Hong Kong's stablecoin launches on 8/1: Hong Kong stock concept stocks surge, Monetary Authority urgently warns "Beware of bubble formation"

The wind of stablecoins continues to blow. On one hand, the U.S. "GENIUS Act" has been signed into law by Trump, and on the other hand, the issuance countdown for stablecoins in Hong Kong has begun. On the approaching August 1st, the Hong Kong "Stablecoin Regulation" will officially take effect. Compared to the massive waves stirred by stablecoins in the U.S. crypto world, the ripples in Hong Kong’s crypto domain may seem minor, but in the stock market, they have shown an unusually remarkable influence. Since the stablecoin draft in Hong Kong was approved, the stablecoin zone in the Hong Kong stock market has surged, with many instances of doubling in value, and even some stocks skyrocketing up to 10 times, much to the delight of investors and the joy of listed companies welcoming capital increase. While this situation seems to bring joy to many, regulatory authorities in Hong Kong have new concerns. Recently, the President of the Hong Kong Monetary Authority, Eddie Yu, wrote an article on the official website titled "Stablecoins for Long-Term Stability," aiming to cool down the rapidly rising stablecoin market. However, facing the boiling kettle that is sizzling, it is somewhat difficult to lower the temperature.

1. The "rush" of stablecoins in Hong Kong and market enthusiasm

On May 21, the stablecoin bill in Hong Kong was passed by the Legislative Council in its third reading. At that time, since the U.S. stablecoin bill was still under review in the Senate, Hong Kong's "first-mover" action sparked heated discussions in the market. In fact, in terms of content, the licensing system, 100% full reserves, HKD 25 million paid-in capital, anti-money laundering regulations, etc., are no different from the legislation in other mainstream regions.

On one hand, due to the waning influence of Hong Kong in the encryption field, coupled with numerous high-profile yet ineffective rush operations, the crypto market generally holds a relatively pessimistic view. It believes that even if Hong Kong continues to solidify its regulatory foundation and improve regulatory provisions, under limited market demand, it will ultimately just be another subsidiary of the US dollar stablecoin, and the residual warmth of its window is already sufficient.

Despite the fact that the crypto world is not well-received, this news is a great boon in other markets. After the regulation was passed, major companies with keen senses rushed to lay out their strategies, and traditional media and brokerages competed to report, allowing stablecoins to achieve a true breakout. For a time, discussions about the connotations, use cases, and value significance of stablecoins continued to ferment, gradually extending to the debate on the necessity of a Renminbi stablecoin. This trillion market of stablecoins seems to be on the eve of an explosion.

2. The Monetary Authority pours "cold water": Beware of excessive speculation and bubble formation

This Friday, the stablecoin regulations in Hong Kong will officially take effect, and the application for licenses will be opened simultaneously. However, just a week before the implementation, the President of the Hong Kong Monetary Authority, Yu Wai-man, poured cold water on stablecoins. In his article "Stablecoins for Steady and Sustainable Growth," he explicitly mentioned that stablecoins are being over-conceptualized and are showing signs of a bubble.

Yu Weiwen pointed out that in the initial stage, at most only a few stablecoin licenses will be issued, and he hopes that investors will remain calm and think independently while digesting the positive news in the market. He emphasized that many institutions are still in the conceptual stage, such as proposing to improve cross-border payment efficiency, support the development of Web 3.0, and enhance the efficiency of the foreign exchange market, not to mention their awareness and ability to manage risks. Some institutions that can provide application scenarios lack the technology to issue stablecoins and the experience and capability to manage various financial risks. For such institutions, a more pragmatic approach seems to be collaborating with other stablecoin issuers to provide application scenarios, rather than pursuing becoming an issuer.

At the same time, the Monetary Authority will implement regulatory measures and solicit market opinions on two guidelines related to regulation and anti-money laundering. Stricter requirements will be established for anti-money laundering to minimize the risk of stablecoins becoming tools for money laundering. Hong Kong regulatory authorities have noticed that recent scams have emerged promoting digital assets and stablecoins, resulting in public losses. The "Stablecoin Regulation" took effect on August 1, and according to the provisions of the regulation, promoting any unlicensed stablecoins to the public in Hong Kong is considered illegal.

From the above remarks, it can be seen that Hong Kong has expressed concerns about the current state of the market and has taken a very cautious attitude towards the approval of stablecoin issuer licenses. As for why regulatory authorities are writing to cool the market down, the reason is quite simple: stablecoins in Hong Kong have indeed become somewhat overheated.

3. The "Carnival" of Hong Kong Stocks: The Surge of Concept Stocks and the Financing Wave

This overheating is concentrated in the stock market. The bright scenery corresponds to a very early stage of development, making stablecoins quite a beautiful capital story. Under this story, almost all stocks associated with stablecoins have experienced a rapid rise, with growth effects almost immediate.

Guotai Junan International was approved for a securities trading license in June, becoming the first Chinese brokerage to provide a full-chain service for virtual assets. On June 25, it surged by 198%, with an annual increase of 4.58 times.

On July 7, Jinyong Investment announced that the company has signed a strategic cooperation framework memorandum with AnchorX to explore potential cooperation in four areas, including cross-border payment and trade, stablecoin application scenarios, etc. The next day, Jinyong Investment surged by 533.17%.

On July 15, China SanSan Media announced that the company has begun preparations to apply for a stablecoin license. On July 16, China SanSan Media's stock surged 72.73% at closing, with an accumulated increase of 14.95 times this year.

Just a single piece of news can lead to a straight-line pump, which shows the strong narrative effect of stablecoins. Besides the new institutions added to the zone mentioned above, the existing established concept stocks have also taken off collectively. Companies like OK Cloud Chain, Yunfeng Financial, Yixin Group, New Fire Technology Holdings, and OSL Group have all seen cumulative increases of over 100% this year. Even the long-criticized A-shares have been shaken, with several RMB concept stocks such as Hengbao Co., Ltd., Sifang Jingchuang, and Chutianlong also experiencing multiple increases.

In this context, whether it is the "chameleon" companies that ride the wave of capital effects, financial institutions that genuinely want to participate in the stablecoin market, or strategic giants aiming to reduce settlement costs and build a corporate moat, all are rushing in. As of now, according to Caixin reports, there are already fifty or sixty companies intending to apply for stablecoin licenses in Hong Kong, including state-owned enterprises and financial institutions from mainland China, as well as internet giants.

IV. The Rigor of License Approval and Future Prospects

However, the enthusiasm for applications does not translate to enthusiasm for approvals. The Hong Kong Monetary Authority stated that among the applying institutions, most are only at the conceptual stage and lack practical application scenarios. Those with application scenarios, however, lack the technology to issue stablecoins and the experience and ability to manage various financial risks. Issuing merely for the sake of issuing is clearly not what Hong Kong is willing to see, and it is in this context that the Hong Kong Monetary Authority indicated that only a single-digit number of licenses would be granted in the initial phase.

At the same time, in response to the overheated licensing applications, the Hong Kong Monetary Authority also intends to adopt a preliminary screening mechanism. Caixin quoted sources as saying that the licenses for stablecoin issuers will not be issued through a method where applicants download forms and submit written applications uniformly, but rather will be arranged in a manner similar to an invitation application system. In practical terms, the Hong Kong Monetary Authority, responsible for regulating licenses, will communicate in advance with interested stablecoin license applicants to understand whether they meet the basic application qualifications. Only after obtaining basic approval in the preliminary communication will the Monetary Authority issue the application forms.

As for who will obtain the license? From the market's public opinion, it seems that the issuers who have shown intention to participate in the stablecoin sandbox pilot have a greater chance of success. As early as July of last year, the Hong Kong Monetary Authority launched the stablecoin sandbox testing, and institutions such as JD Coin Chain Technology, Yuan Coin Innovation Technology, and the Standard Chartered consortium (which includes Standard Chartered, ANZ Group, and Hong Kong Telecom) were selected. Now, the sandbox testing has entered its second phase. Although the Monetary Authority emphasizes that being selected for the sandbox does not mean a license will be granted, sandbox enterprises still need to apply for a license according to regulations. However, given the application scenarios and risk control foundation tested in the sandbox, participants clearly have more insights on how to meet regulatory requirements.

Overall, Hong Kong mainly focuses on three aspects in the license application: first, the technical implementation capability, whether it meets the issuance technical requirements; second, the demand for application scenarios, which requires actual solutions and implementation scenarios; third, risk control capability, especially to prevent the money laundering risks of stablecoins. Objectively speaking, there are already large enterprises with a broad foundation in cross-border finance and payment business, and a complete risk control system, which have advantages, while the success rate of applications from small and medium-sized enterprises can be considered quite bleak, playing more of a supporting role.

Banks Compete to Serve as Custodian Banks: According to the "21st Century Business Herald", some institutions intending to apply for licenses have confirmed custodian banks: Zhong An Bank and Deutsche Bank have been selected by institutions; Standard Chartered Bank and Tianxing Bank are also potential custodian banks; HSBC has recently launched new virtual asset-related services; in addition, Chinese-funded banks in Hong Kong are also actively deploying, with China Merchants Bank's China Merchants Yonglong Bank increasing its promotion of stablecoin custody services. Banks can expand their distribution and trading businesses by serving as custodian banks, further enriching their sources of income. For the Hong Kong banking industry, in a low-interest-rate environment, custody business is an ideal light-asset business.

Industry insiders estimate that the average level of custody fees in the industry is between 0.1% and 0.5%. Taking Circle, known as the "first stock of stablecoins," as an example, it needs to pay hundreds of millions of dollars in custody fees to the custodian each year. Despite the broad prospects of the custody business, regulation is becoming increasingly tight. The Hong Kong Financial Services and the Treasury Bureau and the Securities and Futures Commission have initiated a joint public consultation on legislative proposals for licensing systems for digital asset trading and custody service providers, aiming to strengthen the regulation of crypto asset custody operations, and streamline the relevant licenses into several types such as VATP, VAOTC, and VA Custody.

Applications and Potential of Stablecoins: Yuan Coin Technology is one of the participating institutions in the sandbox for stablecoin issuers by the Monetary Authority, intending to issue a Hong Kong dollar stablecoin HKDR on the Ethereum public chain. CEO Liu Yu stated in a newspaper interview that the planned stablecoin primarily has three application scenarios, namely digital asset trading, cross-border trade, and asset tokenization. She anticipates that within the next 3 to 5 years, the presence of stablecoins in corporate and personal accounts will become the norm. Liu Yu believes that there are vast opportunities in the cross-border trade application scenario.

Many traders in Hong Kong have attempted to use stablecoins for cross-border settlements in various regions around the world. With the compliant stablecoin in Hong Kong, it is believed that more traditional enterprises will be more willing to use stablecoins for cross-border payments and settlements. She cited real cases showing that with stablecoins for cross-border payments, the time required in certain regions has reduced from the original 5 to 7 days to just 1 day; costs have dropped from 3% to 6% down to 1%. The company's original round coin wallet will start operating at the end of 2023, which can be used for B2B payments, with customers mainly being traders, creating a synergistic effect with cross-border trade application scenarios. Liu Yu stated that this market is a "blue ocean," with Hong Kong's B2B payment volume reaching trillions, having the potential to convert into stablecoins. Once the licenses are issued, there will be no lack of demand.

In addition, there may be a future demand for trading financial products using stablecoins, which will facilitate asset tokenization application scenarios. Liu Yu explained that if one aims to pursue low-risk assets, one can use stablecoins to buy tokenized funds, allowing for quick settlements and the ability to trade around the clock. However, the existing tokenized funds in Hong Kong have not yet reached this advantage. Since there are currently no compliant stablecoins in Hong Kong, "asset and fund onboarding must actually proceed simultaneously in order to achieve the efficiency of blockchain. When licensed stablecoins are available, the entire market will unlock." Liu Yu also pointed out that last year, the settlement scale of stablecoins reached over 20 trillion USD, a significant portion of which was still digital asset trading.

Although fiat currency can be used to buy and sell virtual assets, stablecoins operate on-chain around the clock, unaffected by the time constraints of traditional financial systems. Currently, there are 11 licensed platforms in Hong Kong. Liu Yu stated that stablecoins are part of the underlying infrastructure and require circulation, and they also hope to launch on other licensed exchanges.

Liu Yu revealed that he hopes to explore the issuance of other stablecoins in collaboration with regulators, such as the increasing trade along the "Belt and Road" that is priced in RMB. If merchants can receive payments directly in RMB, it would be more efficient and they wouldn't have to bear exchange rate risks, but this must be done with regulatory approval. When discussing the business model, Liu Yu explained that the main income comes from the interest generated by the underlying assets of the total amount of stablecoins. This model is affected by interest rate cycles; however, even if interest rates may decrease in the future, the industry's potential remains very large.

She candidly admitted that there is no specific timeline for profit targets, describing it as something that "requires long-term cultivation," as it is necessary to establish a new financial and payment system based on blockchain. However, it does not take several decades to form a new system, and she firmly believes that Hong Kong has a very good development foundation.

Conclusion:

Overall, with the "Stablecoin Regulation" officially coming into effect on August 1, the stablecoin market in Hong Kong will usher in a new pattern. Despite the Monetary Authority's call for cooling, the market's FOMO is unlikely to diminish anytime soon. First, there is a certain correlation between the development of stablecoins in the United States and Hong Kong. After the passage of the Genius Act, the enthusiasm for stablecoins in the U.S. remains strong, with Circle continuously hitting new highs, and large institutions expressing high interest. Coupled with the positive sentiment in the crypto market and the anticipated interest rate cuts, U.S. stablecoins will continue to experience a persistent narrative, which has a transmission effect. Second, discussions about stablecoins in Hong Kong continue to extend.

Initially, the market only discussed the HKD stablecoin itself, but now more discussions are focusing on the necessity of an offshore RMB stablecoin. National think tanks such as the National Financial Development Research Institute, local governments like the Shanghai State-owned Assets Supervision and Administration Commission, major securities consulting firms, and social organizations have begun to pay attention to this topic. From the existing perspectives, many believe that offshore RMB stablecoins should be piloted in the Hong Kong market, and once conditions are ripe, exploration should be conducted in the domestic offshore market represented by the free trade zone. Before this, the reason for the slow development of Web3 in Hong Kong was due to blocked channels. If the offshore RMB stablecoin is feasible, it will not only provide more imaginative space in this field but also promote the development of the industry itself. In the long run, it will also have a profound impact on the existing financial system.

More importantly, for participants, stablecoins represent a potentially profitable market and are gradually forming a complete industrial chain. From the issuer's perspective, for retail issuers, stablecoins can significantly reduce transaction settlement costs and enhance competitiveness; for payment issuers, there is ambition to penetrate the digital asset market from the medium and move towards global financial infrastructure; even if it's merely to enhance stock prices and obtain capital narratives, there is still motivation for some participants to engage. In recent times, as the concept has gained popularity, more than 5 groups, including ZhongAn Online, Fourth Paradigm, Jiami Technology, and Yisou Technology, have announced substantial equity financing plans. The OSL group allocated over 101 million shares at a placement price of 14.9 HKD per share, with the financing plan nearing 2.4 billion HKD. Beyond issuance, major platforms for monetizing traffic through virtual asset trading and bank-based custodians are actively positioning themselves, planning to capture industry dividends through expansion.

Based on the above factors, the speculation around stablecoins will continue in the short term, and licenses, as a cornerstone in this regulated competition, will see heated competition surrounding them. However, it is worth noting that as an industry in its early development, the scope of influence of licenses, the strength of their impact, and even the feasibility of business needs all require further examination. Considering the hard threshold of HKD 25 million and the potential ongoing compliance costs exceeding one million annually, applying for a license without strong business model support could be counterproductive. As noted in the Hong Kong Monetary Authority's article, those who achieve stability and long-term success are ultimately in the minority, while many enterprises that are merely chasing trends may inevitably revert to their original state after undergoing the scrutiny of licensing. Therefore, investors closely watching stocks may need to be more cautious.