Heated Debate Sparked by Hong Kong’s New Regulations: Openness Holds the Key to Hong Kong’s Potential as a Web3 Hub

Guests:

Sam Lee from Signum Capital (Hong Kong virtual assets Type 1 license)

Marco Lim, Partner at MaiCapital (Hong Kong virtual assets Type 9 license)

Lennix, Chief Commercial Officer at OKX

Edward, Head of Huobi Assets Center

Bao Yu from the Institute of Web 3.0 Hong Kong

Tony Tong, Co-Chairman of the Hong Kong Blockchain Association

Li Mumu, Partner at Web3 Hub

Interview Questions:

1. The impact of new regulations. What is the background of the introduction of new regulations for virtual assets in Hong Kong, the level of government support, and the impact on the Web3 industry?

2. Hong Kong VS The Rest of The World. How does Hong Kong’s virtual asset market differ from other markets worldwide, and what sets it apart?

3. About retail investors. With the SFC implementing proposals to permit licensed virtual asset trading platforms to cater to retail investors, what implications does this hold for investors and trading platforms?

4. About Security Token Offerings (STO). As STOs gain traction worldwide, will they become a crucial component of digital assets?

5. About traditional institutions. In the past, digital assets were clearly not the primary focus for traditional financial institutions. How should they assess risks and opportunities?

6. Can Hong Kong surpass Silicon Valley in the field of Web3 and cryptocurrency compliance?

Key insights:

• The Hong Kong government’s commitment to digital assets went beyond what people anticipated. (Bao Yu)

• The SFC has been relatively lenient on OTC trading, which means there are no major obstacles for funds to enter this market. (Bao Yu)

• The Hong Kong government is doing the right thing by blending Web3 with traditional finance and leveraging  mechanisms to unify them. (Marco Lim)

• Whether Hong Kong will become a pivotal Web3 hub depends on its openness in embracing multiple products, technologies, and emerging trends. (Edward)

• The latest Hong Kong regulations are open to retail investors, allowing them to start with more core underlying assets, which I think is a brilliant opportunity for these novice retail investors to learn progressively. (Edward)

• Singapore and the United States have seen limited success with STO cases, and a successful path in this area has yet to be established. Naturally, we are hopeful that Hong Kong can be the place where this changes. (Edward)

• Whether you choose the stablecoin track, the technology track, or the exchange track, the primary market still holds some promising opportunities. (Marco Lim)

• Assets similar to STOs are poised for a significant boom through the VASP license. (Lennix)

• Therefore, cryptocurrency investors often look down on such low-yield assets. In contrast, traditional investors might be interested, but lack a comprehensive understanding of STOs. Nevertheless, I anticipate that STOs will become more widespread in the next wave, particularly as compliant and licensed companies, like ours, are allowed to launch numerous STOs. (Tony Tong)

Question 1: What is the background of new regulations for digital assets in Hong Kong, the level of government support, and the impact on the Web3 industry?

Bao Yu: I think the determination of the Hong Kong government towards digital assets has exceeded my expectations. Even if the policies are slightly conservative, they can still achieve similar market effects. Recently, I reviewed the consultation summary released by the Securities and Futures Commission (SFC) on the regulation of digital  asset trading platforms, and it revealed many details. First and foremost, the Hong Kong government has shown great determination. First , the new regulations in Hong Kong are pragmatic, using the established licensing mechanism in Hong Kong to regulate digital asset exchanges. This system essentially acknowledges the legitimacy of digital exchange platforms, and as far as I can tell, Hong Kong is the only place in the world that has implemented such a manageable approach. Second, the SFC will not heavily regulate so-called non-mainstream coins; instead, they will allow exchanges to conduct their own reviews for listing. Of course, more detailed guidelines may be issued in due course. It is clearly not feasible  to limit trading to mainstream virtual assets such as BTC and ETH within exchanges. Third, SFC has been relatively lenient on OTC trading, which means there are no major obstacles for funds to enter the market, while the Chinese mainland lacks a legal OTC channel. Fourth, the SFC will include stablecoins in their regulatory scope, but detailed rules are yet to be issued. According to existing Hong Kong laws, as long as you find a bank willing to cooperate with you as a payment channel, you can issue a stablecoin. However, after June 1, individuals will no longer be able to issue stablecoins, as stablecoins will be classified as STO. In my opinion, the Hong Kong government has reached a comprehensive understanding of cryptocurrencies, and all their strategies are well-structured.

Tony Tong: I believe that Hong Kong’s compliance route for digital assets began in 2018. Digital asset management, digital asset funds, and others are slowly developing. Personally, I think progress has not been very fast. Currently,  under new regulations: it only includes BTC, ETH, and some USD-pegged stablecoins. We can see that well-known exchanges in the market, such as Binance, operate globally across regions and countries. However, compliant companies in Hong Kong have to bear higher costs, such as 2% insurance premiums and hiring expensive ROs. As a result, they are restricted and unable to compete with other companies in the industry. So how can we strike a balance? I think our industry needs more communication with the government and the SFC. We can see that the SFC has gradually opened up, previously requiring professional investors to participate. If we have to spend significant costs, manpower, and time to obtain an exchange license, will we really be competitive in the market? Do we have competitive products or services? Without competitiveness, the license can only serve a small group of people.

Marco Lim: The Hong Kong government has opened a door that has been holding us back and now they are allowing traditional financial resources to enter the Web3 industry. What we have been doing is incrementally expanding the Web3 landscape. Previously, we were not connected to traditional finance, but now that the situation has opened up, we can obtain financing from traditional financial sources. Our Type 1 license is essentially for this incremental expansion. However, regulations have not truly opened up for us, and we have been unable to raise funds through proper channels. Currently, the Hong Kong government provides significant support, allowing licensed companies like ours to direct a portion of funds from traditional channels into Web3. The Hong Kong government is doing the right thing by blending Web3 and traditional finance while leveraging licensing mechanisms to unify them.

Sam Lee: Considering that Hong Kong is a well-established financial hub with a significant amount of capital, the regulations implemented by the Hong Kong government serve to bridge the gap between traditional finance and Web3. This integration enables the inflow of traditional financial resources. I see this as a major milestone with a positive outlook on future development.

Question 2: How does Hong Kong’s virtual asset market differ from other markets worldwide?

Edward: We’ve been strategically positioning ourselves in Hong Kong for quite some time now. Back in 2018, we operated within the regulatory framework at the time, although it wasn’t as flexible as it is now. We’ve been eagerly anticipating this major positive event. First and foremost, as a central financial hub in Asia, Hong Kong helps institutions, high-net-worth individuals, and retail investors with  trading experience. So we believe this market holds immense value and potential. Second, from a geopolitical perspective, cryptocurrencies are unavailable in the Chinese mainland, given the regulatory limitations on digital currencies there. Our perception of it extends beyond Hong Kong, and it has the potential to influence key open economic zones like the Greater Bay Area. I think it serves as a crucial access point for connecting with the mainland, whether it is for project teams, industry practitioners, or essential investment and financing opportunities. Additionally, since 2018, Huobi has been expanding globally and obtaining licenses in various countries. For example, we have compliance licenses in Korea, Japan, Thailand, Russia, and more. We’ve noticed that Hong Kong’s willingness to embrace retail investors directly determines the value of compliance licenses and the sustainability of our operations. As professionals in the Web3 industry, sustainable business practices form the foundation of our commercial endeavors. Without the ability to sustain our operations and solely relying on continuous investments, we cannot achieve lasting growth. Thus, the openness towards retail investors holds significant importance, making this policy an extraordinary development. We should pay close attention to new regulations in Hong Kong because it is critical whether this policy can support a wide range of product offerings, including exchanges, on-chain DeFi platforms, and the sale of financial products targeting retail investors. This extends beyond OTC or fiat transactions mentioned earlier. It encompasses popular passive income products like the LSD product currently thriving in the market, which is a staking product based on blockchain technology. How these products are defined in the regulatory framework and whether a comprehensive structure is in place to support their growth directly influences the potential of our industry within this market. This is highly pivotal. On the other hand, Singapore has been influenced by macroeconomic cycles and significant events like FTX, resulting in some fluctuations during the compliance process. Such uncertainties directly impact the overall ecosystem and the industry’s progress in the local context. In contrast, Hong Kong has adopted a more proactive approach, but I want to mention Japan and Korea, which are leading in East Asia. Korea, for instance, displays a more welcoming attitude towards retail trading, primarily emphasizing local fiat trading. Following the opening of fiat channels, its OTC market has contracted, and OTC’s significance has diminished. Second, Korea remains sensitive to whether institutions and retail investors engage in the same trading market. Third, limitations exist concerning liquidity and connectivity at the underlying level of exchanges, influencing user sentiment and trading possibilities. This is something we should refer to. In Japan, we’ve identified several pain points. The number of licenses has exponentially increased. Initially only eight licenses were available for purchase, now there are over thirty. It feels like everyone possesses one. Consequently, the value of these licenses have depreciated. Homogenized products and services prevent the market from exhibiting the uniqueness necessary for effective competition. We acknowledge that the Hong Kong government has thoroughly examined digital asset regulations in numerous countries, considering the interests of the industry, professionals, and users. We trust that they will make a more precise judgment. However, from our perspective, Hong Kong’s distinctive features lie in its openness to retail investors, which is highly advantageous. Whether Hong Kong becomes a pivotal Web3 hub depends on its openness in embracing multiple products, technologies, and emerging trends. It will have a remarkable opportunity ahead if it maintains an open approach. Conversely, if it remains closed, it may face challenges similar to those encountered by Singapore, resulting in a promising start but ultimately falling short of expectations.

Question 3: With the SFC implementing proposals to permit licensed digital asset trading platforms to cater to retail investors, what implications does this hold for investors and trading platforms?

Tony Tong: I’ve been eagerly anticipating this for a long time. Previously, many institutions obtained licenses for Hong Kong digital assets through Type 7 9 licenses, but the costs were enormous and the returns were meager because they could only cater to institutional investors. So, it’s definitely a step in the right direction to offer services to retail investors. The goal is to transform Hong Kong into a thriving hub for Web3 worldwide, and that means ensuring widespread participation. Although the timeline hasn’t been fully established, since the government has expressed its intentions, I believe it will happen. The current whitelist only includes BTC, ETH, USDC, and USDT, which the SFC considers to be highly liquid and secure. It’s similar to compliant exchanges in Japan, which started with just four or five currencies and gradually expanded to over a dozen. I think Hong Kong might follow a similar path.

Bao Yu: Regarding the timing for retail investors to enter the market, I think BTC and ETH are currently the primary trading targets. BTC can be bought when its price plummets. That seems to be the only viable strategy. If prices rise in stages, it is very risky to chase after higher prices.

Edward: Essentially, this provides a learning ladder for retail investors to enter the market. From an exchange’s perspective, participants can be classified into three categories: those who make money, those who lose money, and those who break even. Many new investors and retail traders have limited abilities to identify new assets, understand new concepts, and handle high-risk assets. They often end up following the crowd. So, if they directly enter an exchange offering a wide array of choices with hundreds of cryptocurrencies, different trading pairs, and various derivatives, it becomes an immense challenge. Moreover, they have limited time to learn in the market, and cryptocurrency trading in the current environment is not as thriving as the stock market. Thus, the risks are relatively high. However, the latest Hong Kong regulations are open to retail investors, allowing them to start with the more core underlying assets, which I think is a brilliant opportunity for novice retail investors to learn progressively. They can first grasp fundamental assets and then progress to learning about their concepts and mastering their technology through the trading process. Step by step, they can expand their knowledge, for example, from Bitcoin to Litecoin or from Ethereum to ARB. This allows for a progressive learning process, and ultimately these retail investors can invest in high-risk assets with higher volatility and more expansive changes. On the other hand, high-net-worth clients have larger investment sizes or engage in more frequent trading with higher turnover rates than regular retail investors. For these investors, I think well-designed passive income products would be a valuable complement for them during bearish market cycles. So, overall, I think it’s a positive development. In summary, while this new regulation may not be particularly favorable for speculative retail investors, it is a promising development for a broader range of retail investors.

Question 4: As STOs gain traction worldwide, will they become a crucial component of digital assets?

Lennix: In my view, assets similar to STO are poised for a significant boom through the VASP license. Frankly speaking, the VASP license is not exclusively intended for cryptocurrencies; it aims to tokenize tangible assets, financial assets, and non-standard assets. These assets can then be listed on compliant exchanges using the STO method. I believe this is the SFC’s top goal. The VASP license might be one of the rarest  licenses globally, that allows exchanges to support more assets than just cryptocurrencies. In the future, institutions and individuals involved in STO should consider which assets can be effectively tokenized and aligned with the VSP framework.

Edward: Personally, I am more pessimistic. If this endeavor succeeds, it would be beneficial for everyone and the industry’s progress, and I would gladly welcome it. However, Singapore and the United States have seen limited success with STO cases, and a successful path in this area has yet to be established. Naturally, we are hopeful that Hong Kong can be the place where this changes.

Tony Tong: I believe the STO market still holds great potential, including areas like real estate, artworks, traditional bonds, securities, and more. However, the previous wave of STO did not achieve complete success. When the cryptocurrency market enters a bull run, interest in STO wanes as it is perceived as rather dull. Even if you perform STO on real estate or gold, the growth potential remains quite limited. As a result, cryptocurrency investors often look down on these low-yield assets, while traditional investors might be interested but lack a comprehensive understanding of STO. Nevertheless, I anticipate that STOs will become more widespread in the future, particularly as compliant and licensed companies like ours are allowed to launch numerous STOs. Currently, the STO market lacks widely appealing products. However, I anticipate the emergence of novel STOs to occur within the sharing economy, shared spaces, and Web3. Additionally, the Hong Kong government imposes strict requirements on STOs, such as having 12 months of operational records, financial statements, assessment reports, legal opinions, and undergoing audits. Consequently, purely conceptual white papers are not viable.

Bao Yu: I believe STO entails an extensive legal framework, so we shouldn’t set our expectations too high.

Question 5: In the past, virtual assets were clearly not the primary focus for traditional financial institutions. How should they assess the risks and opportunities?

Marco Lim: Traditional financial institutions primarily look at positioning and returns. They aim to invest in projects within Web3 that could be the next big players like Tencent or Alibaba. I think they have quite a chance during the next bull market. I believe whether you choose the stablecoin track, the technology track, or the exchange track, the primary market still holds some promising opportunities. However, traditional financial institutions may struggle to fully grasp the dynamics of the Web3 primary market. They need us who can navigate between Web3 and traditional finance to help them analyze and strategize before the next bull market. Traditional financial institutions also see potential in this field; otherwise, the Hong Kong government wouldn’t be pushing for it. They also hope to establish their presence in this area. I am relatively optimistic about primary market funding, but we need to incubate high-quality projects. Otherwise, the entire ecosystem won’t thrive, as in the past, around 80% of tokens wouldn’t survive. We need to develop projects that can truly make it in the next bull market to achieve success.

Question 6: Can Hong Kong surpass Silicon Valley in the field of Web3 and cryptocurrency compliance?

Bao Yu: That’s a tough question. In the United States, laws are made by Congress, and many things have already become non-compliant. From that perspective, it is not an easy question to answer.

Tony Tangyi: I believe the United States plays a significant role in setting rules for the cryptocurrency industry, and they have been moving swiftly in terms of compliance. Hong Kong’s securities laws, and even the Securities Association of China, often refer to definitions provided by the U.S. Securities and Exchange Commission (SEC). So, it’s understandable. The United States has more experience in regulating digital assets, blockchain, and related areas. They have dealt with many cases involving STOs, such as the Ripple case, where the U.S. SEC later declared it an STO and stated that Ripple issued the token without their approval. If Ripple disagreed, they could take the matter to court. Of course, the government is not always right, and sometimes they lose legal battles. Hong Kong tends to be more cautious. The SFC’s primary responsibility is to protect investors. They would rather provide excessive protection than leave investors vulnerable.