Written by: Bowen, Bailu Living Room

On July 18, 2024, the Hong Kong Monetary Authority (hereinafter referred to as the HKMA) released a list of participants in the Stablecoin Sandbox. JD.com, Yuanbi, and Standard Chartered became official participants. In the future, the three institutions will cooperate with the regulator to test their operation plans and communicate two-way on the proposed regulatory requirements to develop a regulatory system that is fit for purpose and risk-based. At the same time, it was pointed out that the initial stage of the "Sandbox" trial will not involve the use of public funds, nor will it raise funds from the public or provide any related products in the name of the "Sandbox".

The Financial Services and the Treasury Bureau and the HKMA stated that on July 17, the two sides had issued a consultation summary on the legislative proposals for implementing a regulatory system for stablecoin issuers in Hong Kong. They are currently working hard to advance the drafting of the legislation and hope to submit the relevant draft bill to the Legislative Council for deliberation before the end of the year.

Requirements for entering the Sandbox

The HKMA stated that the purpose of setting up the "Sandbox" is to test the business processes of stablecoin issuers and assess how they can conduct stablecoin business in Hong Kong in a compliant and sustainable manner. Therefore, applicants entering the "Sandbox" need to demonstrate detailed and feasible business and "Sandbox" plans.

One of the keys is that applicants need to propose specific application scenarios and explain how their stablecoin business can feasibly solve pain points in economic activities and bring benefits and new opportunities to Hong Kong's economic and financial activities. At the same time, applicants need to explain how their business network, supply chain or major partners can drive long-term demand for the stablecoin to achieve sustainable business development goals. In addition, the applicant needs to specify how to use the "sandbox" to demonstrate a robust and compliant stablecoin issuance, distribution, and redemption process, and explain how its operations comply with regulatory requirements, including stablecoin reserve management and custody, and Management and control measures for credit, liquidity, technology, business operations, anti-money laundering and other risks.

Taking into account the practical needs of the effective operation of the "Sandbox", there are considerable requirements for the "entry" threshold. Only applicants who fully meet the above conditions can "enter the box". Before the completion of legislation and the implementation of the new law, the HKMA will continue to handle inquiries and applications for the "Sandbox".

Whether individual institutions, including existing stablecoin issuers, apply 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. It should be emphasized that entering the "Sandbox" is not a prerequisite for applying for a stablecoin issuer license in the future. Even if participating institutions that have entered the "Sandbox" intend to obtain a license in the future, they must submit a formal application after the regulatory system is implemented.

Application scenarios of stablecoins

The Monetary Authority of Singapore pointed out that the focus of developing digital finance is to introduce emerging technological means to solve and break through the pain points and difficulties in the traditional financial operating model, better serve enterprises and individuals in economic activities, improve efficiency, reduce costs and enhance experience.

The main application scenarios proposed by the first three institutions participating in the "Sandbox" include payment, supply chain management and capital market use cases. Currently, the transfer of funds in these scenarios may involve financial institutions, payment service companies, settlement systems, etc. in different time zones. These "middlemen" or financial infrastructures do not operate 24/7, and are quite expensive and inefficient.

Stablecoins can not only play the role of transaction medium, reduce costs and save transaction time, but also use their programmable characteristics to develop a variety of innovative solutions to automate and intelligentize financial service processes, facilitate the flow of funds, and more accurately manage various risks related to transactions. In addition to the above application scenarios, the "Sandbox" participants also proposed other use cases, including Web3, games, and virtual asset transactions.

Managing Risk and Compliance Measures

All operations and tests of the "Sandbox" will be conducted within a restricted scope and risk-controlled environment. Participating institutions will test the stablecoin issuance process under different application scenarios, and will pay special attention to business operation risks and technological risks.

During the process, the Monetary Authority will observe how participating institutions comply with the proposed regulatory requirements, such as how to ensure that reserve assets are high-quality and highly liquid, whether the redemption of stablecoins is smooth and can be completed within a reasonable time, whether the management of wallets and private keys is robust, and whether measures to protect stablecoin holders and anti-money laundering have been implemented. In addition to complying with the requirements of the "Sandbox" and the laws of Hong Kong, if the application scenario involves cross-border payments, participating institutions must also ensure that the institution itself and overseas partners strictly comply with local applicable laws and regulations during the testing process. Depending on the participants' plans, the progress of the test and the degree of risk control, the HKMA may appropriately adjust the design scenarios and application scope of the "Sandbox" test.

It is reported that since the launch of the "Sandbox" for stablecoin issuers in March, the HKMA has received inquiries from dozens of institutions. Which of the three institutions, JD.com, Yuanbi and Standard Chartered, has the most likely plan to "come out"? Will there be more institutions involved? There are still many uncertainties.

JD CoinChain Technology

JD CoinChain Technology Co., Ltd. was officially registered in March 2024, and its main businesses include 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. He has been deeply involved in the field of financial technology for a long time and has worked for Tencent, Huawei, Ant Financial, JD.com and other companies. Currently, JD CoinChain Technology has obtained the Hong Kong Securities and Futures Commission (SFC)'s Type 1 (Securities Trading), Type 4 (Providing Opinions on Securities) and Type 9 (Asset Management) licenses.

Yuanbi Technology

Yuanbi Innovation Technology has a background in DeFi, digital payment and financial technology. The company develops and operates a variety of DeFi applications, providing users with services including decentralized trading, lending, and yield farming. Yuanbi Technology currently has two major businesses: "Yuanbi Wallet" that supports digital legal currency payments and "Hong Kong Dollar Stablecoin".

The team has traditional financial experience and mainland background. It was founded by former Hong Kong Monetary Authority Chief Executive Norman Chan, who also serves as chairman of the board. The other six directors are ZhongAn Online Chairman Ou Yaping, ZhongAn International President Xu Wei, HashKey Group Chairman Xiao Feng, Dragonfly Capital Managing Partner Feng Bo, and Boqi Environmental Non-Executive Directors Zheng Tuo and Yu Fanyun.

Rita Liu, CEO of Circle Coin, said: "The actual implementation of the Hong Kong dollar stablecoin requires a certain amount of time for regulators and the market to understand each other. We need to communicate more with regulators. In addition, blockchain itself has many advantages, such as its transparency and traceability, which are advantages in combating crime and anti-money laundering, and this is also what regulators are optimistic about."

“Some stablecoin issuers in the industry have a consensus that within five years, the market is likely to reach 3 trillion US dollars. Stablecoins can bring more traditional financial markets into Web3. If Yuanbi Technology can bridge Web2 and Web3 well, it will expand a huge market.”

Standard Chartered Bank

Standard Chartered Bank (Hong Kong) Limited, Animoca Brands Limited and HKT have jointly laid out plans in the field of virtual assets and stablecoins.

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).

Animoca Brands Limited is headquartered in Hong Kong and focuses on blockchain games and digital entertainment. The company's booking revenue in the quarter reached US$90 million, an increase of 72% from 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. Founded in 1925, the company

Regarding this collaboration, Animoca Brands said: “HKT will work to explore how stablecoin innovation can support local and cross-border payments through the sandbox, bringing greater benefits to consumers and merchants; Standard Chartered Bank (Hong Kong) will actively participate in the Stablecoin Issuer Sandbox to explore how to most effectively support the thriving Hong Kong digital asset ecosystem and gain a deeper understanding of the opportunities and risks brought by the evolution of the stablecoin market to this ecosystem; and Animoca Brands is committed to promoting the popularization and application of digital assets and applying blockchain-related technology solutions to physical assets and the traditional economy.”

Unlike central bank digital currencies such as the digital Hong Kong dollar, stablecoins are oriented to financial institutions in various countries and are one of the important tools for private financial activities. Hong Kong focuses on the issuance of stablecoins and gradually establishes a comprehensive regulatory framework, which will be a crucial step in the development of Hong Kong's financial infrastructure with virtual assets as the core; but on the other hand, Hong Kong's current regulatory framework is extremely strict and costly, which is a great challenge for institutions to implement it. Whether this stablecoin "sandbox" can ensure the implementation of stablecoin solutions while being as "institutionally friendly" as possible to complete the market promotion is also another focus that needs attention.