Editor's note: Recently, the virtual asset market has been bustling with news. In mid-July, CMB International obtained a license for virtual asset services.
【Anchor】Hello everyone, welcome to DDN Business Insider. I am Yunfei Zhang. Recently, the virtual asset market has been bustling with news. In mid-July, CMB International obtained a license for virtual asset services. With the Hong Kong stablecoin regulation set to officially take effect on August 1, we have invited Mr. Ding Zhaofei, Chief Analyst of HashKey Group, to discuss the latest developments in virtual currencies. Welcome, Mr. Ding.
Hello! Recently, stablecoins have been a hot topic of discussion. A Hong Kong official mentioned in an interview that the stablecoin market seems to be overheated. What is your take on this situation? Do you think the stablecoin market is currently in an overheated state?
【Ding】Well, it depends on how we interpret the term "overheated." If it refers to public expectations, I think it's a positive thing. People haven't had new economic growth points or financial innovations for a long time, so there is a strong desire for a promising financial innovation to emerge, providing opportunities for investment and related activities. This high level of expectation is beneficial.
About overheating, I believe this may refer to the overwhelming number of institutions—around 40 or 50—wanting to apply for stablecoin licenses, which exceeds their expectations. This surge in applications could lead to challenges, as they initially intended to issue only two or three licenses. With so many applications, the review process becomes more complex. They might find that while all applicants meet the requirements, they can only issue a limited number of licenses. This situation also highlights the value of stablecoin licenses, as more companies recognize their worth and seek to apply.
【Anchor】You mentioned that everyone is looking forward to a new economic growth point. However, the number of stablecoin licenses to be issued is limited. Do you believe that stablecoins can meet these expectations and become a new growth point?
【Ding】Yes, stablecoins have the potential to drive many industries, especially in terms of financial innovation. However, stablecoins themselves are not good investment vehicles. In the past, we talked about buying Bitcoin and seeing returns of ten or even a hundred times, and Ethereum could also double. But investing in stablecoins has no inherent value. Additionally, the value of investing in issuers is limited since they are not publicly listed. Circle has gone public, but its valuation is already quite high.
For ordinary investors, stablecoins cannot be directly invested in. However, I believe the market-changing value they bring is significant. For example, stablecoins can transform the international payment system. Previously, we used the interbank payment system SWIFT for international payments, which is slow and expensive. With compliant stablecoins, the time for transactions could shrink from three to five days down to just three to five seconds, with costs potentially only a few cents instead of hundreds of dollars. This represents a major advancement. Thus, the changes they can bring to international payments and trade are substantial. I believe all relevant stakeholders will benefit from this shift.
【Anchor】So, I would like to ask about the different motivations for traditional institutions, tech companies, and cryptocurrency exchanges to apply for these licenses.
【Ding】I believe the core motivation is consistent: they all aim to provide virtual asset trading services because they see significant development potential in this area. For traditional brokerages, stock trading and fund redemption have become somewhat saturated in the traditional financial market. In contrast, the virtual currency sector represents a blue ocean market. From their perspective, it could be a multi-trillion-dollar market they want to be part of.
From the perspective of the cryptocurrency sector, traditional exchanges are also experiencing some saturation, and there is a Matthew effect where a few non-compliant exchanges dominate the majority of the market. Many are primarily engaged in competition for existing market share. If compliant capital and users are introduced, they believe that, by leveraging their advantages, they can still find potential for growth and a share of the market.
As for tech giants, they already possess strong ecosystems and can utilize blockchain technology and virtual currencies to empower their existing frameworks. I think they have a strong incentive to engage in competition within this industry as well.
【Anchor】You mentioned that integration is a trend. Traditional finance has advantages in compliance processes, while some tech companies may have stronger technical capabilities.What do you think the future integration or collaboration between these entities will look like?
【Ding】I believe each will leverage its strengths. First, the collaboration must occur within a compliant framework, and how compliance is defined will determine how we present this collaboration. For example, in the traditional brokerage sector, there is a large user base. By opening a window for virtual asset services, they can attract more people and capital, which is something they excel at.
On the other hand, tech companies have strong R&D capabilities. Blockchain technology will have significant applications in the future, allowing them to innovate from both a blockchain perspective and a product development angle, thus leveraging their strengths. Ultimately, these efforts should converge to provide a more innovative, comprehensive, and compliant virtual asset service system compared to the current financial market.
Now, regarding the licenses for stablecoins and virtual asset services, applying for these licenses requires certain compliance costs.
【Anchor】Do you anticipate that some small and medium-sized stablecoin projects might exit the market due to insufficient resources? Could this lead to increased concentration in the industry and potentially create monopolistic phenomena?
【Ding】Yes, this will definitely happen because the development of stablecoins exhibits a Matthew effect. Since 2013, Tether has issued its stablecoin, USDT, which has had wide applications, regardless of its compliance status. Circle began operating USDC around 2018, with a different approach, and quickly captured a significant portion of the on-chain market. Of course, USDT still holds an absolute advantage in the trading pairs of non-compliant exchanges.
In any case, these two stablecoins dominate over 90% of the global issuance. It is hard to see any others in the third position. There might be DAI, a stablecoin generated by MakerDAO using collateralized Ethereum, or other stablecoins like those supported by Binance, but they capture less than 10% of the market.
Thus, stablecoins reflect a Matthew effect, especially with the emergence of new stablecoins. In our current stablecoin ecosystem, applications are already well established. Even if new stablecoins achieve compliance, I believe these application scenarios will not be immediately available. The giants will not fall; if one whale drops, nothing else can survive.
Therefore, for small stablecoin companies, even if they obtain a license, their application scenarios are very limited. Compared to established companies with strong ecosystems that can directly utilize their stablecoins, small stablecoins will find it very difficult to survive in this competitive environment.
【Anchor】CMB International has recently obtained a license, making it the first Chinese bank-affiliated brokerage to do so. What does this actually signify?
【Ding】The market has attributed many stories to this, especially regarding the term "Chinese capital." Previously, licenses were granted mainly to internet brokerages or local Hong Kong brokerages. This time, a Chinese bank-affiliated brokerage receiving a license suggests the possibility of more open policies from mainland China. Therefore, I think it represents a relatively objective, positive, and optimistic attitude toward the virtual asset market and the potential opening up of mainland China.
【Anchor】OK, what types of institutions do you think are more suitable for applying for stablecoin licenses or virtual asset service licenses?
【Ding】I believe traditional brokerages are well-suited for providing services like stock trading and fund purchases or redemptions. They already have a strong customer base and capital, making them ideal candidates for obtaining virtual asset service provider (VASP) licenses. As for stablecoins, I think companies with their own ecosystems—like those that can directly integrate stablecoins into their existing applications—will have a distinct advantage.
【Anchor】Looking ahead, do you think stablecoins could potentially surpass traditional payment tools?
【Ding】Yes, absolutely. As I mentioned earlier, this is akin to what was once popularly referred to as a "dimensionality reduction strike." If stablecoins can establish smooth exchange channels from China to the U.S. for local currency exchanges, it could take just three seconds and only three cents in gas fees for a transaction. This represents a significant advantage.
In the 1.0 era, the dollar was dominant, tied to oil. Now, with more international currencies emerging, including offshore renminbi, and with the dollar facing some skepticism, there could be new currencies rising to prominence. This situation may lead to the birth of new international currencies and payment systems, which I believe presents an opportunity.
【Anchor】Well, regarding the upcoming stablecoin regulations we just discussed, besides Hong Kong, Singapore has also introduced relevant regulations, and I understand that Dubai has implemented related legislation as well. In this context, how can Hong Kong maintain its competitiveness?
【Ding】There is a core viewpoint here: the competition among stablecoins is essentially competition among fiat currencies. Stablecoins are just an extension of fiat currencies; they compete in the same way that fiat currencies do, opening up a new battleground.
When we look at Singapore, Dubai, and Hong Kong, we should consider whether they are significant foreign exchange centers or offshore centers in the traditional financial domain. Hong Kong undoubtedly leads in this regard, especially concerning offshore renminbi, where it is the largest in the world. In this aspect, Singapore does not compare, and Dubai is even less relevant, as almost nobody exchanges currency there.
In the competition among fiat currencies, Hong Kong is in a dominant position. Since the essence of fiat currency competition is the competition among stablecoins, this means that the advantage will go to either the US dollar stablecoin, the offshore renminbi stablecoin, or the Hong Kong dollar stablecoin, depending on where these underlying currencies are used and the demand for them. I believe that the demand for offshore renminbi will continue to grow, and leveraging this advantage, Hong Kong's position will only strengthen over time.
【Anchor】OK, thank you. That's all for this episode. Remember to follow us on YouTube or download our APP. I'm Yunfei Zhang, thanks for watching, and see you next time.
Anchor: Laura Cheung | Edited: Kelly Yang, Laura Cheung, Rachel Liu | Translate: Kato Ip | Proofread: Chris Liu
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