Hong Kong enters the Web 3.0 era

Preface: In 2022, after the collapse of FTX, Japan, South Korea, the United States, Singapore and other regions tightened their regulatory policies on the crypto industry. Hong Kong has made a high-profile policy statement on the development of virtual assets, trying to strengthen the application of blockchain in the capital market and compete for the throne of Asia's virtual asset innovation center. Hong Kong's formal cryptocurrency regulatory framework will take effect in June 2023.

Recently, affected by a series of chain reactions brought about by the previous FTX bankruptcy, crypto-friendly countries in Asia have tightened their regulation of crypto assets. According to a report by CoinGecko: Based on the number of monthly unique visitors from January to October 2022, cryptocurrency investors in South Korea, Singapore and Japan are the largest users of the now bankrupt FTX exchange. According to relevant data: The total traffic of these three Asian countries during this period accounted for 15.7% of the total traffic of FTX, among which South Korea had the highest number of monthly unique users.

01. The new attitude change in Japan and South Korea stems from the FTX crash

On January 10, 2023, the National Tax Service (NTS) of South Korea suddenly seized the domestic and international transactions of Bithumb Korea, the largest exchange in South Korea, and Bithumb Holdings, which operates the local cryptocurrency exchange Bithumb, and its affiliates. Similarly, exchanges that have obtained Japanese licenses have withdrawn from the Japanese market one after another. Among them, Kraken, a cryptocurrency exchange headquartered in the United States, has stated that it will stop its business in Japan after January 1 and will cancel its registration with the Financial Services Agency (JFSA) on January 31.

Japan and South Korea, which once actively embraced Web 3.0, now seem reserved.

But Singapore's transformation is more obvious. Previously, Singapore's inclusive and open attitude towards blockchain technology and financial innovation attracted many companies and investments. According to a report released by KPMG, investment in Singapore's cryptocurrency and blockchain companies surged to US$1.48 billion in 2021 alone, 10 times that of 2020, accounting for about 50% of the total in the Asia-Pacific region in 2021.

However, the collapse of the cryptocurrency exchange FTX caused Singapore's sovereign fund Temasek Holdings to lose $275 million. Singapore's Deputy Prime Minister and Finance Minister Lawrence Wong said: Temasek's losses are huge, and Temasek has launched an internal review by an independent team to study and improve its processes and learn lessons for the future.

On November 30, 2022, Lawrence Wong said in Parliament that Singapore has no plans to become a hub for cryptocurrency activities, but rather an "innovative and responsible digital asset participant". The Singapore police are investigating Binance, the world's largest cryptocurrency exchange, for possible violations of the Payment Services Act. Although Singapore allows retail investors to invest in cryptocurrencies, the Singapore government will focus on reasonable regulation, learn lessons from recent experiences, and continue to remind and educate the public. At the same time, it reiterated that the government and MAS have distinguished between developing innovation and cryptocurrency speculation, and they do not encourage retail investors to participate.

In December 2022, the Monetary Authority of Singapore (MAS) issued two documents in a row to tighten regulation on crypto assets and revise the Payment Services Act, including lending to retail investors for cryptocurrency transactions, requiring local crypto industry companies to distinguish between company and customer assets, and restricting the issuance of local stablecoins. The regulations stipulate that stablecoin regulated issuers must meet multiple requirements, such as owning at least 5 million Singapore dollars in pegged currencies.

As they move towards "strong regulation", Hong Kong chooses to "go the other way" and actively embrace encrypted digital finance.

02. Hong Kong is actively embracing Web3.0

On October 31, 2022, Hong Kong, China officially released the "Policy Declaration on the Development of Virtual Assets in Hong Kong" (hereinafter referred to as the "Declaration"), which officially announced to global investors and entrepreneurs Hong Kong, China's determination to develop into a global virtual asset center and Web3.0 center.

The declaration was released on the first day of Hong Kong Fintech Week 2022. On this most important day for Hong Kong's financial industry, almost all the guests invited by Hong Kong were industry insiders related to Web3 and crypto finance - from the Financial Secretary of Hong Kong, the Chief Executive of the Hong Kong Monetary Authority and other senior officials of the SAR government, to Animoca Brands co-founder Xiao Yi, FTX co-founder Sam, to senior executives of Citibank and Tencent Financial Technology, almost all the guests were discussing the development of Web3.0 in Hong Kong.

The content of the declaration also clarified the attitude and basic tone of the entire Hong Kong government towards Web3 and crypto finance: embracing NFT (non-fungible tokens), embracing stablecoins, embracing DLT (distributed ledger technology), embracing Web3 and the metaverse.

In addition, the government and regulators are also conducting a number of pilot projects to test the technical advantages of crypto assets and explore their further application in the financial market, including issuing NFTs as attendance certificates at Hong Kong Fintech Week; tokenizing government-issued green bonds for subscription by institutional investors; and cross-border applications of the central bank digital currency eHKD.

On January 12, 2022, the Hong Kong Monetary Authority published a discussion paper on incorporating stablecoins into the regulatory framework, and on January 31, 2023, it released the "Summary of the Discussion Paper on Crypto Assets and Stablecoins", and expressed its expectation to implement regulatory arrangements in 2023/24.

Whether it is due to the regulatory requirements for the decoupling and collapse of the Terra/USDT algorithmic stablecoin, or due to Hong Kong's need to establish the financial dominance of the Hong Kong dollar stablecoin, the Hong Kong Monetary Authority needs a relatively flexible system to regulate and promote the development of the Hong Kong dollar stablecoin market.

On February 16, the Hong Kong SAR government announced the successful sale of HK$800 million of tokenized green bonds under the Government Green Bond Program, which are the world's first tokenized green bonds issued by a government. As the first tokenized bonds governed by Hong Kong law, this issuance shows that Hong Kong can provide a flexible and convenient legal and regulatory environment for innovative forms of bond issuance. The successful issuance of tokenized green bonds marks a milestone in Hong Kong's integration of the bond market, green and sustainable finance, and financial technology.

03. Hong Kong, the Crypto Capital, has opportunities and risks

On the evening of February 20, the Hong Kong Securities and Futures Commission launched a consultation (public solicitation of opinions) on the proposal to regulate virtual asset trading platforms. According to the new licensing system that will take effect on June 1, all central virtual asset trading platforms that operate in Hong Kong or actively promote to Hong Kong investors must be licensed by the Securities and Futures Commission. In order to comply with the requirements of the new regulations, a 12-month transition period is proposed.

If this new licensing system for central virtual asset trading platforms that provide non-security token trading services comes into effect on June 1, 2023, it also means that operators of virtual asset trading platforms (including existing platforms) that plan to apply for a license should start reviewing and modifying relevant systems and control measures to prepare for the new system. As for operators who do not intend to apply for a license, they should start preparing to wind down their business in Hong Kong in an orderly manner.

As soon as the news came out, the currency circle was in a frenzy, triggering a surge in the "Hong Kong concept currency". Obviously, this surge undoubtedly foreshadows the migration of crypto investors' confidence. At the same time, it also made many virtual asset trading platforms take frequent actions, and they all issued a gesture of "applying for a license" in Hong Kong, and many high-quality blockchain projects went to Hong Kong to lay out the ecology.

For example, on February 15, Conflux Network announced on its official Twitter that it has reached a cooperation with China Telecom and plans to launch the first BSIM pilot project in Hong Kong later this year. As a new public chain focusing on the aggregated cross-chain oracle track, PlugChain supports Hong Kong's active embrace of the Web3.0 ecological development, and also attaches great importance to the official ecological layout in the Asia-Pacific region. In the future, PlugChain will negotiate with the Hong Kong government on cooperation in Hong Kong dollar stablecoins and infrastructure.

On February 20, Huobi Global Advisory Board member Justin Sun announced that Huobi is applying for a Hong Kong cryptocurrency trading license. Sun also revealed that Huobi will launch a new exchange, Huobi Hong Kong, in Hong Kong, and the new entity will focus on providing trading services to institutional investors and high-net-worth individuals in Hong Kong. In addition, some project parties and institutions have also announced that they are applying for Hong Kong crypto-asset-related licenses, including OKX, Bitget, and Gate Group's trust service provider Hippo Financial Services Limited.

Cameron Winklevoss, co-founder of cryptocurrency trading platform Gemini, recently tweeted that “the next bull market will start in the East, which will remind people that cryptocurrency is a global asset class. The West, which actually refers to the United States, has only two choices: accept it or be left behind. Governments that do not provide clear rules and sincere guidance will miss the greatest period of growth since the rise of the commercial Internet, and will also miss the opportunity to shape and become a fundamental part of the future financial infrastructure of this world (and beyond).”

It is not difficult to find that from the recent heavy blows by the US SEC on cryptocurrency exchange Kraken, BUSD issuer Paxos and Binance, Hong Kong has continued to embrace Web3.0 since last year, allowing crypto investors to begin betting on Hong Kong and other Eastern crypto-friendly regions, and this year's regulatory policies and Cyberport industry have been actively deployed.

Hong Kong is quietly becoming the center of Eastern Web3.0.

However, Hong Kong also faces challenges in its journey to becoming a Web3.0 hub. First, the existing regulatory framework designed for traditional assets may not be suitable for rapidly developing digital assets and cutting-edge technologies.

The principle of "same business, same risk, same rules" for digital asset regulation in Hong Kong means that traditional financial regulation also applies to digital assets. The high threshold for obtaining a license alone has made it a more favorable arena for mature institutions. However, innovation often comes from the unpredictable "grassroots" class. Therefore, how to create space for bottom-up innovation is an urgent problem to be solved.

In addition, Web3.0 is fundamentally a technological movement, but Hong Kong is not a technology center with the same resources as Shenzhen or Silicon Valley. Therefore, Hong Kong also needs to have differentiated technical infrastructure for digital assets.

The security of digital assets is different from that of traditional assets. Their on-chain nature means that digital assets cannot rely on a closed security system like traditional finance. Licenses or regular audits cannot ensure the security of customer funds on centralized platforms. Advanced technologies like multi-party computing are needed to give asset owners full control or joint management rights over their assets.

What kind of Web3.0 infrastructure does Hong Kong need to develop? Given the heavy losses suffered by retail investors last year, 2023 will be more promising for institutional business. Digital assets are mainly held by exchanges, mining pools, investment funds and other institutions. To reduce the risks of centralized platforms, a large part of these assets will eventually be transferred to custody platforms that adopt the latest technological solutions.

More importantly, in order to comply with new regulations, institutions also need solutions that can achieve distributed private key management and fund isolation. Custody, institutional wallets and digital security are just some examples of the infrastructure required for the digital asset ecosystem.

Conclusion: In short, although Hong Kong has the ability to become Asia's virtual asset center to a certain extent, whether it can truly lead the development of Asia's virtual asset industry still needs to see how the Hong Kong government will conduct research in special projects in a proactive manner in the future to promote responsible research and innovation in virtual assets, accelerate industrial development, and effectively respond to the opportunities and challenges brought by new assets.

In the future, we hope that as mentioned in the Hong Kong Declaration: "A consistent, clear and comprehensive regulatory framework will help lay a solid foundation to meet the financial innovation and technological development brought about by the rapid development of global virtual assets."

So Web3 in Hong Kong is worth looking forward to!