Title: Hong Kong: The Eastern Gateway to Web3
Article:
The virtual asset trading platform withdrawal policy in Hong Kong officially came into effect on May 31st, leading to the cessation of operations for non-compliant exchanges. As the deadline approaches, discussions have arisen in the market due to the withdrawal of nearly half of the VATP applicants, including OKX and Kucoin. Some voices have raised concerns about Hong Kong’s future in the financial center, stating that “Hong Kong’s Web3 has ended before it even began.” However, is this really the case? How should regulators embrace Web3?
In conclusion, Hong Kong, as the Eastern gateway to Web3, is just beginning its role in the Western game.
Looking at the global perspective, Hong Kong’s attitude seems to have shifted from “embracing” to “relative caution” when compared to 2022. But where does Hong Kong stand in its historical context? To gain a comprehensive understanding, let’s compare Hong Kong’s position with other major Web3 financial markets worldwide.
Japan was the earliest pioneer in Web3 regulation. After the famous Mt.Gox Bitcoin exchange collapse in 2014, Japan gradually initiated regulations and introduced a digital currency exchange license system approved by the Japanese Financial Services Agency in 2017. Over the past ten years, Japan has approved and licensed 23 digital currency exchanges, including Binance, although most are local companies.
Operating an exchange in Japan has certain similarities to operating in Hong Kong. For example, compliance with regulations regarding asset segregation, cold wallets, and regular audits. It is due to these relatively stringent regulations that Japanese exchanges were not affected by the FTX incident, as a significant portion of user funds were stored in cold wallets. Additionally, Japan has made significant progress in various regulatory frameworks, including ICOs, IEOs, STOs, CBDCs, which are now relatively well-developed.
Singapore and the United States implemented strict regulations following incidents involving Three Arrows and FTX exchanges in 2022.
Although the United States does not have any officially “compliant” exchanges, Coinbase, as a publicly listed company, is more compliant than other exchanges. This year, Coinbase achieved significant business growth, benefiting from being “ordered to operate.” On the other hand, exchanges such as Binance and Kucoin, which are offshore exchanges, have faced regulatory challenges in the United States since the FTX incident in 2022.
A common trend is that regulations are gradually becoming more specific and detailed in each jurisdiction.
Japan and Singapore have also faced criticism for being “too strict” and pessimistic. However, as regulations continue to improve, both regions’ Web3 ecosystems are becoming more active.
The United States, which initially took a strong stance on regulation, has changed its approach. Recently, the United States released the FIT21 (21st Century Financial Innovation and Technology Act) regulatory framework, which outlines how to define digital assets (including DeFi and NFTs) and differentiate between commodities and securities. This framework may have a profound impact on the cryptocurrency industry in the future.
Following the United States, Southeast Asia, Dubai, India, Iran, and other regions are planning to introduce Web3 regulatory policies within the next few years. Even countries like Europe and Nigeria, which previously had no clear regulatory stance in the cryptocurrency industry, have joined the current wave of cleaning and reorganization.
Regulatory agencies worldwide do not want to miss out on Web3. Compliance has become a global trend. Regardless of whether it started with embracing or incidents, each jurisdiction will gradually move towards precise regulation.
Looking at the number of licensed exchanges, offshore exchanges account for less than 30% of the total licenses issued, indicating that regulators are more inclined towards local companies.
The challenge lies not in regulation itself but in offshore exchanges. During the early days, offshore exchanges could serve nearly 200 million users in a lenient regulatory environment. However, those days are now behind us. Apart from well-known exchanges like Binance that have complied and paid hefty fines, the withdrawal of exchange applications shows that it is challenging for offshore exchanges to enter major financial jurisdictions.
To put it in simple terms, it is difficult for offshore exchanges to transition from luxury to frugality. However, for native compliant exchanges, transitioning from a jurisdiction to an offshore exchange could be a shortcut. For instance, HashKey Exchange has gradually obtained licenses in Singapore, Dubai, and other locations and is positioning itself for the future. On the other hand, exchanges like Gate and Kucoin have obtained fewer licenses.
Looking at the bigger picture, the exit of some exchanges should not be overly pessimistic. Like other jurisdictions, Hong Kong is going through a necessary phase of cleaning and reorganization.
Furthermore, the 531 policy also signifies that Hong Kong has successfully tackled the most complex and crucial aspect of the industry – exchanges. With more than half of the applicants still in the market, existing exchanges like HashKey Exchange have already achieved significant trading volumes, surpassing HKD 440 billion and demonstrating positive growth.
Therefore, the exit of certain exchanges is not a cause for excessive pessimism. When viewed from a historical perspective, it is a necessary phase that Hong Kong, like other regulatory jurisdictions, must go through.
Moreover, the 531 policy also marks Hong Kong’s successful adoption of comprehensive regulation, solidifying its position as a gateway to Web3 in the East.
Hong Kong and the United States are the battlegrounds for the East-West game in the Web3 industry.
Regulation is one aspect, but what comes next? The period of initiation has passed, and the period of competition has just begun.
Four years ago, the founder of PayPal predicted that the future of significant political conflicts would revolve around the clash between communist artificial intelligence and liberal cryptographic technology.
Now that both AI and Web3 are gaining momentum, the United States and Hong Kong are seen as the gateways to the Web3 industry in the East and West respectively. The competition between their regulatory attitudes will shape the global development of Web3.
Why is there a need for competition? Unlike AI, monopolistic regulation does not work in Web3. The Web3 era has built a network-based economy that easily transcends physical borders to provide services to customers.
The Web3 bible, “Sovereign Individual,” inspired Satoshi Nakamoto to invent Bitcoin and depicts a scenario where individuals can create wealth in cyberspace without being plundered by nation-states. This forms a de facto constitutional demand: governments must provide satisfactory services before demanding payment.
In the future, political leadership may become more similar to entrepreneurial spirit, attracting funds and talent only if they are friendly. It is not Web3 that needs regulation, but regulators that need Web3.
The recent stance of the United States is already evident. This year, cryptocurrency topics were brought to the forefront of American politics for the first time. According to CoinDesk, about one-third of American voters consider a political candidate’s position on cryptocurrencies before making their voting decisions. 77% of voters believe that U.S. presidential candidates should have at least a basic understanding of cryptocurrencies, and 44% of voters in some way view “cryptocurrencies and blockchain technology as the future of finance.” Even Trump exclaimed, “Make sure the future of cryptocurrencies happens in the United States!”
The competition between the East and the West is already taking shape, with ETFs being a prominent battlefield. The sudden change in the United States’ attitude towards approving ETH ETFs may be influenced not only by domestic factors but also by Hong Kong’s pioneering introduction of ETH ETFs in April.
Although there is currently a significant gap in scale between Hong Kong and the United States in terms of ETFs, as one of the world’s largest offshore financial centers, Hong Kong is expected to attract more institutions as its ecosystem matures, leading to an institutional bull run.
Next, the development of ETH ETFs as interest-bearing assets will become the next focus of the competition. After Ethereum transitions from POW to POS, staking will generate passive income similar to interest. Currently, the market’s annual interest rate is around 4.5%. If Hong Kong becomes the first to launch a Staking-based Ethereum ETF, subscribing to the ETF will no longer be a fee-based action but a profitable one. It can even become a form of “digital treasury bonds,” with its appeal surpassing that of Bitcoin ETFs.
The development of the Web3 industry is also influenced by local cultural foundations. Although Eastern cultures, compared to the more extroverted and diverse Western cultures, may appear more reserved and cautious, it does not mean they are falling behind.
Hong Kong has already released several regulatory documents, such as the “Guideline on the Operation of Virtual Asset Trading Platforms,” “Guideline on Anti-Money Laundering and Counter-Terrorist Financing for Licensed Corporations and Licensed Virtual Asset Service Providers,” “Guideline on Anti-Money Laundering and Counter-Terrorist Financing for Licensed Virtual Asset Service Providers with a Presence in Hong Kong,” and “Guideline on Disciplinary Sanctions and Fines by the Securities and Futures Commission.” These regulatory policies are more clear and mature compared to the United States’ previous use of the “Commodity Futures Trading Commission Regulation.”
As the bull market reaches its peak, the wealth effect of the industry will become evident, leading to the emergence of a new batch of billionaires. Hong Kong, with its inherent advantage as a region with “Eastern mystique,” will attract more mainland Chinese, overseas Chinese, and Web3 enthusiasts, along with their funds, as the market develops.
In the next cycle, Web3 and traditional finance will integrate in multiple dimensions, revitalizing the Hong Kong financial market. The Securities and Futures Commission of Hong Kong has already indicated the possibility of opening up STO and RWA investments to retail investors, further expanding the virtual asset market. Additionally, the regulation framework for Hong Kong’s stablecoin and over-the-counter virtual asset shops is also being developed. Once the entire ecosystem is connected, Web3 will inject new vitality into the entire Hong Kong market.
As history continues to unfold, only the most resilient enterprises will remain at the table. Exchanges play a vital role as the cornerstone of Hong Kong’s Web3 ecosystem.
In the foreseeable future, licensed exchanges like HashKey Exchange will not only focus on their trading operations but also serve as a crucial link to connect various financial industries in Hong Kong’s Web3 ecosystem. For example, in the recent ETF issuance, HashKey Exchange played the role of custodian, providing underlying infrastructure support to the issuer. In the future, in areas such as RWA, STO, and OTC businesses, these exchanges will play an indispensable role.
Therefore, it is not surprising that some offshore exchanges have been pushed off the table in Hong Kong. As the saying goes, “what goes around comes around.”
HashKey Exchange has made a smart move. For offshore exchanges, transitioning to compliance is challenging, but if they are originally compliant exchanges operating within a jurisdiction, expanding to offshore exchanges can even become a shortcut due to their compliance. HashKey Exchange has also obtained a license in the offshore center of Bermuda and launched an international site, HashKey Global, targeting overseas users. In the future, exchanges like HashKey, which have the strength and capability, will break through physical borders and provide individuals with more secure and convenient Web3 services.
In moments like the current withdrawal phase in Hong Kong, we should make rational judgments from a broader historical perspective, considering the ebb and flow of development.
