In 2019, the Hong Kong-listed company “Brand China” chose to change its name to “BC Technology” and fully entered the digital assets and blockchain field. On December 15, 2020, OSL, a digital asset trading platform under the BC Technology Group, obtained the first and seventh licenses under the regulatory framework of the Hong Kong Securities and Futures Commission, becoming the first digital asset trading platform with a listed parent company, licensed in Hong Kong, covered by asset insurance, and audited by the Big Four accounting firms. After the new policy on virtual assets in Hong Kong officially landed on June 1, 2022, OSL became one of the first crypto platforms to apply for virtual asset retail trading business. For a long time, OSL has been 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 an investment of HKD 543 million from Singapore’s sovereign wealth fund GIC. But like most blockchain concept stocks listed on the secondary market, the recent market performance of BC Technology (HK: 863) is not satisfactory. Struggling in the cryptocurrency winter of 2022, its latest financial report shows that the revenue of BC Technology decreased by 64.3% in 2022, and the net loss expanded to HKD 550 million. So far this year, the stock price of BC Technology has reached its historical low. Recently, Jiemian News interviewed BC Technology CFO Hu Zhenbang about the regulatory details of Hong Kong’s virtual assets and OSL’s business development. Hu Zhenbang has over 16 years of experience in the financial field and has held positions in several companies, including Hong Kong-listed technology companies, investment banks, and the Big Four accounting firms.

Original link：

https://finance.sina.com.cn/jjxw/2023-06-29/doc-imyyxwas9785831.shtml?cref=cj

Jiemian News: The Hong Kong government has recently been pressuring banks in Hong Kong to open accounts for crypto platforms. Why are banks in Hong Kong hesitant to onboard cryptocurrency institutions? Is it related to the recent crisis of small and medium-sized banks in the United States?

Hu Zhenbang: This issue is not difficult to understand. Firstly, licensed and compliant crypto institutions have no difficulty in opening bank accounts. However, if it’s an unlicensed, non-compliant crypto trading platform, they would face challenges in opening bank accounts, not only in Hong Kong but also around the world.

There were several cryptocurrency-friendly banks in the United States, including Silicon Valley Bank (SVB), Silvergate Bank, Signature Bank, etc., which had innovative products specifically for cryptocurrency institutions.

But recently, after they collapsed one after another, many of their former customers, which were mostly unregulated exchanges and institutions, had to open accounts with traditional banks. Traditional banks have always been cautious about these crypto institutions because they have not met the standards of general brokerage firms and some banks in terms of KYC, anti-money laundering, market monitoring, and whether customer assets are misappropriated. From the bank’s perspective, it may not necessarily make much profit from these crypto institution clients, but it faces significant risks, including compliance and monitoring costs required to conduct this business. Therefore, they are relatively conservative in accepting cryptocurrency-related clients.

Jiemian News: BC Technology has contributed to Hong Kong’s stablecoin policy. What kind of regulation do you expect from the Hong Kong government on crypto stablecoins? Is it possible for Hong Kong to launch a Hong Kong dollar stablecoin?

Hu Zhenbang: Apart from the previous white paper, there are no further details of the policy publicly available. Regarding how stablecoins should be regulated, from our industry perspective, some of the most popular stablecoins in the market, including USDC, USDT, etc., have been used as a form of crypto payment tool, but there are also significant doubts about their issuers.

As a capital platform, the transparency of their finances and whether they are subject to regulatory compliance, whether they have sufficient payment capabilities, and whether stablecoin holders can easily get satisfaction from the issuer if they want to exchange it into fiat currency, are issues that I believe regulators and investors are concerned about.

So if there’s going to be a stablecoin issuer in Hong Kong, it must first have the qualifications and license to conduct asset management business, like any regular asset management company, and must have a high level of asset protection. Then, there must be a regular process for customers to subscribe and redeem these funds. It must also be audited by regulators and third parties annually to ensure that the assets reported by the institution are consistent with the actual assets.

Of course, in terms of the function of stablecoins, we shouldn’t restrict them too much; otherwise, it would be hard for them to gain popularity. So we also expect that if there is a stablecoin in Hong Kong, it should also have both payment and financial management functions. If these stablecoins can be used as a tool like Yu’ebao that has both financial management and certain payment functions, the market will definitely have a demand for it.

As for whether the Hong Kong government will issue a Hong Kong dollar stablecoin, stablecoins and central bank digital currencies like digital Hong Kong dollars are two different categories. I don’t think the probability of a Hong Kong dollar stablecoin appearing is too high, because the Hong Kong government has explicitly stated in the previous white paper that it will consider developing digital Hong Kong dollars, which would be somewhat similar to the path of digital RMB, so to some extent, the Hong Kong dollar stablecoin may compete with the digital Hong Kong dollar.

However, the international demand for US dollar stablecoins is very high. If an issuer chooses Hong Kong as the place of issuance and accepts the supervision of the Hong Kong Securities Regulatory Commission, it will be more secure than the current US dollar stablecoins on the market and is expected to become mainstream. At present, the global trading volume of stablecoins may actually be higher than the sovereign currency of many African countries, but the US dollar stablecoins currently in circulation haven’t done enough in terms of regulation.

Jiemian News: What are the requirements and measures for crypto trading platforms intending to operate in Hong Kong in terms of customer asset separation and custody?

Hu Zhenbang: Under the regulatory environment in Hong Kong, asset custody cannot be separated from exchange business. The requirements of the Securities Regulatory Commission have clearly stated that if one wants to operate a №1 and №7 license exchange, they must handle the custody themselves, they cannot delegate it to a third party, and the customer assets under custody must not leave Hong Kong.

This is one of the reasons why the threshold for a trading license is so high. For example, when customer assets come into a crypto platform, they are actually completely separated from the platform’s assets. A dedicated customer account is set up in the bank and broker’s account opening process, and the custody of customer assets is carried out 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. The hot wallet is 100% insured, and the cold wallet also needs 50% insurance. Plus, you also need to maintain a cybersecurity team to guard against cyber attacks. Therefore, asset custody in Hong Kong is very safe, with 98% of the assets required to be held in separate cold wallets, and only 2% of the assets are allowed to be put into hot wallets. And even if the platform really encounters financial problems, the worst case is to refund the money of the trust subsidiary to the customers.

So the protection of customer assets is very high. Of course, to achieve this kind of operation, you need to have enough personnel, hardware, software, insurance, audits, and the more customer assets, the higher the cost. The annual expenditure is actually very high, and this figure is not convenient to disclose. Including the government and audit firms, they will also validate on the blockchain network to ensure that these assets truly exist.

Jiemian News: OSL previously had all its customers coming from institutions and high-net-worth individuals, and after the implementation of the new policy in Hong Kong on June 1st, it also simultaneously applied for retail trading business. What considerations are behind this?

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

We had previously built a lot on the trading system, such as the trading processes for professional investors. So it’s like making a little tweak to the existing base can open up a new market, and it doesn’t require a lot of investment to do well. But on the marketing end, retail customers and institutional customers are very different because the markets are completely different. And compared to institutional investors, the profit ratio for retail investors will be a bit higher, so serving these small amount transactions actually costs as well. In this regard, we will mainly cooperate with some brokers in Hong Kong to promote retail business and will also use some automated ways to provide services.

For retail customers, we will also introduce an AI-based service model. By linking to the base of OpenAI, we have developed an AI robot prototype. It can perform customer service, data analysis, execute buy and sell instructions, and can reduce our demand for sales staff.

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

Hu Zhenbang: As a brand-new digital asset, STO mainly differs from stock trading and bond issuance in that it eliminates many intermediaries. Issuing bonds and stocks often involves intermediaries such as banks and brokers, which are cumbersome and costly, and the products issued are subject to the trading hours of the exchange. If it is private equity, it can only be traded OTC. But if issued via the blockchain as STO, it cuts out many intermediaries in the process. Institutions like OSL can handle everything from project design, issuance, service, and custody. After issuance, products can be traded directly on the blockchain network 24 hours a day, which is also more efficient. The issuance cost is also relatively lower than IPO. More importantly, issuers can reach some investor groups that were previously inaccessible through STO.

Digital asset investors often have a significant proportion of digital assets in their wealth, but they may not necessarily have a broker’s account or traditional assets like real estate. However, products like STO are also a new diversified investment opportunity for them.

Jiemian News: Whether it’s STO or RWA (Real World Assets), both are very advanced fields of Web3, but their development is very early. What do you think are the pain points?

Hu Zhenbang: The fact that STO hasn’t become popular despite being around for so long is mainly because the infrastructure in the market is not yet ready, including the regulatory framework. Because it takes a long time for regulators to understand it, it leads to not many STO products in the market. The US was probably the first country in the world to have STOs, but its recent unfriendliness towards cryptocurrencies has naturally slowed the development of STOs. Some countries that have been supportive and studying for a long time, such as Japan and Thailand, actually have some STO cases out there and have entered the application stage.

Japanese mainstream brokers like Nomura Securities, in addition to doing IPOs, are now also doing STO business. They can help some real estate developers and Disney park hotels to conduct STOs on their profits, turn them into tokens, and then sell them to their customers. The holder can enjoy investment rights and interests, and also stay in these hotels for a few nights, receive some souvenirs, and have both economic benefits and usage rights. Japan has passed the validation phase in this field and has moved into the application phase. The main breakthrough now is in terms of compliance, that is, how regulatory agencies can approve a variety of innovative products in a more efficient way.

Jiemian News: As crypto assets move towards the mainstream, more and more crypto institutions are landing on the secondary market. But many companies, including BC Technology, are not doing well in terms of stock prices. What do you think are the reasons?

Hu Zhenbang: Since last year we saw a concentration of risk events in the crypto industry itself, including the collapse of FTX, many investors may have concerns about this industry and have left. Plus, the stock market itself is not in a very good cycle. So, this industry needs more time to adjust, wait for some speculative participants to leave, and the whole industry to develop in a healthier way, which will certainly help all blockchain-type stocks.

In the past few months, especially in the US, there have often been news that the US regulators have been cracking down hard on both compliant and non-compliant trading platforms, so some investors feel that this industry needs some time to integrate. But from my contacts, there are now a small number of investors willing to slowly enter the market, so I hope to give more time to the investment market.