Conversation with OSL’s Hu Zhenbang: RWA is a frontier field of Web3, and the probability of stable Hong Kong dollar is not high

Source: Jiemian News

In 2019, the Hong Kong-listed company “Brand China” chose to rename itself “BC Technology” and fully enter the digital asset and blockchain fields. On December 15, 2020, OSL, the digital asset trading platform under the BC Technology Group, obtained the first and seventh category licenses under the supervision framework of the Hong Kong Securities and Futures Commission. OSL became the first digital asset trading platform of a listed parent company, licensed in Hong Kong, with asset insurance coverage, and audited by the four major accounting firms. After the Hong Kong virtual asset new policy officially landed on June 1, 2022, OSL also became one of the first cryptocurrency platforms to apply for virtual asset retail trading business. For a long time, OSL was the only licensed and listed digital asset trading platform in Hong Kong. Benefiting from compliance advantages, they have successively cooperated with traditional financial giants such as DBS Bank and Standard Chartered Bank in the field of digital assets, and received a HKD 543 million investment from Singapore sovereign wealth fund GIC. However, like most blockchain concept stocks that have landed on the secondary market, the recent market performance of BC Technology (HK: 863) has not been satisfactory. Trapped in the cryptocurrency winter of 2022, its latest financial report shows that BC Technology’s revenue decreased by 64.3% in 2022 and its net loss expanded to HKD 550 million. Since this year, BC Technology’s stock price has reached an all-time low. Recently, Jiemian News interviewed BC Technology CFO Hu Zhenbang on the regulatory details of Hong Kong virtual assets and the business development of OSL. Hu Zhenbang has over 16 years of experience in the financial field and has worked for many companies, including Hong Kong-listed technology companies, investment banks, and the Big Four accounting firms.

Jiemian News: The Hong Kong government has recently put pressure on local banks to open accounts for cryptocurrency platforms. Why do Hong Kong banks have doubts about introducing cryptocurrency institutions? Is it related to the recent crisis of small and medium-sized banks in the United States?

Hu Zhenbang: This question is not difficult to understand. First of all, licensed and compliant crypto institutions have no difficulty in opening accounts in banks, but if they are unlicensed and non-compliant crypto trading platforms, they will encounter account opening difficulties not only in Hong Kong, but also around the world.

Recently, several cryptocurrency-friendly banks in the United States, including Silcon Valley Bank (SVB), Slivergate Bank, and Signature Bank, have closed down. Many clients of these banks were previously non-regulated exchanges and institutions that are now seeking to open accounts with traditional banks. However, traditional banks have always been wary of these cryptocurrency institutions, as they have not met the standards of KYC, anti-money laundering, market monitoring, and asset misappropriation that are generally required by securities firms and some banks. From the perspective of the bank, it may not necessarily gain a lot of profits from these cryptocurrency institution clients, but it faces significant risks, as well as compliance and monitoring costs associated with conducting such business. Therefore, banks are more conservative in accepting cryptocurrency-related clients.

Jiemian News: BC Technology participated in advising Hong Kong’s stablecoin policy. What are your expectations for the regulation of stablecoins by the Hong Kong government? Is it possible for Hong Kong to launch a Hong Kong dollar stablecoin?

Hu Zhenbang: In addition to the previous white paper, the detailed content of this policy has not been further disclosed. From our perspective as practitioners, the most popular stablecoins on the market, including USDC and USDT, have been applied as a type of cryptocurrency payment tool. However, the market also has significant doubts about their issuers.

As a funding platform, their financial transparency and compliance supervision, as well as their ability to pay debts, are all issues that regulators and investors are concerned about. If stablecoin holders want to convert to fiat currency, can they easily obtain satisfaction from the issuer? Therefore, if Hong Kong wants to have a stablecoin issuer, it must first have the qualifications and licenses to conduct asset management business, similar to ordinary asset management companies, and have a high level of asset protection ability. The subscription and redemption of these funds by clients must also have a normal procedure. It must also undergo annual audits by regulatory agencies and third parties to ensure that the assets reported by the institution are consistent with the actual assets.

Of course, we cannot restrict stablecoins too much in terms of their functions, otherwise, they will be difficult to become popular. Therefore, we also expect that if stablecoins appear in Hong Kong, they should also have payment and financial management functions. If these stablecoins can be used as tools for both financial management and payment, like Yu’ebao, there will definitely be demand in the market.

Regarding whether the Hong Kong government will issue a Hong Kong dollar stablecoin, first of all, stablecoins and central bank digital currencies such as digital Hong Kong dollars are two different things. I estimate that the likelihood of a Hong Kong dollar stablecoin appearing is not too great, because the Hong Kong government has already clearly stated in a white paper that it will consider developing digital Hong Kong dollars, which will follow a path similar to that of digital RMB. Therefore, Hong Kong dollar stablecoins may compete to some extent with digital Hong Kong dollars.

However, the international demand for US dollar stablecoins is very high, and if an issuer chooses Hong Kong as the place of issuance and accepts supervision by the Hong Kong Securities and Futures Commission, it will be more secure than the current US dollar stablecoins on the market and is expected to become mainstream. Currently, the transaction volume of stablecoins worldwide is actually higher than that of many sovereign currencies in Africa, but the currently circulating US dollar stablecoins have not done enough in terms of regulation.

Interface News: What are the requirements and measures for customer asset separation and custody in encrypted trading platforms intended to operate in Hong Kong?

Hu Zhenbang: Under the regulatory environment in Hong Kong, asset custody and exchange business cannot be separated. The requirements of the Securities and Futures Commission are very clear. If you want to operate a No. 1 and No. 7 exchange, you must also do custody and cannot hand it over to a third party, and the custodied customer assets cannot leave Hong Kong.

This is also one of the reasons why the threshold for trading licenses is so high. For example, when customer assets come into the encrypted platform, they are actually completely separated from platform assets. A customer account is specially set up in the bank and securities dealer’s account opening process, and the custody of customer assets will be handled by a separate subsidiary. This subsidiary is a trust company protected by Hong Kong trust laws, and we will also help it purchase insurance separately to cover customer assets under custody. The hot wallet is 100% insured, and the cold wallet also needs to have 50% insurance, and it is not just that. You also need to maintain a network security team to prevent network attacks. Therefore, asset custody in Hong Kong is very secure. 98% of assets require custody in a separate cold wallet, and only 2% of assets are allowed to be placed in a hot wallet. Even if this platform really has financial problems, the worst case is to return the money of the trust subsidiary to customers.

So the protection of client assets is very high, and of course, to achieve this kind of operation, sufficient personnel, hardware, software, insurance, and auditing are required. The more customer assets, the higher the cost, and the annual expenses are actually very high, which are not easy to disclose. The government and auditing companies will also verify these assets on the blockchain network to ensure that these assets actually exist.

Interface News: All of OSL’s previous customers came from institutions and high-net-worth individuals. After the new policies were implemented on June 1 in Hong Kong, OSL also applied for retail trading business. What are the considerations behind this?

Hu Zhenbang: Looking at the cryptocurrency market, although we think institutional customers will account for a larger proportion in the future, retail investors are still a relatively important component of the entire market today. At the same time, the Hong Kong government’s relaxation of some restrictions on retail traders is also an important premise.

We have built a lot on the trading system before, such as trading processes for professional investors. Therefore, by making a little modification on the existing basis, we can open up a new market without a lot of investment and do it well. However, retail and institutional customers are very different in terms of marketing, because the market is completely different. And compared to institutional investors, the return on investment for retail investors will be slightly higher, so the cost is also there because we have to serve these small amount of transactions. In this regard, we will mainly cooperate with some local brokers in Hong Kong to promote retail businesses, and will adopt some automated methods to provide services.

For retail investors, we will also launch an AI-based service model. By linking to OpenAI’s base, we have developed an AI robot prototype that can do customer service, data analysis, and execute buying and selling instructions, which can reduce our demand for sales personnel.

Interface News: OSL is one of the only two organizations in Hong Kong that can publicly conduct STOs (Security Token Offerings). What are the differences between STOs and traditional securities issuance?

Hu Zhenbang: As a new type of digital asset, STO’s main difference from stock trading and bond issuance is that it eliminates many intermediate links. Because when issuing bonds and bonds, it often has to go through intermediaries such as banks and brokers, which is more cumbersome, more expensive, and the products issued are subject to the trading time of the exchange. If it is a private placement, it can only be traded in OTC. But if STO is issued through blockchain, the issuance process eliminates many intermediate links. For example, licensed institutions like OSL can design, issue, serve, and custody projects. After issuance, the product can be traded 24 hours on the blockchain network, and the efficiency is relatively high. The issuance cost is also relatively low compared to IPO, and more importantly, issuers can reach investment groups that were previously unavailable through STO.

For investors in digital assets, digital assets account for a large proportion of their wealth, but they may not necessarily have brokerage accounts or traditional assets such as real estate. STO, as a new diversified investment opportunity, is also attractive to them.

Interface News: Whether it is STO or RWA (Real World Assets), they are very cutting-edge fields in Web3, but they are still in the early stages of development. What do you think are the pain points?

Hu Zhenbang: Actually, STO has not become very popular after so long, mainly because the infrastructure in the market has not been well developed, including the regulatory framework. Since it takes a long time for regulatory agencies to understand it, there are currently not many STO products on the market. The United States should be the first country to have STO, but because it is not very friendly to cryptocurrencies recently, the development of STO has naturally slowed down. For some countries that are more supportive and have been researching for a long time, such as Japan and Thailand, there have been some STO cases and they have entered the application stage.

Japanese mainstream brokers such as Nomura Securities now do STO business in addition to IPOs. They can help real estate developers and Disneyland hotel income do STO, turn them into tokens, and sell them to their customers. In addition to enjoying investment benefits, holders can also stay in these hotels for a few nights, get some souvenirs, and enjoy economic benefits and usage rights. Japan has already passed the verification stage in this field and has entered the application stage. Now the main thing to break through is compliance, that is, how regulatory agencies can approve various innovative products in a relatively efficient way.

Interface News: As encrypted assets move towards the mainstream, more and more encrypted institutions have landed on the secondary market, but many companies including BC Technology have not performed well in terms of stock prices. What do you think are the reasons?

Hu Zhenbang: Since we saw the concentration of risk events in the encrypted industry last year, including the outbreak of FTX, many investors may have concerns about this industry and left. Coupled with the fact that the stock market itself is in a not very good cycle. So more time is needed for this industry to adjust, wait for some speculative participants to leave, and the entire industry to develop in a healthier way, which is definitely helpful for all types of blockchain stocks.

Over the past few months, especially in the United States, there have been frequent news reports of regulatory crackdowns on both compliant and non-compliant trading platforms, so some investors feel that this industry still needs some time to consolidate. However, from my own experience, there are also a small number of investors who are willing to slowly enter the market, so I hope that more time can be given to the investment market.

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