Regarding the frontline situation in the Hong Kong market concerning "stablecoins, RWA, digital exchanges," this interview with the CFO of OSL GROUP is worth a look

Hong Kong's digital asset ecosystem welcomes new expansion opportunities! OSL Group CFO elaborates on the development prospects of stablecoins, RWA, and trading platforms, believing that licensed institutions hold an advantage as the regulatory framework continues to optimize, gradually expanding their business scope.

On July 31, according to news from the Chasing Wind Trading Desk, JP Morgan's latest research report published the minutes of a recent expert interview with OSL Group CFO Ivan Wong. The main points include the following three key aspects:

First, Hong Kong regulators are relaxing the business scope for licensed institutions, with the Securities and Futures Commission having approved licensed crypto exchanges to provide staking services after obtaining separate approval;

Second, as the compliance framework improves, licensed institutions will accelerate their expansion, while global participants without local licenses may be marginalized;

Third, licensed Virtual Asset Trading Platforms (VATP) will play a key role in stablecoin distribution, tokenized RWA trading based on stablecoins, and cross-border payments.

JP Morgan pointed out in the report that experts revealed during the interview that Hong Kong regulators are gradually relaxing the scope of digital asset business, and VATP licensed institutions will play a key role in stablecoin distribution, RWA tokenization trading, and cross-border payments.

The meeting also focused on the important position of stablecoins in Hong Kong's digital asset ecosystem and the development potential of RWA tokenization trading, providing investors with first-hand information on the development of Hong Kong's digital asset market.

Regulatory framework continues to optimize, business scope gradually expands

According to Ivan Wong, Hong Kong's virtual asset regulation initially adopted a strict approach, but the regulatory environment has gradually evolved. The Hong Kong Securities and Futures Commission has begun to allow a broader range of product offerings and recently relaxed the licensing scope, enabling licensed cryptocurrency exchanges to provide staking services.

There are significant differences between the VATP license and the enhanced Type 1 license. VATP license holders can provide comprehensive virtual asset services, including trading, custody, and staking, to retail, corporate, and institutional clients, serving clients directly and supporting licensed brokers. In contrast, brokers with the enhanced Type 1 license must collaborate with VATP license holders to offer cryptocurrency trading services to clients.

JP Morgan noted that the Hong Kong government adopts the "same activity, same risk, same regulation" principle for digital assets, aiming to create a vibrant and innovative virtual asset ecosystem. With the establishment of a legal framework for digital assets, regulators are expected to allow licensed institutions to expand their business scope within the licensing system.

Competitive landscape reshaped, licensed institutions hold an advantage

The cryptocurrency trading market in Hong Kong mainly consists of three types of participants: global exchanges without Hong Kong licenses (such as Binance), licensed exchanges and brokers (such as OSL and Futu), and offline stores facilitating small-scale cryptocurrency trading.

Although global exchanges have a wide range of products, the lack of a Hong Kong license limits their local market activities, including the inability to conduct proactive marketing and establish customer fund access connections with banks. Licensed exchanges and brokers, on the other hand, have the advantage of connecting with local banks, providing enhanced customer protection, and conducting marketing activities in Hong Kong OSL's over-the-counter cryptocurrency trading business charges a fee of 25 basis points, while comprehensive solutions charge 10-15 basis points, and payment services charge about 2.5%. JP Morgan believes that this fee level exceeds expectations, especially compared to the single-digit basis point rates of international peers like Coinbase, which serves as a positive reference for Futu.

Stablecoins Become Key to Ecosystem, Distribution Model Dominates

Stablecoins play an important role in Hong Kong's digital asset ecosystem. Ivan Wong pointed out that cryptocurrency exchanges facilitate a large number of transactions related to stablecoins, making them ideal partners for stablecoin issuers. Stablecoins are a key component of OSL's global payment business, and the company has applied for a stablecoin license in the EU and is considering applying for relevant licenses in Hong Kong and Singapore.

The Hong Kong government has clearly stated that one of the key criteria for granting stablecoin issuance licenses is whether the issuer has the ability to sustainably expand application scenarios. JP Morgan believes that it will be challenging for investors to shift from current mainstream stablecoins to Hong Kong dollar stablecoins, and therefore expects that most VATP licensed institutions will primarily operate as "distributors" of stablecoins.

The application of stablecoins in payments has the potential to accelerate settlement speed and reduce costs. OSL is building a global payment network that utilizes stablecoins to provide cross-border payment solutions for payment service providers and merchants, achieving instant processing compared to the 2 to 5 business days processing time of traditional banks.

RWA Tokenization Begins, 24/7 Trading Yet to Break Through

Real-world asset (RWA) tokenization is still in its early stages in Hong Kong. OSL is participating in RWA tokenization, providing end-to-end solutions, custody services, and tokenized asset distribution services. It has launched a tokenized money market fund and plans to achieve instant subscription and redemption supported by stablecoins.

Ivan Wong believes that the slow development of RWA tokenization in Hong Kong is partly due to the lack of stablecoin-supported trading. Currently, tokenized RWAs are still traded through fiat-based methods, making 24/7 trading impossible. If trading can be conducted on-chain using stablecoins, real-time trading could be achieved.

JP Morgan pointed out that RWA tokenization is still in its early stages, which provides opportunities for the application scenarios of Hong Kong dollar stablecoins. On-chain solutions using stablecoins may bring lower transaction costs and longer trading hours, thereby encouraging more real-world assets to be tokenized. However, until the trading volume of tokenized RWAs significantly increases, around-the-clock trading remains difficult to achieve.

The following is the full AI translation of the interview:

Key points from the Hong Kong digital asset expert conference call: Revealing a new era of digital asset expansion

We recently held an expert conference call with Ivan Wong, the Chief Financial Officer of OSL Group, focusing on the development of digital assets in Hong Kong. Our interpretation of this is positive for licensed institutions in Hong Kong's digital asset ecosystem (such as Futu) for the following reasons:

First, Hong Kong's regulatory authorities may allow licensed institutions in the digital asset ecosystem to expand their business scope under the existing licensing framework. For example, the Hong Kong Securities and Futures Commission (SFC) has recently authorized licensed cryptocurrency exchanges (approved separately by the SFC) to provide staking services in Hong Kong We believe this will benefit the expansion of the business scale of relevant institutions and the overall improvement of the take rate.

Secondly, with the establishment of the legal framework and the continuous improvement of the digital asset licensing system, we expect licensed institutions to accelerate their expansion, while global participants without local licenses may gradually be marginalized and ultimately lose market share.

Thirdly, we anticipate that licensed Virtual Asset Trading Platforms (VATP) will play a key role in several areas: distribution of stablecoins, tokenization trading of real-world assets (RWA) based on stablecoins, and cross-border payments based on stablecoins. Among the companies we cover, Futu has received conditional approval for the VATP license in January 2025, and we expect the company to launch related business operations within 6 to 12 months, which may further drive up its price-to-earnings (PE) multiple.

Please note that the opinions expressed by the experts do not represent those of JP Morgan.

Question 1: What is the main business of OSL Group?

Expert: OSL Group is the first cryptocurrency exchange to obtain a VATP license in Hong Kong and is also the only cryptocurrency exchange listed on the Hong Kong Stock Exchange. Since 2024, OSL has undergone significant changes, including changes in major shareholders, management, and strategic direction. The company now positions itself as a global digital asset platform, with the vision of becoming Asia's leading digital asset platform.

OSL currently operates three core businesses:

Cryptocurrency trading services;

Institutional business (empowering other brokers to provide cryptocurrency trading services to their clients);

Payment products supporting cross-border payments and cryptocurrency on/off-ramp functions.

Question 2: What is the difference between the VATP license and the enhanced SFC Type 1 license?

Expert Opinion: The VATP license allows license holders to provide a comprehensive range of services, including trading, custody, and staking services for virtual assets, targeting retail, corporate, and institutional clients. VATP license holders can engage directly with clients or empower licensed brokers to provide services to clients.

In contrast, brokers with the enhanced Type 1 license must collaborate with VATP license holders to offer cryptocurrency trading services to clients, as they are not authorized to provide such services independently.

This mandatory collaboration highlights the broader capabilities of VATP license holders and their strategic advantages in the virtual asset market.

JP Morgan's View: The business scope of VATP license holders is broader than that of enhanced Type 1 license holders. Futu obtained the enhanced Type 1 license in 2024 and began offering cryptocurrency trading services in August 2024. Recently, Futu received conditional approval for the VATP license, and we expect it to launch related business within 6 to 12 months.

Accordingly, we expect Futu's revenue share from cryptocurrency trading business to increase from 0.2% in 2025 to 2% in 2026, and reach 4% in 2027

Question 3: Will Hong Kong regulators allow the introduction of more products and services in virtual asset trading?

Expert Opinion: Hong Kong's regulation of virtual assets initially took a stricter approach. However, over time, the regulatory environment has evolved, and the Securities and Futures Commission (SFC) has begun to allow a wider variety of products. Recently, the SFC has relaxed the scope of licenses, allowing licensed cryptocurrency exchanges to offer staking services (subject to separate approval from the SFC), which were previously prohibited. This change indicates that regulators are increasingly confident in the industry and are showing a more open attitude towards the scope of business and types of products.

Additionally, ongoing discussions between the SFC and the industry may lead to the introduction of contract-based products (such as derivatives).

These regulatory advancements bring new opportunities for businesses in the virtual asset space, enabling them to explore and offer a broader range of services and products to customers.

JP Morgan Opinion: The core regulatory principle of the Hong Kong government regarding digital assets is "same activity, same risks, same regulation," aimed at protecting investor rights and financial stability while promoting a vibrant and innovative virtual asset ecosystem. With the establishment of a legal framework for digital assets, we do expect regulators to allow licensed institutions to expand their business scope under the licensing system.

This is favorable for licensed institutions in the digital asset ecosystem, as a broader product offering can not only enhance the overall scale of digital asset business but also potentially increase the blended take rate.

Question 4: What is the competitive landscape for cryptocurrency trading in Hong Kong?

Expert Opinion: Experts point out that there are currently three types of market participants in Hong Kong:

1. Global exchanges, such as Binance, which do not hold a Hong Kong license;

2. Licensed exchanges and brokers, such as OSL and Futu;

3. Offline stores that facilitate small-scale cryptocurrency trading, which experts believe operate in a regulatory gray area.

Although global exchanges offer a rich variety of products, their activities in the local market are restricted due to the lack of a Hong Kong license, including being unable to conduct active marketing or connect customer funds with banks for deposits and withdrawals.

In contrast, licensed exchanges and brokers in Hong Kong have the following advantages: they can connect with local banks, provide higher levels of customer protection, and conduct marketing activities in Hong Kong.

Experts believe that global exchanges face significant challenges in serving corporate clients in Hong Kong, as these clients typically demand independent asset custody, stronger consumer protection mechanisms, and smooth banking service connections.

Among local licensed institutions, OSL focuses on institutional business, while Futu currently focuses on retail business.

JP Morgan Opinion: We agree with the experts that licensed institutions permitted to operate digital asset businesses in Hong Kong have better growth prospects. Among licensed institutions in Hong Kong, Futu is currently focused on retail cryptocurrency trading, but we expect the company to expand its cryptocurrency business to institutional clients in the future

Question 5: What is the unit economics model of OSL's main business?

Expert: OSL's over-the-counter (OTC) cryptocurrency trading business charges a fee of 25 basis points (bps) based on trading volume. OSL's omnibus solution (which empowers brokers with an "uplifted Type 1 license" but without a VATP license to provide cryptocurrency trading services to clients) charges between 10-15 basis points.

OSL also operates a payment business to support cross-border payments and on/off-ramp for cryptocurrencies. OSL charges approximately 2.5% for this payment service.

It is important to note that OSL primarily focuses on institutional business.

JP Morgan's View: This fee rate is higher than our expectations, especially compared to international peers (for example, Coinbase, which charges single-digit basis points for its institutional business). Therefore, this comparison is favorable for Futu—Futu charges about 8 basis points (on a gross basis) for its retail cryptocurrency trading business under its "uplifted Type 1 license."

Question 6: What impact do stablecoins have on cryptocurrency exchanges in Hong Kong?

Expert's View: Experts explain that cryptocurrency exchanges facilitate a large number of transactions related to stablecoins, making them ideal partners for stablecoin issuers. Experts believe that stablecoin issuers may wish to collaborate with licensed cryptocurrency exchanges to list and trade stablecoins.

Experts also point out that stablecoins are a key component of OSL's global payment business. OSL has applied for a stablecoin license in the EU and is considering applying for relevant licenses in Hong Kong and Singapore.

JP Morgan's View: The Hong Kong government has clearly stated that one of the key criteria for granting stablecoin issuance licenses is whether the issuer has the ability to sustainably expand use cases.

We believe that it will be challenging for investors to shift from current mainstream stablecoins (such as USDC and USDT) to using Hong Kong dollar stablecoins for cryptocurrency trading.

Therefore, we expect that most VATP licensed institutions will primarily operate as "distributors" of stablecoins rather than "issuers."

It should be noted that for Futu, we expect its cryptocurrency trading business to contribute about 4% of revenue by 2027, which does not yet account for any potential upside from stablecoin distribution.

Question 7: What is the current progress of RWA (Real World Assets) tokenization in Hong Kong?

Expert's View: Experts reveal that OSL is involved in the tokenization of real-world assets (RWA) and provides end-to-end solutions, custody services, and distribution services for tokenized assets. The company has launched a tokenized money market fund and plans to achieve instant subscriptions and redemptions supported by stablecoins Experts believe that the tokenization of RWA in Hong Kong is still in its early stages, partly due to the lack of stablecoins to support transactions; however, they see growth potential in this area as the ecosystem develops.

Currently, existing tokenized RWAs are still traded through fiat-based methods, which prevents 24/7 trading. However, if these tokenized RWAs can be traded using stablecoins on-chain, real-time trading could be possible.

JP Morgan's Viewpoint: The tokenization of RWA is still in its early stages, which provides opportunities for the application of Hong Kong dollar stablecoins.

At the same time, using stablecoins for on-chain solutions may lead to lower transaction costs and longer trading hours, thereby encouraging more real-world assets to be tokenized.

That said, we do not expect to achieve 24/7 trading until the trading volume of tokenized RWAs significantly increases.

Question 8: How can stablecoins be used to promote cross-border payments?

Expert Opinion: Experts reveal that OSL is building a global payment network that supports cryptocurrency and fiat transactions, with stablecoins playing a key role.

The company plans to use stablecoins to provide cross-border payment solutions for payment service providers and merchants.

OSL will also establish a stablecoin exchange platform to facilitate conversions between different stablecoins.

The application of stablecoins in payments has the potential to accelerate settlement speed and reduce costs.

JP Morgan's Viewpoint: Payment functionality is one of the main application scenarios for stablecoins.

We believe that companies with cryptocurrency trading businesses will provide clearing services to payment service providers, who will be responsible for KYC (Know Your Customer) and other cross-border compliance requirements.

Exchanges must hold liquidity in mainstream stablecoins to support cross-currency payments.

The main advantage of stablecoins is that they significantly shorten cross-border payment times; compared to traditional bank cross-border payments that take 2 to 5 business days, stablecoin solutions can achieve instant processing.

This will be particularly beneficial for small and medium-sized enterprises (SMEs) and individual users with frequent cross-border payment needs