The first batch of licenses for Hong Kong stablecoins may be 5.5 (including regulatory interpretation)

With the official implementation of the Hong Kong stablecoin regulations on August 1, more and more institutions are interpreting the Hong Kong stablecoin, with opinions divided into two main factions: one is the Capital Market and Chinese-funded institutions, which are all seeking Hong Kong stablecoin licenses or related ecological layouts; the other is many institutions that, after dissecting the details and guidelines of the stablecoin regulations, lament that the Hong Kong stablecoin is yet another conservatively unhelpful issuance.

Compliance Requirements

The call for the abolition of stablecoins in Hong Kong is mainly due to very strict compliance requirements. Firstly, licensing is required: all stablecoins issued in Hong Kong and entities promoting stablecoins to the public must be licensed, including USDT and USDC, with a 6-month transition period; otherwise, they must cease operations. Secondly, all users holding fiat stablecoins need to undergo KYC real-name verification, which is quite bank-like. However, for on-chain Web2.5 stablecoins, should the requirements be so strict, or should the ZKP+DID privacy ID model be adopted instead? Thirdly, with such strict compliance, Hong Kong stablecoins are largely unable to integrate into the on-chain DeFi ecosystem.

The first batch may have 5.5 licenses

It is said that over a hundred institutions have inquired and about forty to fifty institutions have applied for stablecoin licenses. However, according to regulatory news, the first batch of licenses is likely to be between 5 to 6. The three in the sandbox are: JD Coin Chain, Yuan Coin (local representative), and Standard Chartered (foreign joint venture), along with Ant Group, which has performed outstandingly in RWA. Then, through a green channel (LD), one license has been reserved for a Chinese institution: CITIC Group (a comprehensive Chinese institution with full licensing in banking, brokerage, etc., as well as overseas assets and investment financing from Charoen Pokphand Group). There is also one that has been applied for normally but has not gone through the green channel, which is Bank of China. Bank of China Hong Kong is the clearing and settlement bank for RMB and offshore RMB, which is typically a must, but since Bank of China did not go through the green channel, it cannot fully guarantee it, so it counts as 0.5 licenses. As for the others, they basically have to wait for the second batch.

Core Guidelines for Stablecoin Regulations

The newly released stablecoin regulatory guidelines specifically refine the previously ambiguous treatment of reserve assets, as follows:

Scope and Composition of Reserve Assets

2.3.1. Appendix 2 of the "Stablecoin Regulations" stipulates in Article 5(5) that reserve assets must be of high quality and high liquidity, and carry minimal investment risk. Reserve assets should be held in the following forms:

(1) Cash;

(2) Bank deposits with a term not exceeding three (3) months;

(3) Debt securities that meet the following descriptions:

A. Represents claims against the government, central bank, public institutions, qualified international organizations, or multilateral development banks;

B. The remaining term does not exceed one (1) year;

C. (1) Credit risk calculated according to the standards of the "Banking ( Capital ) Rules" (Chapter 155L) Articles 55 to 58 may be assigned a 0% risk weight; or (2) denominated in the issuer's local currency, where the issuer is a government or central bank;

Ding. Has high liquidity; and

V. Obligations of financial institutions or related entities that do not belong to public sector banks;

(4) Cash receivables generated by the overnight reverse repurchase agreement, which is secured by the collateral in item (3) and has the lowest counterparty risk;

(5) Invest in the investment funds of (1), (2), (3) and/or (4), which shall be specifically established and used solely for managing the reserve assets of the licensee; and/or

(6) Other asset types recognized by the Monetary Authority.

Collectively referred to as qualified assets.

2.3.2. To avoid doubt, the reserve assets may consist of qualified assets in tokenized form. In this regard, the licensee should demonstrate to the Monetary Authority and ensure that it is satisfied with how the relevant tokenized forms of assets meet the requirements of high quality, high liquidity, and minimum investment risk.

Interpretation of Huaxia Digital Capital: From this guideline, we can see the similarities and differences between Hong Kong stablecoin and US stablecoin:

1. They are all high liquidity assets, but Hong Kong allows the issuance of multi-currency stablecoins, so it does not specify cash and short-term bank deposits of a specific coin. This means that the issuance of USD stablecoins in Hong Kong is USD cash and 3-month USD bank deposits.

2. Public debt with a remaining term of less than 1 year issued by the government, central banks, etc. includes the green bonds issued by the Hong Kong government, offshore RMB government bonds issued by China (Ministry of Finance), and offshore RMB bonds issued by the central bank, but local government bonds such as dim sum bonds do not fall into this category.

3. I won't mention the overnight repo, but that investment fund is quite interesting. It is a liquidity management fund that invests in several asset classes mentioned earlier, such as short-term bond funds. These types of funds have strong liquidity and can respond to liquidity demands. This is a very flexible model.

4, however, it is unfortunate that money market funds were not mentioned, which means that temporary money market funds cannot become reserve assets for the Hong Kong stablecoin. This is unexpected for us, as Hong Kong has a large amount of USD money market funds, HKD money market funds, and RMB money market funds, and there are already some tokenized money market fund assets.

Issuer Requirements

The requirements for issuers of stablecoins and guidelines in Hong Kong mainly include three aspects: sustainability, application scenarios, and anti-money laundering technology and management capabilities.

1. Sustainability:

• Strength, with technical and financial resources, a capital of 25 million HKD or no less than 1% of the issuance amount, reasonable necessary liquid assets, and supporting capabilities;

• The ability and plan for sustainable operation, it cannot just be left there after applying or fail to operate.

2. Scenario:

• Application scenarios should have practical application scenarios.

• Reserve assets must have reserve assets or business scenarios that generate reserve assets.

• Business plan, business model, operational plan, implementation plan

3. Anti-money laundering capabilities (this is actually a strength of exchanges, wallets, and payment companies)

• Meet regulatory requirements, management of reserve assets, redemption, risk management, and anti-money laundering.

• Risk control capability

-Compliance plans and system resources

System Requirements

The regulations and guidelines on stablecoins also significantly mention the requirements surrounding stablecoin-related systems, such as tokens, wallets, private keys, and so on.

Interpretation of Huaxia Digital Capital: Currently, the requirements for stablecoin issuers in Hong Kong are still relatively high. Capital such as funds is not an issue; the key is to have application scenarios and capabilities such as AML.

Especially for offshore RMB stablecoins, it is estimated that non-Chinese institutions cannot do it. The Chinese institutions here refer to central state-owned enterprises and state-owned enterprises based in Hong Kong, particularly those with offshore RMB scenarios, with the core being Bank of China (Hong Kong) as the key clearing and settlement bank. Those proactive internet technology companies are likely to primarily use HKD stablecoins and USD stablecoins, and will not be approved to issue offshore RMB stablecoins.

We also notice that some Chinese listed companies, facing difficulties in seeking stablecoin licenses in Hong Kong, are taking a detour to apply for stablecoin licenses in the United States, or cooperating with exchanges in Abu Dhabi, Dubai, or the EU MiCA to form a well-rounded digital asset industry layout, as well as a comprehensive R-share linkage strategy.