Recently, Futu Securities and Tiger Securities have announced their plans to enter the cryptocurrency industry and plan to launch cryptocurrency trading platforms.

Tiger Securities told the “Blockchain Daily” reporter that it is indeed applying for relevant licenses in the United States, Singapore and other countries and will provide cryptocurrency services to overseas customers. Futu Securities responded to the “Blockchain Daily” reporter that the launch of cryptocurrency trading is a plan for the second half of this year.

By charging high fees and commissions, exchanges have become one of the most profitable business models in the crypto industry. This year, as the price of Bitcoin has skyrocketed, various exchanges have made a lot of money.

The “Blockchain Daily” calculation found that Coinbase, the largest cryptocurrency exchange in the United States, had a net profit of $771.5 million in the first quarter of this year, with an average daily profit of $8.572 million; the world’s largest exchange Binance had a profit of $3 billion in the first quarter. Cheng Renminbi is 19.2 billion yuan, more than 40% of Tencent’s profits, with an average daily profit of more than 200 million yuan.

In contrast, Futu Securities’ net profit in the first quarter of this year was 929 million yuan, which could not match Binance’s five-day profit; Tiger Securities could not match Binance’s one-day profit of 133 million yuan in the first quarter of this year.

Faced with such huge profits, it is no wonder that Futu Securities and Tiger Securities are jealous.

How profitable are cryptocurrency exchanges?

The outside world has circulated stories about the richness of various cryptocurrencies, but the exchange is the most profitable link, and the degree of profitability may be unimaginable to the outside world.

Coinbase’s 2021 fiscal first quarter financial report showed that net profit was US$771.5 million, more than four times the US$177 million in the fourth quarter of 2020, an increase of 3.36 times from the previous quarter, and more than 24 times the profit in the same period last year.

As the world’s largest cryptocurrency exchange, Binance’s data is even more shocking.

According to data released by Binance in 2020, the average daily trading volume is US$3.88 billion, and the trading volume of Binance contracts, options, and spot leverage in 2020 is US$1.7 trillion.

Although Binance did not directly disclose the company’s profits, on April 16, 2021, Binance announced that it had burned nearly 1.1 million BNB in ​​the first quarter of this year, worth about $600 million.

Previously, the BNB white paper stipulated that 20% of Binance’s quarterly profit would be used for repurchase (later changed to burn). According to the burned amount of US$600 million in the first quarter of this year, Binance’s first quarter profit of US$3 billion can be rolled out. Converted into RMB, it is 19.2 billion yuan, making more than 200 million yuan a day.

“Blockchain Daily” asked Binance to verify whether the figure of “200 million yuan a day” is accurate, and received a response saying “about this.” For comparison, Tencent Holdings’ revenue in the first quarter of 2021 was 135.303 billion yuan, and its net profit was 47.8 billion yuan. This means that Binance, with more than 1,000 people, earns more than 40% of Tencent Holdings’ profits, and the latter employs more than 60,000 people.

The main income of cryptocurrency exchanges is to collect trading commissions. “Blockchain Daily” found that for ordinary users, Binance’s handling fee rate is 1/1000 of the transaction amount, Huobi is 2/1000, and OKEx is 0.8/1000.

Like Binance, Huobi also uses 20% of the exchange’s profits to repurchase and burn HT. According to the latest monthly operating report of Huobi, in April, Huobi allocated 104 million U.S. dollars for repurchase and destruction. According to this calculation, Huobi’s April profit exceeded 500 million U.S. dollars, and its daily profit exceeded 16.67 million U.S. dollars. 100000000.

“Blockchain Daily” asked Huobi to verify whether the above data is accurate, and the other party said it was “inconvenient to reply.”

For OKEx, 30% of the currency transaction fee is used to repurchase OKB and burn it. According to the announcement, from December 1, 2020 to February 28, 2021, OKB completed the 11th repurchase and burned about 2 million pieces, worth about 35.6 million U.S. dollars. In other words, OKEx’s currency transaction fee for three months is US$118.6 million, with an average daily average of US$1.32 million, which is about 8.5 million in RMB.

However, in cryptocurrency exchanges, contract trading is more profitable than currency trading, and OKEx is the first to launch contract trading.

How profitable is the contract? A person close to the top of a crypto exchange told the “Blockchain Daily” reporter that the exchange has less than 1,000 active contract users a month and contributes 60 million yuan in handling fees to the exchange every month.

In addition to transaction fees, the source of income for cryptocurrency exchanges includes listing fees, withdrawal fees, investment income, and issuance of their own platform tokens.

Even more frightening is that the Bitcoin market has risen sharply this year, and various business indicators of the exchange have continued to hit historical highs and maintained rapid development.

Liu Changyong, director of the Blockchain Research Center of Chongqing Technology and Business University, told the reporter of “Blockchain Daily” that so far, the most mature crypto economy is finance, so the exchange is the most profitable industry link in the crypto economy.

Traditional financial institutions are particularly jealous

Looking at these exchanges, which have grown up from the blockchain industry, making huge profits, all kinds of traditional financial giants are extremely jealous.

Goldman Sachs, Standard Chartered Bank, Singapore’s DBS Bank, etc. have all launched encrypted asset trading businesses. Domestic Tiger Securities and Futu Securities have also recently expressed their intention to enter this field.

However, due to domestic compliance policies, Tiger Securities and Futu Securities have told reporters of the “Blockchain Daily” that they will apply for compliance licenses in the United States, Singapore and other places, and will only provide encrypted trading services to overseas customers.

Although you are an emerging Internet brokerage firm, Tiger Securities and Futu Securities are far behind large cryptocurrency exchanges in terms of number of users, trading volume, and revenue.

The financial report shows that as of the first quarter of this year, there are more than 56 million verified users on Coinbase, and the quarterly total transaction volume reached 335 billion US dollars. Monthly trading users more than doubled from the previous quarter, from 2.8 million to 6.1 million. For Binance, the number of users in the first quarter of 2021 increased by 346% from the previous month, and the transaction volume increased by 260% from the previous month.

Futu Securities, as of the end of March, had 789,000 customers with assets in its trading accounts, more than three times the number of a year ago; Tiger Securities said that in the first quarter of this year, the number of customers with deposits increased over the same period last year. More than doubled, reaching 376,000.

In terms of revenue, Futu Securities’ revenue for the first quarter of 2021 was HK$2.205 billion (RMB 1.76 billion), gross profit of HK$1.761 billion (RMB 1.408 billion), and net profit attributable to the parent company of HK$1.162 billion (RMB 929 million) .

Tiger Securities’ revenue for the first quarter of 2021 was US$81.28 million (RMB 516 million), gross profit of US$81.28 million (RMB 516 million), and net profit attributable to the parent company of US$21.06 million (RMB 133 million).

In contrast, Futu Securities’ net profit of RMB 929 million in the first quarter could not even offset Binance’s five-day profit; Tiger Securities’ net profit of RMB 133 million in the first quarter could not even offset Binance’s one-day profit.

Yu Jianing, the rotating chairman of the Blockchain Committee of the China Communications Industry Association, told the reporter of the “Blockchain Daily” that traditional financial institutions are so keen on launching cryptocurrency trading services. It is accepted by more and more mainstream investors and is becoming a “new mainstream asset”.

Yu Jianing pointed out that for institutions such as Futu Securities, due to their own development in the traditional financial field, there is no threshold to build an encrypted asset trading platform. It is a further extension of the business and only needs to apply in accordance with the requirements of countries and regions. Just operate the license. Once successfully applied for a license, it will serve more institutional investors, high-net-worth individuals, and family offices.

How to apply for an overseas license?

As we all know, domestic policies do not allow cryptocurrency transactions, let alone issuing licenses.

After the “94” policy in 2017, domestic trading businesses including Binance, Huobi, and OKEx have all been cleaned up and closed. The founder of Binance, Changpeng Zhao, whose nationality is Canada, immediately moved the exchange overseas in September of that year. Domestic exchanges have followed suit. As a result of the fast pace, Binance gradually surpassed Huobi and OKEx to secure the top spot on the exchange.

Because of this, Futu Securities and Tiger Securities both stated that they will only launch cryptocurrency trading services for overseas customers and apply for relevant licenses in the United States and Singapore.

In March 2018, the U.S. Department of the Treasury and the Securities and Exchange Commission (SEC) clearly emphasized that for digital asset-related businesses in the United States, an MSB license must be registered with FinCEN (Financial Crime Enforcement Agency, an agency under the U.S. Treasury Department). The main regulatory objects of the MSB license are businesses and companies related to money services, including digital currency, virtual currency transactions, ICO issuance, and foreign exchange, international exchange, etc.

The conditions for applying for a US MSB license are that a company must be incorporated in the United States; have a legal address in the United States; at least two responsible persons must be appointed, at least one of whom must be a director of the company, and at least one responsible person as a compliance officer. And provide EIN tax number, exchange customer base, service content, operating status and proof of good reputation of the company for more than one year.

Currently, Binance, Huobi, and OKEx all hold US MSB licenses. As the “most compliant” exchange recognized on the market, Coinbase not only has the MSB license, but also the European Electronic Money license, and the New York State business license BitLicense for crypto asset activities.

Singapore is a country that is more friendly to digital currencies. The Monetary Authority of Singapore (MAS) formally implemented the “Payment Services Act” on January 28, 2020, providing account issuance, domestic remittance, cross-border remittance, merchant acquisition, and electronic currency issuance. , Cryptocurrency trading companies are required to submit application filing documents.

On June 4, Sopnendu Mohanty, Chief Financial Technology Officer of the Monetary Authority of Singapore, disclosed that there are currently more than 300 companies applying for licenses to operate payment or cryptocurrency exchange businesses in Singapore, including well-known companies such as Alibaba, Binance, and Google’s parent company. .

“Issuing such a license will give companies a huge advantage and cannot make decisions lightly. We will ensure that the company that obtains the MAS license is trustworthy.” Mohanty said that these applications are still being processed and there is no timetable for now.

Yu Jianing, the rotating chairman of the Blockchain Committee of the China Communications Industry Association, pointed out to the reporter of the “Blockchain Daily” that encrypted assets have brought a new business model that combines new technologies, new finance, new industries, new organizations, etc. This deeper model innovation is different from the past technological innovation, and it also poses a great challenge to the regulatory model and risk management.