The cryptocurrency market is hot, and is JD.com also going to get a piece of the action?
On July 24th, according to Caixin, JD Technology's JD Coin Chain Technology (Hong Kong) will issue a stablecoin pegged to the Hong Kong dollar at a 1:1 ratio, sparking widespread discussion in the market.
Due to well-known regulatory reasons, domestic major companies quickly withdrew from the cryptocurrency field after getting involved in the early years, and are currently focusing more on industrial blockchain or indirectly participating in cryptocurrency projects as investors. Even after the policy release in Hong Kong, the participation of domestic internet giants in this area is rare.
JD's move is indeed surprising.
01. Origin: Sandbox for Stablecoin Issuers in Hong Kong
Talking about the origin of JD's stablecoin, we need to trace back to the exploration of stablecoin regulatory policies in Hong Kong.
In terms of stablecoin regulation, Hong Kong has a long history. As early as January 22, Hong Kong began to pay attention to this key infrastructure linking traditional finance and the cryptocurrency field. At that time, the Hong Kong Monetary Authority issued a discussion paper, outlining the preliminary direction of the regulatory framework for stablecoins.
In the sensational virtual asset declaration in October 22, Hong Kong explicitly stated that it would formulate policies to regulate stablecoins. "Stablecoins are another focus of ours. Given that stablecoins are said to be able to maintain value stability, and their use is increasing, such as as a medium of exchange between cryptocurrencies and fiat currencies, they also have the potential to establish connections with traditional financial markets (such as payment systems). Drawing on the experience brought about by the recent crisis in the virtual asset market (cryptocurrency winter), there is international consensus that appropriate regulation should be established for stablecoins in different areas including governance, stability, and redemption mechanisms."
Subsequently, in December 23, the Hong Kong Monetary Authority again issued a consultation paper on the proposed regulatory regime for stablecoin issuers, initiating the second round of public discussion. In March of this year, the Hong Kong Monetary Authority announced the sandbox policy for stablecoin issuers, allowing testing of stablecoin issuance within the regulatory sandbox.
On July 17, the Hong Kong Treasury and the Monetary Authority jointly published a consultation summary on the legislative proposal for the implementation of a regulatory regime for fiat-backed stablecoin issuers in Hong Kong, explaining the corresponding qualifications of stablecoin issuers, reserve management, and stability mechanisms. If all goes well, the next stage will be the legislative council's deliberation, which is expected to be completed by the end of the year.
In the nearly 2 years of exploration, the most closely related to JD is the "sandbox policy for stablecoin issuers." In simple terms, Hong Kong will select suitable test subjects within a certain regulatory gray area to explore the feasibility of stablecoin issuance. On July 18, Hong Kong announced the list of 5 stablecoin issuer "sandbox" participants, including JD Coin Chain Technology (Hong Kong) Limited (Coinlink), Circle Coin Innovation Technology Limited, Standard Chartered Bank (Hong Kong) Limited, ANJI Group Limited, and Hong Kong Telecommunications (HKT) Limited.
After the list was released, Coinlink disclosed its stablecoin information on its official website, stating that JD's stablecoin is a stablecoin based on a public chain and pegged to the Hong Kong dollar (HKD) at a 1:1 ratio, which will be issued on a public blockchain. It emphasized that each JD stablecoin can be redeemed at a 1:1 ratio, and its reserves consist of highly liquid and trustworthy assets, which will be securely stored in independent accounts of licensed financial institutions. Through regular disclosure and audit reports, the integrity of the reserves will be rigorously verified. In terms of regulation, JD's stablecoin also stated that it will actively cooperate with global regulatory agencies and comply with existing and evolving legal and regulatory standards.
02. Fermentation: Major Companies Entering the Cryptocurrency Field with No Good Outcome?
If we only talk about major companies entering the blockchain, it is not surprising, as the peak was around 2015. At that time, influenced by the blockchain wave of foreign companies such as Hyperledger and R3, Baidu and Tencent established blockchain R&D teams in 2015, while Ant Financial, an affiliate of Alibaba, formed an interest group. Ping An and JD followed suit, announcing the establishment of research departments for blockchain in 2016. Soon after, Tencent Blockchain, AntChain, Baidu Super Chain, and JD Zhizhen Chain emerged, establishing a solid foundation for major companies' blockchain strategies.
Up to now, major internet companies in China occupy the first echelon of the blockchain industry, covering all categories from infrastructure to product applications and even expanding services. BaaS platform services are a key area where many major companies are focusing their blockchain efforts. In 2022, the market share of Chinese blockchain BaaS vendors was divided among seven companies, namely Ant Group (26.6%), Tencent Cloud (16.3%), Huawei Cloud (11.4%), China Unicom Digital Technology (7.5%), Qulian (6.8%), Inspur (6.7%), and Zeros (5.4%), with the seven companies accounting for a high share of 80.7%.
However, when it comes to the cryptocurrency field, major companies tend to avoid it. During the cryptocurrency boom in 2018, major companies such as Tencent, Alibaba, and Xunlei almost all participated in cryptocurrency projects, with DePin being particularly popular among major companies at that time. However, due to regulatory reasons, major companies quickly withdrew from the cryptocurrency projects after making some profit, and only made a slight splash in the digital collectibles market in 2021. Currently, most major companies' digital collectibles platforms have already announced their exit. Apart from Ant's Whale Exploration still in operation, JD's Lingxi and Baidu's Aixunyu have disappeared, and Tencent wisely chose to shut down its subsidiary's digital collectibles business after shutting down its subsidiary's digital collectibles business.
Now, under strict regulation, major companies' involvement in cryptocurrency appears more circuitous. Some set up overseas entities to divide their business, such as Bilibili promoting NFT overseas, while others focus on investment, such as Tencent's investment in Immutable X and Chainbase. Most of them have taken a different approach, actively promoting cloud services and infrastructure in the cryptocurrency field, such as AntChain's new brand ZAN targeting the Hong Kong and overseas markets.
Returning to JD itself, overall, JD has a relatively limited market share in China's blockchain industry, but with its strong retail advantage, it still has a solid market foundation in the field of traceability and certification, with over 3 million users and 1.4 billion pieces of data on the chain disclosed on its official website. Well-known consumer brands such as Wyeth, Yili, and Nestle are all clients of its blockchain. However, JD is relatively conservative in the cryptocurrency field, with minimal involvement. In search engines, JD and cryptocurrency businesses are almost unrelated.
03. Vision: Targeting the Most Profitable Payment Business
Because of this, Coinlink's bold announcement of the release of a stablecoin under the JD name undoubtedly sparked market discussion. Is the entry of major companies a sign of the warming of the spring river?
This question remains to be further explored, but if we delve into JD Coin Chain, its determination to target the payment business is evident.
In terms of its establishment time, the company was just established, officially registered in March of this year, and its main business covers digital currency payment systems and blockchain infrastructure. The current CEO is Liu Peng, Vice President of JD Technology.
Although the company has been established for less than 5 months, its enterprise license is quite comprehensive. According to information disclosed by the Hong Kong SFC, JD Coin Chain Technology has obtained Securities Trading License No. 1, No. 4, and Asset Management License No. 9. From the licenses, it can be seen that Coinlink has not applied for the core virtual asset business licenses No. 7 and VASP, indicating that there is currently no plan to enter the virtual asset trading business. However, the coverage of payment business licenses still reflects a clear business focus, of course, it does not rule out the possibility of future involvement in cryptocurrency platforms.
Looking at the current CEO, he describes himself as a "co-founder of WeChat Pay" on LinkedIn, mentioning 8 years of experience in WeChat Pay. He claims to be the co-founder and product director of WeChat Pay, creating the phenomenon of WeChat red envelopes as a core product member. In 2018, he joined Huawei as the global mobile payment product operations manager and director of aggregation operations.
In May 2022, Liu Peng joined JD and subsequently served as the Vice President of JD Logistics Group. In 2023, he began to be responsible for overseas financial technology business and founded JD Coin Chain this year. Overall, his experience in the payment industry is quite extensive.
It can be seen that the company was initially established with the goal of digital currency payments. As for why they chose stablecoins as their entry point instead of a more direct cryptocurrency trading platform, the answer is quite simple - the profit effect.
The most direct manifestation of the cryptocurrency business in Hong Kong is virtual asset exchanges, and this area is currently not optimistic. Due to strict compliance and regulation, coupled with a small local market, even with a relatively high user conversion rate, the user base is very limited. Local virtual asset exchanges in Hong Kong are also facing profitability and survival difficulties that cannot be avoided. The leading exchange, Hashkey, only achieved positive cash flow for the first time in January this year, and OSL was even sold to Bitget by BC Group, reflecting the challenging operating conditions.
In contrast, the stablecoin payment market is different. Data shows that the quarterly transfer volume of stablecoins has increased seventeenfold over the past four years, reaching $4 trillion in the second quarter of this year. On July 17, 2024, the total trading volume of the entire cryptocurrency market was $94.8 billion, with stablecoins accounting for 91.7% of the market trading volume, reaching $87 billion, indicating a huge market.
For example, Tether, the parent company of USDT, has been extremely profitable, earning a net profit of $6.2 billion in 2023 with a total staff of only about 100 people. This is due to the issuance of stablecoins at close to zero marginal cost to obtain risk-free interest and investment gains.
In addition, due to the clear and simple business lines and less complex operations compared to securities businesses on platforms, the regulatory costs are more controllable and consistent. In this context, as a digital currency payment company, it is only natural to target the stablecoin business, which is the most profitable and easiest to enter.
04. Current Situation: Worth a Try Despite Realistic Difficulties
From the current situation, JD Coin Chain clearly intends to imitate the infrastructure of payment as the main body and extend its business after gaining a first-mover advantage. However, despite the good intentions, the actual implementation is fraught with difficulties.
Under the lure of a lucrative market, many well-known institutions have entered the stablecoin field in recent years, but most have returned empty-handed. The core reason is that the dominance of the top stablecoins is too prominent. In the stablecoin market, the top three stablecoins occupy 90% of the market share, especially USDT, which almost has a monopoly position with over 1.1 trillion yuan out of a total market value of 160 billion yuan. For JD, the situation is even more challenging. The concentration of the US dollar stablecoin market implies restrictions on other fiat stablecoin markets. It remains to be seen whether the Hong Kong dollar stablecoin can stand out in the face of the limited size of the Hong Kong cryptocurrency market, and local regulations will also hinder JD's development in this area.
From the perspective of local regulatory requirements, Hong Kong has relatively clear regulations for issuers, with high compliance costs. Only licensed fiat stablecoin issuers, banks, licensed corporations, and licensed virtual asset trading platforms are allowed to sell fiat stablecoins in Hong Kong or actively promote related services to the Hong Kong public. For existing stablecoin issuers, the Treasury Department has set up a transitional arrangement.
In terms of reserves, the Monetary Authority requires issuers to ensure that fiat stablecoins are backed by 100% reserves of high-quality and highly liquid assets. The minimum paid-up capital of the issuer should be at least 2% of the total circulation of the fiat stablecoin, or 25 million Hong Kong dollars, whichever is higher. To curb the damage of stablecoins to the traditional financial system, stablecoin issuers in Hong Kong are also prohibited from paying interest to users.
For mainstream stablecoins such as USDT and USDC to enter the market, Hong Kong has not directly rejected them, but emphasizes observing whether they can meet Hong Kong's regulatory requirements. Institutions need to establish entities in Hong Kong and obtain licensed approval. It is worth noting that Hong Kong has not ruled out the possibility of bank institutions applying for stablecoins.
This undoubtedly means that even if it is difficult to obtain issuer qualifications, the competitive pressure will increase significantly. Existing issuers, licensed exchanges, and even banks could become potential competitors. Even from a short-term realistic perspective, stablecoins also have many problems. The issuance threshold is high, and there is no direct payment system or storage method for stablecoins. From an accounting perspective, the determination of company assets is also not clear.
However, regardless of the challenges, given the timeliness and singularity faced by the current payment system, there is undoubtedly space for the tokenization of fiat currency. This is especially true for Hong Kong, a region that hopes to become a global virtual asset center, where stablecoins are an indispensable infrastructure. Perhaps this is also one of the important reasons why major companies are willing to get involved.
A small profit is still a profit, and JD clearly needs this piece of the pie. After all, the core e-commerce business of the three giants is facing bottlenecks in growth, logistics is in the optimization period, and the exploration of new growth points in digital finance is crucial. After the opening of Hong Kong's policies, the huge traffic in the virtual asset market has become a close and profitable point. Whether it is for experimentation or development, JD Coin Chain has sufficient reasons to be established. Stablecoin applications cover both the B-end and C-end, traditional financial markets, and the cryptocurrency market, not to mention that stablecoin cross-border payments are highly compatible with JD's e-commerce retail business, making it the primary entry point for JD to enter the cryptocurrency market.
Overall, JD's involvement still gives a positive signal to the cryptocurrency industry, and it is worth looking forward to whether it will attract more major companies to join. However, it should be emphasized that, according to the regulations, although it has entered the sandbox trial, this is only a small-scale test, and it does not mean that JD Coin Chain already has the qualification to issue stablecoins. Subsequent approvals are still required, and Coinlink has not yet issued any stablecoins in Hong Kong or any other jurisdiction. Participants in the sandbox will not involve the use of public funds in the initial stage, and investors should remain cautious.
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