Author: Jessy, Golden Finance
Since the release of the "Policy Declaration on the Development of Virtual Assets in Hong Kong" in November 2022, compliant Web3 that meets the requirements of the Hong Kong government has been developed for a year and a half.
During this year and a half, compliant exchanges have been opened to retail investors, spot ETFs for Bitcoin and Ethereum have been approved for launch, and some crypto-native projects have chosen to set up branches in Hong Kong. On July 18, the Hong Kong government officially announced the list of institutions that have entered the Hong Kong dollar stablecoin regulatory sandbox. These institutions can now try to issue Hong Kong dollar stablecoins first.
More subtle changes have been integrated into the daily lives of residents. Retail investors can participate in compliant investments in Bitcoin and Ethereum by entering securities companies on the street. More top Web3 activities are blooming everywhere, and knowledge about blockchain has been written into elementary school textbooks...
The development of the Web3 industry in Hong Kong is being steadily promoted as planned, and Hong Kong citizens are gradually accepting Web3. However, from the perspective of practitioners, overall, the development of Web3 in Hong Kong has also gone from being relatively aggressive at the beginning to being more cautious at present.
As the Hong Kong government tightens its Web3 policies and foreign capital withdraws, the top priority for Web3 companies that develop in compliance with regulations in Hong Kong is how to gain a foothold in Hong Kong and open up a larger market.
Can the Hong Kong dollar stablecoin improve the status of the Hong Kong dollar in the international financial market?
The Hong Kong dollar stablecoin is the highlight of the Hong Kong government's bet on Web3 development this year. In March this year, the Hong Kong government issued a notice approving institutions that want to issue Hong Kong dollar stablecoins to start applying to enter the sandbox. Four months later, on July 18, Hong Kong announced the first batch of sandbox companies: JD CoinChain Technology (Hong Kong) Co., Ltd.; Yuancoin Innovation Technology Co., Ltd.; Standard Chartered Bank (Hong Kong) Co., Ltd., Anmi Group Co., Ltd., and Hong Kong Telecommunications (HKT) Limited.
When the public was consulted on the regulatory regime for issuers of Hong Kong dollar stablecoins, 108 institutions submitted their opinions. Chen Weimin, deputy director of the HKMA, said in a statement that the HKMA had received inquiries from ten institutions, some of which were more prepared and formally submitted applications, and three were finally approved. He said that whether or not to be approved to enter the "sandbox" depends on many factors, such as the issuer's business plan after the implementation of the law, whether there is a need to test the stablecoin issuance process at this stage and within a limited scope, etc.
Yuanbi Technology, which was selected to enter the sandbox, submitted its application as soon as the notice was issued. Entering the sandbox means that it can launch the Hong Kong dollar stablecoin and launch specific use cases under supervision.
Stablecoins are definitely a global business, and the current market has been basically divided up by US dollar stablecoins, with USDT being the only one in the market. How much of the pie can Hong Kong dollar stablecoins get in the current environment where stablecoins anchored to the US dollar occupy an absolute market share? For issuers of Hong Kong dollar stablecoins, it is also difficult to give a definite answer.
Rita Liu, CEO of Yuanbi Technology, said in an interview with Golden Finance that the current stablecoin market is a process of making the pie bigger, rather than competing for the market in a red ocean. After the Hong Kong dollar stablecoin is launched, they will spend more energy to cooperate with global compliant exchanges, institutional market makers, etc., or cooperate with traditional corporate merchants to do payment settlement in cross-border trade, so that the Hong Kong dollar stablecoin has more use cases.
It can be seen from this that although the Hong Kong dollar stablecoin is anchored to the Hong Kong dollar, its actual influence does not entirely depend on the status of the Hong Kong dollar in the international financial market, but on how each Hong Kong dollar stablecoin opens up the market in the crypto world. The Hong Kong dollar stablecoin is widely used in Web3, which can improve the status of the Hong Kong dollar in the international financial market.
Chen Weimin also stated that he would implement a stablecoin issuer regulatory system in Hong Kong, fully advance the drafting of the law, and strive to submit the relevant draft bill to the Legislative Council for deliberation before the end of the year.
Sandbox - legislation - licensing, the Hong Kong dollar stablecoin is being implemented step by step. The core role of the Hong Kong dollar stablecoin is to be a link that seamlessly grafts traditional finance into the blockchain world. There is a huge market just for moving the exchange of legal currencies between countries to the blockchain. From this perspective, the imagination of legal currency stablecoins is large enough.
Globalization becomes the focus of Hong Kong's compliant exchanges
It is not easy to make money working in a compliant exchange in Hong Kong.
In one week this year, the profit of institutional client business of a certain exchange in Hong Kong was only over 100 US dollars. This profit includes the revenue of all services provided to institutional clients, including handling fees, custody fees, etc.
Market insiders close to the exchange told Golden Finance that institutional clients are mostly reluctant to use compliant exchanges, as they are more accustomed to over-the-counter transactions. One of the main reasons is that the money of institutional clients is not clean.
There are only more than 7 million local residents in Hong Kong. For a licensed exchange in Hong Kong, the ceiling for converting users is very low. Take Hashkey Exchange as an example. In the nearly one year since the launch of retail trading, Hashkey Exchange Hong Kong Station has accumulated nearly 100,000 users. The Hashkey Exchange International Station, which was launched in April this year, has accumulated nearly 100,000 users in just one month.
It is reported that Hashkey Global obtained a compliance license in Bermuda. Currently, it is mainly targeting the Asia-Pacific and Southeast Asian regions. Japan, South Korea and Taiwan are all key markets for Hashkey Global. The focus of Hashkey Group's exchange business has shifted to Hashkey Global.
Establishing a foothold in Hong Kong and then expanding globally may be the only way out for Hong Kong's compliant exchanges. It is difficult to obtain a license and make a profit in Hong Kong.
At the beginning of 2023, news came out that Hong Kong licensed exchange OSL was seeking an acquisition for HK$1 billion. Half a year later, it finally got its wish, and Bitget's parent company invested HK$700 million.
At that time, it would cost tens of millions of Hong Kong dollars to apply for a license, and Bitget undoubtedly spent a lot of money.
But now it seems that Bitget was smart just to obtain a Hong Kong compliance license. Hong Kong is very strict about the application for licenses of crypto-native exchanges, and most cryptocurrency-native exchanges have difficulty in obtaining approval. At the end of May, before the second license issuance date was approaching, traditional crypto-native exchanges such as OKX and Huobi announced their withdrawal from the Hong Kong market before the second license was announced. It is said that if they want to obtain a license in Hong Kong, they need to sign a letter of commitment to guarantee the withdrawal of mainland users.
Summarizing the second batch of 11 institutions that were announced by the Hong Kong government in June to be licensed, it can be found that these institutions are local institutions and companies with resources in mainland China, with traditional financial backgrounds.
Regardless of the reasons why traditional cryptocurrency exchanges withdrew from the Hong Kong market, the result is that Hong Kong does not welcome traditional cryptocurrency institutions. Hong Kong's Web3 market is more like a game of traditional finance. What Hong Kong hopes to do is to use Web3 to complete the transformation of traditional finance, or to use Web3 to empower traditional industries.
However, it is not easy for traditional finance to transform into Web3 or for native Web3 to gain a foothold in Hong Kong.
Looking at OSL again, BC Technology, which is backed by it, has been in a loss-making state for several consecutive years. The actual controlling shareholder of BC Technology is Gao Zhenshun, the "shell king" of Hong Kong stocks. Unlike Hashkey, the trading business for retail investors is not the core business of OSL. They put more energy on the business of institutions. For example, on September 12, 2023, OSL also announced a strategic cooperation with Harvest Global Asset Management Co., Ltd. in the field of security tokens (STO), and reached liquidity cooperation with many exchanges. In the spot ETF of virtual currency, it has become the custodian of Harvest Global and China Asset Management.
Like Hashkey Exchange, OSL has also focused on global market expansion this year. Earlier this year, the company announced the launch of its 2024 globalization strategy. Moreover, since last year, OSL has begun to actively deploy overseas licenses, such as submitting a license application to Singapore.
It is not just exchanges, virtual banks are also having trouble making money. In 2023, ZA Bank had a net loss of HK$399 million, but the net loss narrowed by 20% from the previous year. It is not just ZA Bank that is losing money, including Ant, Star and other 8 virtual banks in Hong Kong are also in the red.
Exchanges and virtual banks will face similar difficulties when operating in Hong Kong. For institutions, it is generally about how to market and promote new things to seize the market. The local market in Hong Kong is very limited. How to make good use of Hong Kong's position as an international financial center to bridge domestic and foreign capital is also an important consideration for these institutions.
The main reason for these difficulties is the withdrawal of foreign capital from Hong Kong. When money is less, you get half the result with twice the effort. For Hong Kong institutions, what they need to do together is to look for more opportunities abroad.
The two earliest licensed exchanges in Hong Kong will focus on the global market this year. For exchanges, Hong Kong can only be a compliance base. The broader world lies overseas.
Cryptocurrency spot ETFs have high fees and complicated subscription and redemption processes, which discourages users from investing.
Another important measure taken by the Hong Kong government this year is the launch of virtual currency spot ETFs. Hong Kong's Bitcoin and Ethereum spot ETFs have been online for two months. According to SoSo Value data, as of July 5, the total trading volume of the six spot ETFs exceeded US$26 million.
In the new subscription stage, Hong Kong ETFs have achieved remarkable results. According to SoSo Value data, the scale of the first-day subscription of the three Bitcoin ETFs was US$248 million, while the total net value of the US Bitcoin spot ETF products, excluding Grayscale (GBTC), which was converted from a trust to an ETF, was only US$130 million on the first day.
A market insider close to several major ETF issuers in Hong Kong told Golden Finance that the reason for the huge difference between the volume in the subscription stage and the actual transaction volume is that during the initial subscription, these ETF issuers actually found big customers and allowed them to purchase ETFs in the form of resource swaps, so the volume on the first day of subscription was large.
The subsequent trading volume is the real ETF volume in Hong Kong. Hong Kong's independent capital volume is relatively small, with a population of more than 7 million, and the current volume of Hong Kong stocks is only 3.2 billion Hong Kong dollars. The reason why fund companies all buy US ETFs is also very simple. Virtual currency spot ETFs are a global competitive market, and capital will choose the lowest cost, most efficient and safest products.
In comparison, Hong Kong's virtual currency spot ETF is actually not competitive. Hong Kong's compliance costs are high. The above-mentioned market insider told reporters that time is very tight and everyone is rushing to launch. For example, in terms of custodian banks, Huaxia and Harvest have both signed agreements with OSL. For example, there are two issuers of virtual currency spot ETFs, both of whom chose OSL as the custodian, and the custody fee is very high.
This undoubtedly raises the cost of spot ETFs. Comparing Bitcoin spot ETFs in Hong Kong and the United States, we find that in the United States, except for ETFs issued by Grayscale and Hashdex, the fees of other ETFs range from 0.2% to 0.49%. The fee rate of Huaxia is 1.99%, the fee rate of Harvest is 1%, and the fee rate of Bosera is 0.85%, which are all higher than those in the United States.
In terms of user experience, the current virtual currency spot ETFs in Hong Kong are not doing well. Take Victory Securities as an example. This is the only securities company that can realize the currency in and out policy. Users still need to use email and phone to apply for redemption.
All of the above issues require further optimization by publishers.
An obvious and more fundamental problem is that the issuers of virtual currency spot ETFs in Hong Kong still use the traditional financial mindset to develop virtual currency spot ETFs, competing on marketing and channels rather than working hard to improve product quality.
Some practices of China Asset Management can prove this point. Compared with the virtual currency spot ETF products of the three funds, China Asset Management has the largest trading volume. Its ability to achieve the largest trading volume has a lot to do with channels and marketing. For example, at the Bitcoin Asia conference held in early May this year, which was mainly to discuss the development of the BTC ecosystem, China Asset Management's marketing staff also stood on the main stage of the venue to introduce the situation of China Asset Management's spot ETF and set up a booth at the conference. This is enough to see the efforts China Asset Management has made in marketing and the market.
For Hong Kong's virtual currency spot ETF, the next thing to do is to reduce handling fees and simplify the application and redemption process so as to gain a place in the global competition.
Whether it is a virtual currency exchange, a virtual currency spot ETF, or a Hong Kong dollar stablecoin, what they are facing is not just the Hong Kong market, but how to expand to the world and participate in the global Web3 competition after obtaining compliance in Hong Kong.
