Countdown to the effectiveness of the regulations: The "silent battle" for stablecoin custody in the Hong Kong banking industry escalates.

Author: Huang Zixiao, Reporter of 21st Century Business Herald Huang Zixiao

With only one week left until the Hong Kong "Stablecoin Regulation" comes into effect, a silent "cold war" surrounding the custody business is quietly unfolding.

The regulations require stablecoin issuers to find custodians for their reserve assets, creating new business opportunities for the banking industry in Hong Kong.

Against the backdrop of narrowing net interest margins, being selected as a custodian bank means gaining a valuable source of non-interest income.

According to reporters from the 21st Century Business Herald, some institutions planning to apply for licenses have already settled on custodians: ZhongAn Bank and Deutsche Bank have been selected by institutions; Standard Chartered Bank and Tianxing Bank are also potential custodians; HSBC has recently launched virtual asset-related services; in addition, Chinese banks in Hong Kong are also actively laying out plans, with China Merchants Bank's subsidiary, China Merchants Yonglong Bank, increasing its promotion of stablecoin custody services.

The banking sector in Hong Kong is vast, and there is still room for imagination: will a single issuer choose only one custodian bank? Will multiple issuers choose the same custodian bank? Will the number of initial licenses exceed three?

Industry insiders told reporters that banks can leverage their identity as custodians to expand distribution and trading businesses, further enriching revenue sources. However, it is worth noting that Hong Kong is recently strengthening its regulation of virtual asset custody, and license types may be integrated and streamlined.

Who Will Be the Custodians of the "Sandbox"?

From the issuance model, stablecoin issuers return 1 stablecoin to users for every 1 fiat currency received. The fiat currency collected forms reserve assets, and the interest generated becomes the main source of income for the issuer. The large reserve assets create a demand for custody.

According to the Hong Kong Stablecoin Ordinance, issuers must choose a third-party institution for reserve asset custody, such as a licensed bank in Hong Kong or a qualified institution approved by the Monetary Authority, with the former referred to as a reserve bank or custodian bank.

In August last year, the Hong Kong Monetary Authority announced three applicants in the first batch of stablecoin issuer sandbox: Yuan Coin Innovation Technology, JD Coin Chain Technology, and a consortium consisting of Standard Chartered Bank, ANZ Group, and Hong Kong Telecommunications, which are also the three institutions most likely to obtain the first batch of stablecoin issuance licenses.

As of today, the three institutions have not yet officially announced the selected custodian bank.

Among them, Yuan Coin Innovative Technology has clearly designated ZhongAn Bank as the custodian of its reserve funds. Both parties share ZhongAn Online as a common shareholder background, with ZhongAn Online indirectly holding 8.7% equity in Yuan Coin, and through ZhongAn International holding 43.43% equity in ZhongAn Bank. Xu Wei, President of ZhongAn International, is also one of the directors of Yuan Coin Technology. ZhongAn Bank is the first digital bank in Hong Kong to provide stablecoin reserve bank services and currently serves two licensed virtual trading platforms. Prior to ZhongAn Bank, the fiat custody of Yuan Coin Technology was managed by OK Blockchain Chain and executed by its trust subsidiary.

JD Coin Chain Technology has not yet officially announced a custodian bank. Reporters noticed that in July last year, Tianxing Bank officially announced its cooperation with JD Coin Chain Technology, stating that it would leverage its banking advantages to assist the latter in attempting cross-border payment solutions based on stablecoins, but it did not mention any custodial cooperation. Recent research reports from Guosheng Securities and Guojin Securities predict that Tianxing Bank will become the custodian for JD Coin Chain Technology. Information shows that Tianxing Bank is 50.3% owned by Xiaomi Group and 44.1% owned by Futu Holdings.

In fact, JD Group also owns a licensed bank in Hong Kong. In 2020, JD cooperated with Bank of China (Hong Kong) to establish the digital bank Livi Bank. The 2024 annual report of Livi Bank shows that Bank of China (Hong Kong) holds a 49.91% equity stake, JD Technology holds a 23.73% equity stake, and Jardine Matheson Group holds a 26.36% equity stake, indicating the possibility of further collaboration between the parties. Like the aforementioned WeLab Bank and ZhongAn Bank, Livi Bank is also a digital bank in Hong Kong.

The cross-border joint application of Standard Chartered Bank, the Hong Kong Telecom, and the Anni Group brings together expertise from various parties, with some opinions suggesting that Standard Chartered Bank will become the custodian.

Previously, the three parties stated in a joint statement that they are establishing a joint venture and briefly discussed the division of labor. Standard Chartered Bank will provide backing in terms of banking infrastructure and compliance systems for the joint venture, Anping Group will develop application scenarios for the Web3 ecosystem, and Anping Group will leverage its business advantages such as mobile wallets to implement the applications. However, it is still unclear whether Standard Chartered Bank will act as the custodian. Guo Xin Securities believes that Standard Chartered will provide fund custody, Anping will be responsible for contract development, and Hong Kong Telecom will handle payment integration.

However, custody has always emphasized the independence of third parties, and having the issuer also act as the custodian violates the principle of risk isolation. The establishment of a joint venture company separates the issuer and custodian into two entities; the reporter also noted that Standard Chartered Bank has an independent subsidiary, Zodia Custody, which operates digital asset custody services, possibly adopting the aforementioned practice to achieve "isolation" and meet the independence requirements of custodians.

Chinese Banks Explore Stablecoin Custody

In addition to the three applicants in the sandbox, Ant Group recently announced a "dual-line layout" for stablecoins.

In 2024, Ant Group adjusted its organizational structure, with Ant International and Ant Digital Technologies each establishing their own boards of directors and operating independently.

In June of this year, Ant International and Ant Digital Technology officially announced that they will apply for a stablecoin issuer license in Hong Kong. Industry insiders told the 21st Century Business Herald that this move aligns with the internet giants' consistent practice of "multiple teams competing and experimenting in parallel."

Among them, Ant International's reserve bank has chosen Deutsche Bank. In June this year, Deutsche Bank reached a strategic cooperation with Ant International in Munich, Germany, to collaborate with Ant International's scenario finance department to explore solutions such as tokenized bank deposits and stablecoin payments, providing real-time cross-border financial management, reserve management, and capital inflow and outflow services for entities under Ant International.

However, more banks are tapping into the stablecoin trend, targeting opportunities in reserve custody services. According to data from the Hong Kong Monetary Authority on June 30, there are currently 32 licensed banks in Hong Kong.

The Chief Executive of the Hong Kong Monetary Authority, Eddie Yue, revealed in a statement on July 23 that although it is expected that only a few issuer licenses will be granted initially, dozens of institutions have actively reached out to the HKMA team.

In May of this year, HSBC launched a blockchain-based corporate treasury management solution backed by tokenized deposits in Hong Kong, with Ant International becoming the first client.

At the same time, in addition to the innovative technology of the Round Coin in the sandbox, ZhongAn Bank previously stated to reporters from the 21st Century Business Herald that it has engaged in in-depth discussions with several potential stablecoin issuers and is ready to comply with the requirements of the new policy at any time.

In addition to the local banks in Hong Kong mentioned above, there are also Chinese-funded banks increasing the promotion of custody services.

On July 17, China Merchants Bank released a tweet introducing the stablecoin reserve custody service of its Hong Kong subsidiary, China Merchants Yonglong Bank. The bank stated that in terms of custody, the reserve assets must be held in a trust plan, separating them from the issuer's own assets, with the trust plan holding the underlying assets.

In specific terms, China Merchants Yonglong Bank can act as the custodian, while China Merchants Yonglong Trust (a subsidiary of the former) serves as the trustee, achieving custody and real-time exchange of reserve assets; moreover, if Hong Kong asset management companies launch stablecoin subscription shares, China Merchants Yonglong Bank can also provide product custody services.

In addition, bank custody is located at the issuance stage of stablecoins, and there is also custody services on the user side. After customers obtain stablecoins, they can deposit them into exchange custody (such as Hashkey, etc.) or personal decentralized wallets (wallet service providers) for subsequent use or trading.

What is the future of the custody business?

For the banking industry in Hong Kong, reserve custody business is an ideal light asset business in a low interest rate environment.

According to data from the Hong Kong Monetary Authority, the net interest margin of Hong Kong's banking sector has narrowed from 1.73% in the second half of 2023 to 1.51% in the first quarter of 2025.

Insiders told reporters that the industry average rate for custody fees is between 0.1% and 0.5%, but when issuers select custodians, they will negotiate specific rates, and custodial institutions generally do not disclose these rates.

Taking Circle, the "first stock of stablecoins," as an example, the company has selected Bank of New York Mellon as the custodian to provide custody services for its over $60 billion USDC reserve assets. Based on this calculation, Circle needs to pay over $100 million in custody fees to the custodian annually. In response, Circle recently announced its application for a national trust bank license to provide custody services on its own.

However, the regulation of custodial services is tightening. Previously, on June 27, the Hong Kong Treasury and the Hong Kong Securities and Futures Commission launched a joint public consultation on legislative proposals for a licensing system for providers of digital asset trading and custodial services.

"Hong Kong is strengthening its regulation of cryptocurrency custody services." Alex Zuo, Senior Vice President and Head of Stablecoin at Cobo, told reporters from the 21st Century Business Herald that many merchants may have dual accounts of fiat currency + stablecoins in the future, and banks are naturally ideal custodians. Recently, many banks in Hong Kong are tightening the opening of VA (Virtual Asset) accounts on one hand, while also increasing spot checks on trade records for existing clients.

He stated that previously institutions could engage in virtual asset custody operations through licenses such as MSO and TCSP, but currently there are thousands of license holders for these two licenses. The regulator hopes to streamline the relevant licenses into several, such as VATP, VAOTC, and VA Custody, to further strengthen regulation.

In addition, the central bank can further expand into channel distribution and virtual asset trading through custody services. Guojin Securities believes that Circle issues USDC and distributes it through Coinbase, and after deducting an interest net amount of less than 1% of the basic issuance cost, the corresponding share of interest income is distributed, while the remaining net income pool is divided equally at a ratio of 5:5. However, the profit-sharing ratio in this case is rather extreme, and it is expected that related banks, even if engaged in distribution business, will have a significantly lower profit-sharing ratio than Coinbase.

The Hong Kong "Stablecoin Regulation" will take effect on August 1, and the licensing channel will soon open. The Hong Kong Monetary Authority stated on July 23 that it will release a summary of the licensing system for stablecoin issuers next week.