Zhiwubuyan Roundtable Discussion: From putting stocks on the blockchain to putting everything on the blockchain?

Original link: https://mp.weixin.qq.com/s/-YWvjfq2ipETrgOmeUmhaA

1. Introduction

On July 31, Paul S. Atkins, Chairman of the U.S. Securities and Exchange Commission, delivered a speech titled "America's Leadership in the Digital Financial Revolution" in Washington, D.C., and put forward a plan called "Project Crypto" - a reform plan aimed at putting the U.S. financial market on-chain.

Atkins said that he would provide regulatory exemptions for the "issuance of tokenized securities in the United States" where appropriate to ensure that the American public is not excluded, and that "brokerage firms with ATS should be allowed to simultaneously offer non-securities crypto assets, crypto asset securities, traditional securities and other services on their platforms," allowing market participants to create "super-apps." To support on-chain trading of tokenized securities, he also suggested that "Reg NMS may have to be revised while correcting the distortions it has caused in the current market."

This podcast episode was actually recorded before Atkins's speech. Even without the official launch of this initiative, the on-chain movement in the US financial market, represented by the US stock market, had already begun with great fanfare. From Dinari to xStocks, from Gemini to Robinhood, overnight, crypto users could suddenly use their stablecoins to buy on-chain shares of Nvidia and Tesla, as if they had plunged down a rabbit hole into a strange and bizarre world.

"In the next three to five years, traditional stock exchanges and crypto exchage may become direct competitors, such as the competition between Nasdaq and Binance, and the Hong Kong Stock Exchange and Coinbase." "The significance of on-chain US stocks may not just be an alternative channel, but a real financial infrastructure." "Whether it is a brokerage, asset management or exchange, users essentially rely on trust + local experience. It is difficult for the market to form a super unified platform. There will always be second, third and fourth players who can get their respective shares and survive well."

These wonderful sharings come from the sixth episode of Zhiwubuyan, featuring three guests from cutting-edge technology investment, internet brokerage, and stock blockchain startup projects. Now let us dive in and explore the vast universe of blockchain-based everything.

Guest Didier/Zheng Di

Frontier technology investor, managing the "Dots Institutional Investor Community" on the Knowledge Planet

Guest Sherry Zhu

Futu Group's global head of digital assets, worked at the Hong Kong Securities and Futures Commission for more than five years, responsible for encryption policy and licensing direction

Guest Zixi Zhu

Founder of the on-chain stock project Stable Stocks, formerly worked at Matrix Partners and co-founder of 10K Ventures, X: Zixi.sol

Anchor Hazel Hu

Host of the podcast "Zhi Wu Bu Yan", 6+ years of experience as a financial media reporter, core contributor to the Chinese Public Goods Fund GCC, focusing on the practical application of encryption. X: 0xHY2049; Immediately: A careless Yueyue

Anchor Ivy Zeng

Host of the podcast "Zhi Wu Bu Yan." Previously worked in VC post-investment, where she became involved in pop-up cities and payments. Currently responsible for growth at a new type of bank. (X: IvyLeanIn; Immediately: Spoon in Cup; Xlog: ivyheretochill)

Sponsors

This episode is sponsored by Cobo, the largest digital asset custody and wallet solutions provider in Asia Pacific.

Facing the new wave of global payments, Cobo helps companies build digital currency acquiring capabilities and provides a full-stack payment solution covering underlying wallets and risk control compliance.

Visit https://www.cobo.com/ for more information or schedule a demo.

2. User needs and profiles for on-chain stock trading

Ivy: Before we get into the main topic, let's have a quick discussion: Do any of you currently have a US stock account? What software do you use? Are you considering investing in US stocks on the blockchain?

Sherry: I'm a big user of Futu. I initially chose Futu because of its excellent product experience, and later joined the company because I was impressed by its product strength. I've always been very interested in innovative products like on-chain US stocks.

Currently, most US stock tokens launched in the industry are derivatives, more aligned with the preferences of crypto-native users than the voting rights, dividends, and other benefits traditional US stock investors value. However, these on-chain derivatives do offer a wider range of application scenarios, such as serving as the underlying assets of DeFi's Lego blocks. As long as this product addresses real user pain points, I believe the market will respond positively.

Zheng Di: I initially used Interactive Brokers (IB), and recently started using Moomoo, the overseas version of Futu. The interface design of Chinese companies is more in line with Chinese user habits.

I believe the real beneficiaries of this market rally are online brokerages. Traditional exchanges (CEXs) face even greater challenges, as most crypto traders have suffered heavy losses, while those trading US stocks have profited handsomely. This has led many CEXs to turn to operating Xiaohongshu accounts to attract traffic.

Ivy: Mr. Nadi, would you consider trading US stocks on the blockchain now or in the future?

Zheng Di : I think it is possible because on-chain transactions are more convenient.

First, the money in the crypto and the money in traditional brokerage accounts are two separate entities, essentially incompatible. It's like fighting on two separate fronts. The "wear and tear" of deposit and withdrawal processes is significant, especially when dealing with fiat currency. Even in relatively easy-to-access markets like Singapore and the US, the costs are still substantial.

For example, if you deposit funds through an over-the-counter (OTC) transaction, you'll still have to pay thousands of yuan in fees. If you go through a licensed exchange like Coinbase in Singapore, you'll also have to pay a 1% handling fee and a 9% sales tax. The bill will really make you faint.

Therefore, people generally prefer to manage these two parts of funds separately and are reluctant to frequently transfer funds across systems. If the chain can provide US stock trading with sufficient liquidity depth, it is definitely worth considering.

Zixi: I mainly use Tiger Brokers because Futu didn't even have a presence in Singapore when I was studying. Tiger supports PayNow deposits, which is very convenient. I also used RockFlow before, but its deposit and withdrawal speeds were too slow.

Ivy: Today we're discussing on-chain US stocks. The key question is, who actually needs this product? Zixi, before you decided to enter this field and start your own business, you must have done more market research than most of us. Can you share some insights on this?

Zixi: Of course. I have always divided users of on-chain US stocks into three categories:

Novice users: These users are primarily located in countries with strict foreign exchange controls, such as China, Indonesia, Vietnam, the Philippines, and Nigeria. They hold stablecoins, but due to various restrictions, they are unable to open overseas bank accounts and successfully purchase traditional US stocks. On-chain US stocks can bypass complex know-your-customer (KYC) and deposit and withdrawal processes, allowing them to easily invest in US stocks.

Professional users (Pro users): These users hold both stablecoins and overseas bank accounts, perhaps with Futu or Tiger. However, their pain point is the low leverage offered by traditional brokerages. For example, Tiger offers only 2.5x leverage. On-chain, high leverage can be achieved by setting a higher LTV (Loan-to-Value) ratio. For example, a 90% LTV allows for 9x leverage.

High-net-worth individuals (Pro Max users): These individuals hold US stocks for a long time and may earn interest, dividends, or share gains from stock price increases through margin trading in traditional brokerage accounts. We can tokenize their stocks, such as into sTSLA or sNVDA (stablecoin-like Tesla or Nvidia). These tokens can then be used for on-chain LP lending, lending, and even cross-chain operations.

Hazel: Thank you Zixi for sharing. Sherry, you are closest to traditional stock users. From the perspective of an Internet brokerage, what user needs are currently difficult to meet with non-chain solutions?

Sherry: Let me summarize several common pain points:

Low capital efficiency: Traditional securities trading has a settlement cycle of T+1 or even longer, and capital turnover is slow. Especially when investing across markets, capital transfers take even longer.

Trading hours restrictions: US stocks open at night, making it difficult for Asian users to monitor the market. Many users would like to have a 24/7 trading window.

High investment threshold: Stocks like Tesla and Nvidia have high unit prices, and users with small regular investment needs cannot enter.

On-chain stocks provide a space for imagination, such as real-time settlement, fragmented investment, 7×24 hours trading, on-chain mortgage lending, etc. These are scenarios that traditional finance is difficult to cover.

Of course, Futu is also using innovative ways to solve these problems:

Launched a unified purchasing power mechanism that can calculate users' total assets in cash, securities, and money market funds in multiple markets in real time, enabling cross-market transactions;

Launched night trading, covering almost 24 hours a day;

Introducing Fractional Shares (fractional share investment), for example, you can buy Tesla shares with as little as $5.

However, I must emphasize that despite our continuous innovation, the underlying architecture remains centralized. The emergence of blockchain does have the potential to bring about deeper structural changes, and may even drive the reconstruction of the entire financial infrastructure.

3. The long-term trend of stocks on-chain

Hazel: Mr. Di, we've heard some data before, such as XStocks' total market capitalization of approximately $30 million and daily trading volume increasing by $30 to $40 million. As a researcher and investor, what are your thoughts on these on-chain US stock data?

Zheng Di: At present, the activity of on-chain US stocks is still concentrated in several centralized exchanges, such as Gate and JuBi. The trading volume of these two platforms accounts for 70%-80%.

However, products like those in partnership with Kraken have not performed well on the chain. Although they have officially released a lot of news, such as holding a license in Bermuda through a subsidiary, the overall trading volume has not increased.

In terms of compliance, if we rank them, Robinhood is the most compliant, Dinari is in the middle, and Kraken is a more aggressive approach.

A significant regulatory development is that US SEC Commissioner Hester Peirce recently stated that if stock token trading is to be open to retail investors, it must be conducted on a platform licensed by a national securities exchange, such as the NYSE or Nasdaq. Otherwise, it will be restricted to accredited investors. This statement could have a significant impact on projects like Dinari and Coinbase.

But in the long run, I believe the convergence of stocks and cryptocurrencies is a trend. Within three to five years, traditional stock exchanges and crypto exchage will become direct competitors, like the competition between Nasdaq and Binance, or the Hong Kong Stock Exchange and Coinbase. By then, traditional exchanges may also move their trading structures on-chain, significantly reducing settlement costs in the middle and back-end.

So, we need to consider whether the on-chain role will become a front-end tool, directly facing users, or will it become the back-end infrastructure for brokerages and exchanges? I think both are possible.

In one scenario, end-users trade directly with on-chain products. In another, users still place orders through familiar apps, brokerages, and front-end operating systems, but the entire underlying trading logic is already running on-chain. This trend is irreversible.

Take Robinhood, for example. While it currently uses contracts for difference (CFDs) for "lightweight, fast, and compliant" stock token trading, its business model inherently favors on-chain structures. Therefore, I believe that Robinhood's first phase will be CFDs, and its second phase will inevitably move towards a full on-chain trading process.

Currently, on-chain stock token trading primarily occurs within centralized exchanges (CEXs), and truly full-chain scenarios are relatively rare. However, another possibility exists: users use the CEX or brokerage front-end, but the back-end trading and settlement infrastructure is already running on-chain. This "centralized on the surface, on-chain behind the scenes" model may be a compromise that best suits current user habits while also embracing new technological architectures.

Especially in the short term, the barrier to entry for on-chain transactions remains high, making it unlikely for novice users to directly interact with the chain. Perhaps in the future, once AI agents mature and security solutions are implemented, users will be able to trade on-chain assets through AI, but that will take several years. Therefore, until then, enabling users to indirectly access on-chain assets through front-end-friendly CEXs or brokerages will likely be the mainstream approach. I believe we're still in the early stages, but this path is certain and holds the potential for explosive growth.

4. Is on-chain US stock customer acquisition a patchwork of web2 and web3 marketing?

Hazel: Regarding user demand, there's another follow-up question: how do you attract these users? After all, the on-chain US stock product itself spans Web2 and Web3, so wouldn't its marketing be a patchwork? Zixi, as a startup, what are your thoughts on your go-to-market (GTM) strategy?

Zixi: Our product has been a broker from day one. Retail investors deposit USDT into our wallet address. When placing an order, we transfer the funds through Coinbase to our US bank account, then deposit them into Nasdaq to complete the trade. After the transaction is completed, we mint a 1:1 stock token on-chain for the user based on the information returned by the broker. Throughout this process, the information flow and asset flow are separated. We prioritize the information flow to ensure the trustworthiness of the on-chain mapping.

Our approach to attracting users is also divided into two levels:

On-chain: We have a product called Vote. Users stake tokens like sTSLA and sNVDA into Vote, and we then provide these tokens to various DeFi protocols, such as lending and DEX market making. We split the profits with market makers and return the majority of the profits (80-90%) to users.

Operationally: We primarily rely on Web3 methods, such as transaction mining and liquidity mining. These growth methods are more natural and can better mobilize the enthusiasm of crypto users.

Sherry: I think the two directions mentioned by Zixi are very good. I can add another direction - the demand for institutional arbitrage.

For example, market makers and quantitative funds are also interested in on-chain US stocks and can enter through arbitrage mechanisms. However, institutions are more sensitive to regulatory frameworks and must meet internal compliance requirements before participating.

So I think from the growth perspective:

Initially, it relies on the native Web3 ecosystem to feed back users and on-chain gameplay to attract capital flows;

Rapid product iteration in the mid-term in the gray area where regulation is still unclear;

The Matthew effect will be formed in the long term, redefining the way capital flows.

While you could argue there's some regulatory arbitrage involved, it could also force reform, much like the initial unchecked growth of USDT, which ultimately led to changes in regulation and financial architecture. The significance of on-chain US stocks might not simply be an "alternative channel," but a true form of financial infrastructure.

5. Global expansion of Chinese enterprises

Ivy: Zixi, when we heard you talk about this topic a month ago, the on-chain US stock market was still a nascent one. But in the past two weeks, various players have suddenly become active, with online brokerages launching new features and exchanges entering the market one after another, and the market's enthusiasm has rapidly increased. As a professional startup, how do you view the competition? What are the potential opportunities for differentiation?

Zixi: I think players in the on-chain US stock market can be roughly divided into three categories:

US-based projects include Dinari and Robinhood. Dinari has a stronger regulatory compliance foundation and focuses primarily on the US market; whereas Robinhood, due to regulatory restrictions, is currently only testing the waters in the European market, with a weak presence in the Asia-Pacific region.

European projects, such as Backed Finance, typically partner with exchanges, adopt a B2B2C approach, and primarily focus on the European market. However, reaching end-users in the Asian market, particularly the Asia-Pacific region, is relatively difficult.

Chinese-speaking startup teams like ours are more familiar with regions like Asia Pacific, Southeast Asia, and the Middle East from the outset. Many of our team members have lived or worked in these regions, naturally giving them a deeper understanding of local users, language, culture, and compliance procedures.

Honestly, entering the US and European markets wasn't easy for us. However, we are very familiar with the local markets, which gives us a significant advantage when onboarding institutional clients and communicating with retail investors. For example, many users ask, "Since you're a Chinese user, why don't you use Futu or Tiger instead of Interactive Brokers?" These local brands serve as anchors of trust.

So, you'll find that whether it's a brokerage, asset management, or exchange, users essentially rely on "trust + local experience." It's difficult for a market to form a "super unified" platform; there will always be second, third, and fourth players who can capture their respective market shares and thrive.

Ivy: It sounds like the on-chain US stock market is still a non-oligopoly market, with each player having their own strengths. Sherry, could you please describe Futu's global business layout? Specifically, in the Web3 space, what capabilities does Futu currently possess?

Sherry: Yes, Futu has indeed made significant efforts to globalize in recent years. We use the "moomoo" brand in markets outside of Hong Kong. Since entering the US market in 2018, we have expanded our business to Singapore, Australia, Japan, Canada, Malaysia, and recently entered the New Zealand market through an Australian license. We currently have over 26 million registered users worldwide, with client assets reaching hundreds of billions of US dollars and annual trading volume approaching one trillion US dollars.

In the Web3 direction, we actually started planning very early, and it is mainly divided into the following areas:

Hong Kong: Starting in August 2023, Futu has supported trading of mainstream cryptocurrencies (such as BTC and ETH). This year, it also launched a deposit and withdrawal feature, allowing users to convert cryptocurrencies in their wallets into fiat currency with a single click, directly investing in traditional assets like Hong Kong and US stocks, and withdrawing funds to banks. This significantly addresses the challenges crypto users face in withdrawing funds, including difficulty in withdrawing funds, high fees, and non-compliant channels.

In addition, Futu has also established a licensed exchange called "Cheetah Exchange" in Hong Kong. In January this year, it obtained the Virtual Asset Trading Platform License (VATP) issued by the Hong Kong Securities and Futures Commission and is currently cooperating with regulators to complete subsequent evaluations.

Singapore: Moomoo is the first local digital brokerage to obtain a digital asset trading license from the Monetary Authority of Singapore. It launched crypto trading in July last year and will also launch deposit and withdrawal services this year, with plans to support more currencies in the future.

United States: It has obtained MTL licenses and exemptions in more than 40 states and provides transactions for more than 30 mainstream cryptocurrencies.

In the future, we hope to expand our Web3 business to all countries covered by securities business under a compliance framework, and realize the vision of "one app, one account, investing in global assets".

Hazel: Some virtual asset concept stocks in Hong Kong stocks soared some time ago. What do you think of this market enthusiasm?

Sherry: Indeed, this shows that the market is optimistic about traditional financial institutions entering Web3, which is a typical bull market performance. But we also need to look at it calmly:

Some brokerage firms have obtained upgraded qualifications based on the Type 1 license, essentially continuing to operate as brokerages, providing virtual asset services through omnibus accounts. The Hong Kong Securities and Futures Commission's official website currently lists 43 institutions with similar qualifications. Under this model, brokerage firms are restricted to licensed virtual asset exchanges, with their business scope and tradable currencies restricted by the upstream exchanges.

We at Futu hold both a No. 1 license and an exchange license. Our goal is to create an “upstream and downstream integrated” ecosystem and create synergy in areas such as stablecoin applications and asset issuance.

However, it's important to emphasize that a license is only an entry ticket, not a guarantee of success. In the long run, truly competitive platforms will be those that can organically integrate both types of resources, leverage a strong customer base to create an ecosystem, and possess the ability to continuously innovate.

Hazel : Zixi, what compliance licenses are involved in the current operation of your Stable Stocks business? What is your strategy?

Zixi: Currently, our team does not hold a direct license, but we cooperate with our partners through license authorization, which is divided into two parts:

1) Broker Dealer License

This is an area of particular concern for the SEC. Our off-chain transactions are physical shares, which are tokenized securities, and therefore must be conducted by institutions with securities licenses. The licenses we use include:

Hong Kong's number one license plate;

Broker Dealer brand in the United States;

Australia's AFSL (Australian Financial Services License), etc.

These are held by our partners, who allow us to operate together within a compliant framework.

2) MSB Payment Service License

Because we are also involved in the process of USDT or fiat currency entering the banking system from Coinbase and then transferring to the exchange's bank account, which involves compliant deposits and withdrawals, we also need to:

Money Service Business (MSB) license in the United States;

Similar payment licenses are also required in other countries to legally explain the source and flow of user funds.

In addition, if we launch asset management products in Hong Kong in the future, we may have to apply for a Type 9 license; if we expand into the Middle East such as Dubai and Abu Dhabi, we will also need to obtain virtual asset business licenses from VARA, ADGM and other places.

6. Robinhood and the ambitions of US brokerage firms

Hazel: We just talked about Chinese brokerages and crypto-native startups, but there's another equally important player: online brokerages trading US stocks. Robinhood is a very representative example. Mr. Di, I know you're very familiar with Robinhood's business model and history. Could you break down their development path, revenue structure, and why they've entered the on-chain US stock and CFD space?

Zheng Di: Robinhood is actually a very divided company. On the one hand, its zero-commission policy and young user base are enviable, but on the other hand, many people feel its model is somewhat exploitative. It's clearly different from traditional online brokerages like Interactive Brokers (IBKR).

Interactive Brokers' revenue structure is relatively stable, mainly coming from:

Interest income (including interest on idle cash and securities lending) can account for 60-70%;

The remaining 30-40% is transaction commissions and other fees.

In contrast, Robinhood's revenue comes primarily from:

PFOF (Payment for Order Flow) order flow resale revenue;

And a part of the interest income (they have also been working hard to increase this proportion recently, such as increasing the penetration rate of gold card members, which has now reached 12.3%).

But Robinhood can't completely get rid of PFOF because their users are very different from Interactive Brokers:

Interactive Brokers targets institutional and high-net-worth investors who are price-sensitive and very concerned about fee structures.

Robinhood targets younger retail investors with a higher preference for volatility. They are less sensitive to prices and instead focus more on "ease of use" and "excitement."

This also determines Robinhood's PFOF revenue model - you are being "charged" unknowingly, but you don't realize it.

Zheng Di: Let me illustrate this with data. For example, when Robinhood trades stocks, the market-making rebate given to it by companies like Citadel Securities is 0.8 basis points, or 0.8 per ten thousand. But when trading options, this rebate can reach 8 basis points, which is 10 times that of stocks.

If you are trading crypto, the rebate given by platforms like Binance.US, C2, and Jump is about 35 basis points, which is 45 times that of stocks and 4.5 times that of options.

That's not all. There's also the smart routing premium and slippage, which together contribute another 20 basis points. So, you can understand why Robinhood earns roughly 55 basis points on each crypto trade, which is already half of Coinbase's retail fees. Yet, everyone thinks Coinbase's fees are expensive because they're transparent. But no one thinks Robinhood's are expensive because Robinhood is a brokerage, not an exchange, and uses "hidden fees."

This is why the Florida Attorney General launched an investigation into Robinhood a few years ago, alleging it was engaged in false advertising. They claim to offer "zero commission trading," but are actually charging fees through PFOFs and hidden slippage.

When I was communicating with some institutions a few days ago, they were also confused: Robinhood launched the CFD (contract for difference) function for trading US stocks in Europe. Why should European users use Robinhood instead of local brokerages?

I say it's simple because Robinhood claims to offer zero-commission trading. There's probably no other brokerage in Europe that's as competitive with zero-commission trading. Robinhood's apparent fee is only a 0.000% euro-dollar exchange fee; everything else is zero. However, they can employ other methods. For example, if Tesla's underlying stock price is $200, they might quote it to users as $200.05 or $201, making an extra dollar profit that users won't notice. This structure ensures that Robinhood's "zero-commission trading" actually carries significant costs.

Robinhood's profits therefore come from self-feeding prices and hiding fees. This also makes Robinhood's business model heavily dependent on the characteristics of its user base: youth, a willingness to take risks, and a lack of financial literacy. Of course, this model is very friendly to Robinhood shareholders.

Hazzel: I'd also like to ask Mr. Di to explain this in more detail. We know that Robinhood is essentially an on-exchange contract for difference (CFD), but many listeners may not quite understand this model. Could you explain in more layman's terms what CFDs are and how they are anchored to the underlying stock price?

Zheng Di: Okay, actually, you can simply understand the Contract for Difference (CFD) as a perpetual contract with a 1x leverage. It is settled in cash, and it will always exist as long as you don’t close the position.

But this is actually a "virtual contract" because you can't withdraw the currency and there is no actual stock asset delivery. The only reason it can work is that you have an "anchor" - the actual price of the underlying stock.

There are two ways to obtain the anchor price:

Relying on arbitrage to smooth it out through price differences, but this will result in uncompensated losses, which is also a drawback of many DeFi models;

The introduction of the price feed mechanism (Oracle) is the background for Chainlink's rise in the last bull market.

But Robinhood clearly doesn't want its profits to be taken away by arbitrageurs. Its entire market is closed-loop, and it simply feeds its own price feeds. I saw in Backed Finance's work documents that they use an oracle once every 24 hours, mostly using their own, and that they will urgently intervene with the oracle when the price difference exceeds 10%. To prevent arbitrage, they also set a redemption cap. If you're an institutional investor, the highest tier, your total subscription and redemption volume per 24-hour period appears to be capped at CHF 30 million.

Conversely, Robinhood likely uses a similar mechanism. When the price deviates significantly from the underlying stock, a custom price feed is triggered. However, this price is set by Robinhood itself, effectively giving it the final say.

Therefore, in their zero-commission model, the way they make money is not from handling fees, but from price differences and slippage, and users are completely imperceptible to it.

Furthermore, unlike Dinari or Xtock, which offer 1:1 asset swaps, Robinhood's CFDs are legal and compliant securities derivatives. Their compliance is completely sound, and there's no issue with proxy asset holding. As we all know, during the GME (Golden Metal Exchange) incident, Robinhood faced a $3.7 billion funding shortfall and nearly collapsed. Subsequently, the US Congress, including relevant SEC departments, attempted to investigate Robinhood. Therefore, I believe that in the years since then, Robinhood has been under constant scrutiny.

For example, Robinhood's holdings of underlying stocks in the US aren't intended as collateral for CFDs, but rather to hedge its own short positions. CFDs are essentially a bet between Robinhood and its customers: you're long, they're short. This is why Robinhood holds the underlying stocks as a hedge. This entire design is very clear in terms of compliance, risk control, and profit structure. It can even be said that this model is much cleaner than token mapping on-chain. However, I also believe that Robinhood will definitely enter the on-chain market in the future, as on-chain products are more profitable. The rebates for on-chain products are much higher than those for stocks, and the profit margins are greater.

7. Deepen the impact of stocks on the blockchain on the profit sharing chain

Ivy: Mr. Di just explained how Robinhood puts US stocks on-chain and how it tracks prices. Zixi, could you also explain how Stable Stocks implements price feeds? Which stakeholders are involved in this process? How are prices handled on weekends and during market hours? What happens when there's a price discrepancy between on-chain and underlying stocks?

Zixi: I have introduced this before. To put it simply, users can buy and sell US stocks through our Broker. When users buy US stocks on the chain, we will simultaneously purchase real stocks off-chain through our cooperative brokerages and mint the corresponding tokens to achieve a 1:1 mapping.

Many people ask us, "Don't you need an oracle to synchronize prices?" In fact, in our model, on-chain transaction prices are essentially brokerage prices. User trading behavior directly reflects the real market price, without the possibility of decoupling. In theory, there should be no significant price difference.

Of course, not everyone can participate in arbitrage (such as cross-market arbitrage or arbitrage). However, if we can open up more brokerage interfaces in the future, such as opening accounts on platforms like Futu and Tiger, and allowing arbitrage during night trading, the price gap will be further eliminated.

Market closings and weekends are special periods of time because the off-chain market is closed, but the on-chain market is still open.

Our current idea is to use a weighted approach to calculate the reference price for this period, for example:

Friday's closing price × α + average on-chain transaction price × β

We are further studying this model with our team to ensure that it is both reasonable and reflects market expectations.

Ivy: You just mentioned that the old model of Mirror Protocol is different. Can you elaborate on the differences between yours and it?

Zixi: Yes. I've used both Mirror Protocol and Synthetix. Their core issue is inefficient liquidity utilization. For example, Synthetix requires 80% overcollateralization. If you deposit 100 USDT, you might only be able to mint 20 USDT worth of synthetic assets. Capital efficiency is incredibly low.

Our approach is to completely mirror actual off-chain stock purchases 1:1. Once you make an off-chain purchase, we mint the corresponding token. This is similar to the logic behind stablecoins, but with higher liquidity efficiency. We hope to enable everyone on the blockchain to access high-quality assets, achieving true financial inclusion.

Hazel: Specifically, how does Stable Stocks make money? How are the profits shared among different stakeholders, such as brokerage firms, public blockchains, and exchanges?

Zixi: Our profit model can currently be divided into three parts:

1) Broker Transaction Fee

We operate as a proprietary broker, similar to platforms like Futu. As long as we don't use PFOF (payment for order flow), we must charge a "full fee," or normal trading commission. Since we don't make money from selling orders, this fee is higher than that of Robinhood or Futu.

We also provide some OTC services. We hold a MSB license and can legally offer OTC trading, rather than relying on black market liquidity. However, our volume hasn't yet grown, so we charge lower fees for VIP users and higher fees for regular users.

In addition, we will also charge a portion of the on-chain transaction fee, which is expected to be between 15,000 and 1,000 (the specific amount has not yet been determined). Overall, the average fee for the entire platform is around 1,400.

2) On-chain business model: market making and liquidity provision

On-chain, our primary profit stream is market making and providing liquidity. We are building a Maker Liquidity Pool similar to MakerDAO. Users can entrust their assets to us, and we will then find professional market makers, decentralized exchanges, and lending protocols to distribute liquidity.

The logic is the same as Lido’s staking model for Ethereum:

Ordinary users cannot become nodes or traders themselves.

So, just hand over your assets to us.

We uniformly allocate liquidity, hedge risks, and receive agreement subsidies.

Users receive income certificates, and we help them split the stocks into different strategies for liquidity use. This part of the income will become another source of income for our platform.

3) Off-chain cooperation and lending business

In the future, we will also have some income related to physical stock lending, which will mainly come from cooperation with securities firms, such as helping clients with stock pledges and financial management services.

Ivy: Okay, let's ask Mr. Di the same question. What are your thoughts on the impact of blockchain-based stocks on brokerage firms' profit models? In particular, what new profit-sharing structures will emerge between brokers, issuers, and public blockchain exchanges?

Zheng Di: This is a very good question. In fact, it should be viewed from two dimensions: legal definition and business model.

Legally speaking, no matter how you put it on the blockchain, it's still a security. Even if it's just a transfer of income rights and doesn't include full shareholder rights, it will still be considered a security. Therefore, it will still be regulated as a security.

But from a business model perspective, who will get the rebate after the stocks are put on the chain? Will it be calculated according to the current 0.8BP of traditional stocks or the 35BP of DEX? This depends on the ability of the on-chain matchmaker - whether it can control slippage and profit margins.

In fact, there are many tools on the chain that can prevent "slippage" and "order taking", but the problem is that it is difficult for novice front-end users to perceive these behaviors. In other words, even if the back-end costs drop significantly, the front-end quotes may not drop by that much accordingly.

Let me give you an example: This has already happened in the payments industry. Stripe acquired Bridge, a stablecoin payment service provider. Bridge's service to B-side businesses was priced at only 1.2‰ to 2.5‰, while Stripe's traditional card schemes charge 2.8% to 3%. After the acquisition, Stripe packaged its stablecoin service as a new product and offered a 1.5% fee to the public.

This may seem like a "price reduction," but the actual cost is only about 0.12‰ to 0.25‰. Even with fiat currency deposits and withdrawals and OTC costs, it's probably no more than 1,800 yuan. In other words, it still makes a lot of money, it just "didn't drop the price much."

This logic also applies to Robinhood. If stocks are put on the blockchain in the future, they may no longer rely on the useless off-chain rebate business to make money. Instead, they may use the extremely low financial transaction costs on the blockchain to reduce their own costs while maintaining a superficially "reasonable quote." Even charging 5 basis points or 10 basis points is much higher than the current price.

Even if the rebate on the chain is only 8BP, it is still 10 times the 0.8BP off-chain. Therefore, Robinhood will definitely embrace this model because it has huge room for revenue growth.

This, however, also depends on whether regulation can keep pace. If regulation remains absent, it will become a gray area—one where middlemen can continue to exploit information gaps to exploit novice users. This is a future Robinhood may be hoping to achieve.

Hazel: I mentioned earlier that during our conversation with GPT, GPT believed that regulation would "penetrate," meaning that as long as the underlying assets were securities, the PFOF rebate model would still be regulated. But you said at the time that GPT was gravely mistaken. What are your thoughts?

Zheng Di: I still hold this view: even if regulators take action, it will be slow. The US doesn't completely ban market maker rebates; it simply requires transparency.

Currently, the EU, UK, Canada, Australia, and Singapore have all banned this model, but the US remains compliant. This is because Robinhood is like an investment bank's sales department, and Citadel is like its trading desk. Traditional investment banks rely on these two departments for internal collaboration, but Robinhood and Citadel are "external partners." If rebates are truly banned, Robinhood and Citadel could simply merge into one company to circumvent the ban.

Under the current political landscape, Republicans have largely ignored this issue, while Democrats have shown a keen interest. I originally assumed regulation would only be pushed forward after the November midterm elections, when the Democrats could turn the tables. I wasn't expecting Florida to initiate an investigation so quickly.

Of course, Florida cannot directly regulate PFOFs, so it can only approach the issue from the perspective of false advertising - for example, Robinhood claims to have "zero commission trading", but in fact it makes a lot of money through order commissions, so it can only use this as a reason for investigation.

This situation warrants continued observation to see whether it spreads nationwide. However, my overall assessment is that a complete ban is highly unlikely. At most, platforms will be required to disclose more information. For example, market maker rebates for US stocks and options currently only disclose information, not outright prohibit them. Furthermore, the interests of both parties are not aligned, so this legislative amendment process will not be swift.

7. A review of Hong Kong’s virtual asset regulatory history

Hazel: Back to Hong Kong, I'd like to ask Sherry to explain Hong Kong's regulatory logic for crypto-related businesses. You previously worked at the Hong Kong Securities and Futures Commission for many years and participated in the licensing process. Can you review the thinking behind Hong Kong's licensing process?

Sherry: The Hong Kong Securities and Futures Commission (SFC) actually started regulating virtual assets quite early. During the ICO boom in 2017, regulators in many countries were still debating whether virtual assets were legal and worthy of legislative regulation. Some even believed that crypto would eventually fade away and was merely a passing fad.

But Hong Kong made a decisive decision at the time: crypto would not die out, and regulation was inevitable. The question was—how to regulate it? At the time, the Hong Kong Securities and Futures Commission (SFC) did not legally have the authority to issue licenses for such assets. Many other regions used payment licenses, offering a "light-touch" approach to anti-money laundering regulations.

But things are different in Hong Kong. The Securities and Futures Commission (SFC) has long experience regulating traditional finance and has weathered numerous financial crises. Therefore, in 2018, it proposed a core principle: "Same business, same risks, same regulation." This means that many crypto projects are essentially replicating traditional financial practices. Given the similar risks, regulatory standards cannot be downgraded.

However, the legislative process had not yet started at that time and the industry was developing rapidly, so the CSRC formed two major regulatory strategies in practice, which I call two "comprehensive" ones.

The first "comprehensive" aspect involves in-depth regulation. We've found that virtual asset trading platforms (also known as crypto exchanges) pose the highest risk within the entire ecosystem, particularly regarding issues like client asset custody, security, conflicts of interest, and market manipulation. In 2019, without legislative support, the China Securities Regulatory Commission (CSRC) designed a voluntary licensing framework, drawing on licenses 1 (securities trading) and 7 (automated trading services) under the existing Securities and Futures Ordinance.

This framework is very comprehensive, covering the core risk controls in exchange operations, such as customer asset custody, hot and cold wallet ratio requirements, network security, anti-money laundering, market operation regulations, etc. At that time, several institutions became the first platforms to enter the Sandbox.

It was not until June 2023 that the Hong Kong Anti-Money Laundering Ordinance came into effect, upgrading this framework to a mandatory licensing system.

I remember that during those years, we frequently shared our experiences with regulators around the world. Many countries would ask us questions about the technical standards we developed, such as, "Why do you require 98/2 for hot and cold wallets?" and "How do you design your insurance mechanism?" To this day, many regulators still refer to Hong Kong's institutional framework.

The second "comprehensive" aspect is the breadth of our expansion. Beyond licensing exchanges, we've expanded our scope to encompass the entire virtual asset business chain, including brokerage, asset management, and advisory licenses.

for example:

Securities dealers with a No. 1 license can provide virtual asset trading through omnibus accounts and can also act as introducing agents for exchanges.

The advisory agency of brand No. 4 can provide crypto investment advice.

For Type 9 asset management, if more than 10% of the funds under management are invested in crypto, you can also apply to upgrade your license to manage crypto funds.

Ivy : You mentioned exchange-related regulation. What about businesses like "stock on-chain"? Would traditional online brokerages or capital market exchanges be allowed to do this in Hong Kong? What would the specific regulatory process be?

Sherry : Hong Kong actually has very clear restrictions in this regard. Section 19 of the Securities and Futures Ordinance grants the Hong Kong Stock Exchange a statutory monopoly. This means that whether it's off-chain or on-chain, any trade involving Hong Kong stocks can only be matched by the Hong Kong Stock Exchange.

In other words, any other platform attempting to operate Hong Kong stock trading business in Hong Kong (including on-chain) is not legally permitted.

This point was actually very clear to me during my time at the China Securities Regulatory Commission. Whenever the industry discusses putting stocks on the blockchain, the discussion usually stops at the Hong Kong Stock Exchange's monopoly.

This legal status has a long history. A historical review reveals that Hong Kong wasn't the only exchange in existence. There were four exchanges before, but due to various factors, including liquidity issues, they gradually consolidated into the current HKEX. This structure is the result of years of evolution, and anyone who attempts to challenge or question it will face significant resistance.

Furthermore, this is no longer within the purview of the Securities and Futures Commission (SFC). Changing the Hong Kong Stock Exchange's monopoly cannot be driven solely by regulatory oversight, but requires the involvement of higher-level policy bodies, such as the government and the Legislative Council.

Despite this, within the constraints of the existing regulatory framework, the industry has been actively exploring innovative approaches within compliance. For example, I've seen some institutions experiment with packaging stocks or other underlying assets into a fund structure and then tokenizing and distributing them through collective investment schemes (CISs). This no longer directly defines them as "stocks," but rather as token issuances for private equity funds.

From a legal perspective, this approach does open up a new path, circumventing the red line of securities matching. However, there are also some practical challenges. For example, if a fund wishes to issue funds to retail investors, it still must obtain approval from the Investment Products Department of the China Securities Regulatory Commission. Compared with traditional securities issuance, the approval process is not as efficient as financing.

So, at present, this model still faces many restrictions in Hong Kong, and its advancement is somewhat difficult. However, I believe that with the development of technology, the evolution of regulatory concepts, and the gradual realization of "everything on the blockchain", this may change in the future.

I personally look forward to the day when traditional exchanges face the impact of on-chain transformation. At that time, the Hong Kong Stock Exchange may not necessarily stick to its current model; it is entirely possible that it will make a choice.

8. Imagine a future where everything is on the blockchain

Hazel: I think this final section could be a good time to discuss some more futuristic possibilities. Right now, we're mostly discussing the capabilities of traditional stocks, such as the returns from price growth. But will tokenized stocks offer new capabilities in the future? I remember in one of Mindao's podcasts, he raised an interesting point: If I hold tokenized Disney stock, will I get discounted tickets to Disneyland in the future? In other words, if we give stocks more "attached rights," would that increase their appeal? Have you considered what new value tokenized stock can offer users, beyond traditional shareholder rights like dividends and voting?

Sherry: When I was thinking about this issue, I always felt that the real charm of blockchain lies in its programmability.

In the traditional financial system, securities are "dead." For example, matters like dividends, stock splits, bonuses, and voting rights are all handled through announcements, manpower, and processes, resulting in low efficiency, limited flexibility, and a poor user experience.

On-chain securities, however, are "live" and can be dynamically adjusted through smart contracts. For example, different equity classes can carry different rights. If a company suddenly decides to offer shareholders a special benefit, such as ticket discounts or exclusive pre-sales, it can be distributed instantly through an on-chain contract, eliminating the need for announcements or manual registration processes. This gives tokenized stocks richer interactivity than traditional stocks and provides users with a more emotional and consumer-oriented experience.

On the other hand, the future is an AI-driven era, where a vast amount of IP content, NFTs, and creator assets will be on-chain. These assets can also interact with each other through smart contracts. The integration of securities and NFTs, identity credentials, and content copyrights will create a highly imaginative structure. While I'm not a technologist and can't claim these things will be realized immediately, I believe they're a direction worthy of long-term investment.

Hazel: I see. What do you think, Mr. Di? Do you have any particular thoughts on the ultimate outcome of tokenized stocks, or even "everything on the blockchain"?

Zheng Di: Actually, Michael Saylor already raised this issue in February of this year. He made it clear during a research session with institutions. While he didn't use the phrase "everything on the blockchain," his meaning was clear: "The future is the digital economy. Everything—from IP to a house, a collectible, to a stock—should be traded on the blockchain."

He said that in addition to Bitcoin, the overall size of other digital assets will grow from the current US$1 trillion to US$590 trillion in the future.

Therefore, the assets we are currently working on on-chain, such as money market funds and stocks, are actually still considered "infrastructure" in traditional finance. These things can originally be traded off-chain.

But the more important question is whether we can bring assets that are “originally untradable” in the real world onto the blockchain. I believe this is a truly new asset class.

Imagine if games like "Sheep Goat" could be invested in on-chain, or if the box office revenue of "Nezha 2" could be invested directly through tokens. Wouldn't that open up a whole new market? In reality, you can't just invest in the box office of a specific movie, but on-chain, you can buy the future copyright income of a song, buy the playback revenue of a short drama, or even invest in a character trained by an AI model.

These assets are characterized by high volatility, high volatility, and strong cash flows. Essentially, they're more like "tradable lottery tickets," and they're real-world, income-generating assets, not just tokens. I believe that if Robinhood users could invest in GameStop, they would also invest in content assets like these, because they inherently enjoy betting on a hit.

Hazel: I'm particularly touched. We actually discussed these ideas back in 2017 and 2018. Back then, many of the narratives about "chain-based" and "currency-based" reforms seemed so far-fetched, even a bit like empty air. Without a compliance framework, and without the ability to connect on-chain and off-chain, many projects ultimately fizzled out.

But now, six or seven years later, we're returning to this narrative, and it seems like it's truly starting to materialize. I'd also like to add that Zheng Di's comment about "things that can't be traded in real life, but everyone wants to trade" is actually being partially absorbed by prediction markets.

For example, you can bet on whether Zelensky will wear a suit tomorrow or whether Nezha's box office will break 2 billion yuan. However, these prediction markets are not tied to the underlying assets, so even if you win the bet, you won't receive any box office revenue.

Therefore, the truly imaginative scenario is to enable these real-world assets that can generate cash flow to be securitized, tradable, and composable. This could be the ultimate vision of "everything on the blockchain."

Hazel: We just talked about the tokenization of spot stocks. In fact, following this logic, it is easy to think of two directions:

One is to push forward: the pre-IPO (pre-IPO) equity market is put on the chain;

One is to push it forward: in addition to spot, it also includes the chain-linking of derivative markets such as futures and contracts.

Take pre-IPOs, for example. Similar practices have existed in the US for a long time, and Robinhood's listing of OpenAI's stock tokens sparked considerable controversy. What are your thoughts?

Sherry: From a Hong Kong regulatory perspective, the key principle is: "Same business, same risks, same rules." In the traditional financial system, pre-IPO equity is essentially private equity, and its sales must be limited to professional investors.

Even if a technology wrapper is added, such as a token, the Hong Kong Securities and Futures Commission (SFC) considers it to be essentially the same thing. Using a technology wrapper doesn't allow you to bypass regulation.

Under these criteria:

First, you need to certify your clients as professional investors;

Second, you also have to conduct a risk assessment and suitability analysis, such as filling out questionnaires, assessing investment experience, etc.

So, in the early days of tokenized pre-IPOs, everyone believed that putting tokens on a blockchain would increase liquidity. However, the Hong Kong Securities and Futures Commission (SFC) focused more on efficiency, transparency, and reducing intermediary friction, but never mentioned "enhanced liquidity." Why? Because truly high-quality assets will be snapped up regardless of whether they're on a blockchain. Meanwhile, unpopular assets won't automatically experience increased liquidity after being put on a blockchain.

Hazel: That's a very interesting point. "A good asset remains a good asset on a blockchain, and a bad asset remains a bad asset on a blockchain." The essence doesn't change. This may also explain why token fundraising in the crypto has been inefficient for so many years. Good projects don't necessarily adopt the token model; on the contrary, bad projects are more likely to raise funds through marketing.

However, I also wonder, if regulations allow, will traditional startups imitate the Web3 model in the future, using airdrops to attract users early on and issuing equity tokens later? Would this be like going down the DeFi path all over again?

Sherry: I think this path is very difficult to follow now. Because the supervision has caught up and the compliance framework has been basically established, it is not easy to "grow wildly" like in the past.

Hazel: Mr. Nadi, what are your thoughts on Robinhood launching OpenAI equity trading? In particular, where are the regulatory boundaries for this "primary-semi-market" model of pre-IPO transfers?

Zheng Di: This matter itself is not conclusive, but it is indeed worthy of attention. I have also discussed this with Sherry.

From an off-chain perspective, pre-IPO equity transfers already exist, but they are extremely inefficient. Once you put it on-chain, it becomes 24/7 high-frequency trading, which will directly impact these companies' existing financing strategies.

Primary market financing is inherently a scramble: shout out a valuation, circle your friends, and once the hype builds, invest. But if you establish a secondary market with ongoing transactions on-chain, that valuation is immediately subject to scrutiny. Especially in a scenario where prices are visible and in-depth, how will auditors and appraisers explain your valuation?

This will directly impact financing logic. Such transactions will shift from "verbal valuation" to "real-world validation." For example, a blockchain data company I follow boasted a $9 billion valuation two years ago, yet its primary market trading volume was $2.6 billion. How would you explain this? What would auditors think? What would fund investors think?

These companies certainly don't want shareholders placing orders, but you can't really control that. Whether a shareholder can transfer shares is determined by the articles of association and the board's authority, not by law. Many projects, driven by financing and profit margins, simply don't have the ability to restrict existing shareholders from transferring their shares.

To take a step back, even if your regulations state that it is "non-transferable", shareholders can still sign an income rights agreement and post a contract to do CFD (contract for difference), and there is no way to stop it.

Zheng Di: Robinhood is under investigation in Lithuania because it uses Lithuania's MiFID II investment license. However, the Lithuanian regulator only checks whether the company has actual stock collateral. We're not even sure if the OpenAI shares offered by Robinhood have any underlying assets.

It could simply be a derivative, a non-redeemable contract. If it is indeed a derivative contract, how should regulators handle it? This is actually a key question.

I tend to believe that no matter how hard the game is played or how much regulation is applied, this market is unstoppable. Just like the prediction market. Over a decade ago, the US government cracked down on political futures and shut down Intrade, but then PolyMarket emerged. The demand for this kind of market is always there; even if a platform is shut down, another wave will emerge.

Every day, people on WeChat Moments are selling old shares of SpaceX, ByteDance, and OpenAI, even shares indirectly linked to them through ETFs. These transactions have long existed, but they suffer from poor liquidity and low efficiency. On-chain trading simply makes them more transparent and efficient. This trend is unstoppable unless there's strong regulatory action.

Even if you don't allow equity trading, there's still the prediction market. You can open a perpetual contract for "OpenAI IPO price prediction" and trade it until the day it goes public. How can you ban it?

9. Questions from Guests

Ivy: Here comes the traditional part of our show - before the show officially ends, we will ask the guests to ask a question about today's topic, and we may throw this question to other guests for further discussion in subsequent shows.

Sherry: I have two questions:

What are your predictions for the next cycle? This round's theme is "stock-to-cryptocurrency convergence," but what about the next? Where will capital flow? Will there be continued convergence, or a new divergence?

What systemic risks might the move to blockchain bring? For example, in terms of technology, contract security, and financial structure, are there any potential for "mine-stepping" incidents or new financial risks in the next few years?

Zheng Di: This is something I've been pondering for a long time. Currently, the real push for blockchain-based stocks is being actively pursued by second- and third-tier exchanges, while first-tier exchanges are still waiting and watching. But regardless of whether they're first or second-tier, they all share one thing in common: a deep sense of anxiety.

The source of the anxiety is actually very clear - everyone has been looking forward to new traffic and new users. Now that Web2 users have really come in, they are following the path of Internet brokerages, not exchanges.

If this trend continues, does it mean that Internet brokerages will become the biggest winners in this round of stock-cryptocurrency integration?

The question then becomes: How will CEXs (centralized exchanges) respond to this situation? Especially in the next three to five years, they may face direct competition from Nasdaq, the New York Stock Exchange, and the Hong Kong Stock Exchange.

So my question is: facing this potential head-on conflict, what is the path forward for CEX? Can they find a new value proposition, rather than relying solely on price and new listings?