terms of reserves, the HKMA requires issuers to ensure that the fiat stablecoins are 100% backed by high-quality and highly liquid reserve assets. At the same time, the issuer's minimum paid-up capital should be at least 2% of the total amount of fiat stablecoins in circulation, or HK$25 million, whichever is higher. In order to curb the damage of stablecoins to the traditional financial system, Hong Kong stablecoin issuers will also be prohibited from paying interest to users.
Hong Kong did not directly reject the entry of mainstream stablecoins such as USDT and USDC into the market, but emphasized observing whether they can pass Hong Kong's regulatory requirements. Institutions need to establish entities in Hong Kong and obtain license approval. It is worth noting that Hong Kong has not ruled out the possibility of banking institutions applying for stablecoins.
This undoubtedly means that even if it is difficult to obtain the qualification of issuer, the competitive pressure will increase sharply, and the original issuers, licensed exchanges, and even banks can become potential competitors. Even from a short-term perspective, stablecoins have many problems. The issuance threshold is high, there is no direct payment system and storage method to carry stablecoins, and at the accounting level, the determination of company assets is not clear.
But in any case, given the timeliness and singleness faced by the current payment system, there is bound to be market space for the tokenization of fiat currency. Especially for Hong Kong, a region that hopes to become a global virtual asset center, stablecoins are an indispensable infrastructure. Perhaps this is also one of the important reasons why large companies are willing to get involved.
Even a little bit of money is still a bit of money, and JD.com obviously needs this piece of meat. After all, the growth rate of the core e-commerce business of the troika is facing bottlenecks, and logistics is in the optimization period. The exploration of new growth points in digital finance is particularly critical. After the opening of Hong Kong's policies, the huge flow of the virtual asset market has become a profit point within reach. Whether it is for testing the waters or seeking development, JD.com's coin chain has enough reasons to be established. The application scenarios of stablecoins span the B-end and the C-end, and the traditional financial market and the encryption market are all available, not to mention that encrypted cross-border payments are highly compatible with JD.com's own e-commerce retail business, and eventually became JD.com's primary entry into encryption.
Overall, JD.com's involvement still sends a positive signal to the crypto industry, and it is worth looking forward to whether it will attract more large companies to join in the future. But on the other hand, it should be emphasized that according to regulations, although it has entered the sandbox pilot, this is only a small-scale test, which does not mean that JD.com CoinChain is qualified to issue stablecoins. It will have to go through a lot of approvals in the future. At present, CoinChain has not issued any stablecoins in Hong Kong or other jurisdictions, and sandbox participants will not use public funds in the initial stage, so investors should also remain vigilant.