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 open 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 already try and discover 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 steadily advancing as planned, and Hong Kong citizens are gradually accepting Web3 in a subtle way. However, from the perspective of practitioners, Overall, the development of Web3 in Hong Kong has also gone from running forward relatively boldly at the beginning to being more cautious at present.
At the moment when the Hong Kong government's Web3 policy is increasingly tightened and foreign capital is withdrawing, the top priority for these Web3 companies that are developing in compliance in Hong Kong is actually how to gain a foothold in Hong Kong and then 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 sandboxes: JD CoinChain Technology (Hong Kong) Co., Ltd.; Yuanbi Innovation Technology Co., Ltd.; and Standard Chartered Bank (Hong Kong) Co., Ltd., Anmi Group Co., Ltd., and Hong Kong Telecommunications (HKT) Limited.
When Hong Kong consulted the public on the regulatory system for Hong Kong dollar stablecoin issuers, 108 institutions submitted opinions. HKMA Deputy Director Chen Weimin wrote that the HKMA received inquiries from ten institutions, some institutions with better preparations formally submitted applications, and finally approved three. He said that whether 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 specific use cases under supervision.
Stablecoin is definitely a global business, and the current market has basically been divided up by US dollar stablecoins, with USDT being the only one. How much of the pie can the Hong Kong dollar stablecoin share 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 make payments and settlements 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 depends on how each Hong Kong dollar stablecoin itself opens up the market in the crypto world. Hong Kong dollar stablecoins are widely used in Web3, which can improve the status of Hong Kong dollar in the international financial market.
Chen Weimin also said that the regulatory system for stablecoin issuers will be implemented in Hong Kong, and the drafting of laws will be fully promoted, and the relevant bill will be submitted 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. Just moving the exchange of legal tender between countries to the blockchain has a huge market. From this perspective, the imagination of legal tender stablecoins is large enough.
Globalization has become the development focus of Hong Kong's compliant exchanges
It is not easy to make money in Hong Kong's compliant exchanges.
One week this year, the institutional client business of a certain exchange in Hong Kong only made a profit of more than 100 US dollars. And this profit includes the revenue of all services provided to institutional clients, including handling fees, custody fees, etc.
Market insiders close to this exchange told Golden Finance reporters that most institutional clients are reluctant to use compliant exchanges. 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 aimed at 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.
Based 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, it was reported that OSL, a licensed exchange in Hong Kong, sought 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 is smart just to obtain a Hong Kong compliance license. Hong Kong is very strict about the application of licenses for crypto-native exchanges, and most of the native exchanges in the currency circle are difficult to obtain approval. At the end of May, near the second licensing date, traditional crypto-native exchanges such as OKX, Huobi and other exchanges announced their withdrawal from the Hong Kong market before the second license was announced. It is rumored 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 issued licenses by the Hong Kong government in June, it can be found that these institutions are local institutions and companies with resources in mainland China, with traditional financial backgrounds.
No matter what the reason is for the traditional currency circle exchanges to withdraw from the Hong Kong market, the result presented is that Hong Kong does not welcome traditional currency circle institutions. The Web3 market in Hong Kong is more like a game of traditional finance. What Hong Kong hopes 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, OSL's core business is not retail trading. They put more energy on institutional business. For example, on September 12, 2023, OSL also announced a strategic cooperation with Harvest Global Asset Management Co., Ltd. in security tokens (STO), and reached liquidity cooperation with several exchanges. In the spot ETF of virtual currency, it became the custodian of Harvest Global and China Asset Management.
Like Hashkey Exchange, OSL also focused on the expansion of the global market this year. At the beginning of 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.
Not only exchanges, virtual banks are not easy to make 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. Eight virtual banks in Hong Kong, including Ant and Star, are also losing money.
Exchanges and virtual banks will face similar difficulties in their business in Hong Kong. For institutions, it is roughly how to market and promote new things to seize the market. Hong Kong's local market 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.
And these difficulties are more due to the withdrawal of foreign capital in Hong Kong. When money becomes less, twice the result with half the effort. For Hong Kong institutions, what they need to do together now is to look for more opportunities outside.
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 is overseas.
Virtual currency spot ETFs have high fees and complicated redemption processes, which discourage users
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.
During 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 when the subscription was first made, it was actually these ETF issuers who found big customers and asked them to buy ETFs in the form of resource exchange, so the volume on the first day of subscription was large.
The subsequent trading volume is the real volume of ETFs in Hong Kong. The volume of independent funds in Hong Kong 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 globally competitive market, and capital will choose the products with the lowest cost, highest efficiency and the safest.
In comparison, Hong Kong's virtual currency spot ETFs are actually not competitive. The compliance cost in Hong Kong is relatively high. The above-mentioned market personage told the reporter that time is very tight and everyone is rushing to launch. For example, in terms of custodian, China Asset Management and Harvest Asset Management have both signed agreements with OSL. For example, two issuers of virtual currency spot ETFs have chosen OSL as the custodian, and the custody fee is very high.
This undoubtedly raises the cost of spot ETFs. Comparing the Bitcoin spot ETFs in Hong Kong and the United States, it is found that in the United States, except for the ETFs issued by Grayscale and Hashdex, the rest of the fees are between 0.2% and 0.49%. The fee rate of China Asset Management is 1.99%, the fee rate of Harvest Asset Management 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 Shengli Securities as an example. This is the only securities company that can realize the currency in and out. Users still need to use emails and calls to apply for redemption.
All of the above problems need to be further optimized by the issuers.
An obvious and more fundamental problem is that the issuers of virtual currency spot ETFs in Hong Kong still use the traditional financial thinking mode to make virtual currency spot ETFs, competing for marketing and channels, rather than working hard to improve product quality.
Some practices of China Asset Management can prove this point. Comparing 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 about discussing the development of the BTC ecosystem, the marketing staff of China Asset Management 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 made by China Asset Management in marketing and the market.
For Hong Kong's virtual currency spot ETFs, the next step is to reduce handling fees and simplify the subscription 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.
JinseFinance
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