A New Era of Web3 Regulation in Hong Kong Begins, Moving Towards Full Compliance

The new regulatory policy for virtual asset trading platforms in Hong Kong was officially implemented on May 31, and non-compliant exchanges will cease operations. As the deadline approaches, nearly half of the VATP applicants have withdrawn, sparking heated discussions in the market. Some believe this marks the "decline of Hong Kong's status as a financial center" and the "end of the Web3 era in Hong Kong". But is this really the case? How should regulatory authorities respond to the development of Web3?

In fact, Hong Kong, as a Web3 bridge connecting the East and West, has just begun to reveal its strategic position.

Web3 is about to enter a new decade of full Compliance.

Looking at the major Web3 financial markets globally, it can be observed that stricter regulations are a common trend.

Japan is a pioneer in Web3 regulation. After the collapse of the Mt.Gox exchange in 2014, Japan quickly initiated regulations, introducing a licensing system for digital currency exchanges in 2017. Over the past ten years, Japan has approved 23 digital currency exchanges to operate, most of which are local companies. Japan's regulatory requirements are similar to those in Hong Kong, such as asset segregation and cold wallet custody. The strict regulations have also meant that Japanese exchanges were less affected by the FTX incident. In addition, Japan's regulatory framework for ICOs, IEOs, STOs, and CBDCs is also relatively well-developed.

Singapore and the United States strengthened regulations after the Three Arrows Capital and FTX incidents in 2022. Although there is no formal "Compliance" exchange in the U.S., the publicly traded company Coinbase is viewed as relatively compliant, with significant recent performance growth. Other offshore exchanges, such as certain platforms, are gradually facing regulatory challenges following the FTX incident.

It can be seen that regulations in various countries are gradually delving into niche areas and becoming more refined. During this time, Japan and Singapore were once considered to have "too strict" regulations, but with the improvement of policies, the Web3 ecosystem in both regions is becoming increasingly active.

The regulatory attitude in the United States has also eased. The recently released FIT21 bill proposed definitions for digital assets and standards for distinguishing between commodities and securities, which could have a profound impact on the cryptocurrency industry.

Southeast Asia, Dubai, India, Iran, and other regions also plan to introduce Web3 regulatory policies in the coming years. Even previously inactive countries like Europe and Nigeria have joined the regulatory ranks.

Global regulators are unwilling to miss the Web3 wave. Regardless of the starting point, jurisdictions will ultimately move towards precise regulation. From the perspective of the number of licensed exchanges, local enterprises generally account for more than 70%, and regulatory tendencies support local businesses.

This poses a challenge for offshore exchanges. In the past, they could serve nearly 200 million users in a loose environment. But the situation has changed. Apart from a well-known exchange that is willing to pay hefty fines to ensure Compliance, other exchanges like a certain X platform have gradually laid out plans to obtain licenses in places like Singapore and Dubai, but some platforms have relatively few licenses.

The "onboarding" path for offshore exchanges may be bumpy. The era of "regulatory arbitrage" in the wild growth of the crypto market is now a thing of the past.

Compared to the "first operate and then punish" model in the United States, Hong Kong adopts a "first license and then operate" approach, skipping the stage of barbaric growth. Since the introduction of Web3 regulatory policies in 2022, Hong Kong has begun to promote comprehensive Compliance. As of June 1, 2024, the AMLO license will be officially implemented, and informal exchanges have completed their exit, with more than half of the applicants still remaining. The trading volume of certain licensed exchanges and platforms has exceeded 440 billion HKD, showing a good development trend.

Therefore, the exit of some exchanges is not something to be overly pessimistic about. From a historical perspective, this is just a necessary phase that Hong Kong has gone through, similar to other regions. More importantly, the 531 policy signifies that Hong Kong has completed its regulation of the exchange sector with the highest concentration and most complexity of funds.

Hong Kong and the United States: The East-West Web3 Game

After regulation, the game has just begun. The founder of PayPal once predicted that future political conflicts will focus on the artificial intelligence of communism and the cryptocurrency technology of liberalism.

Today, both AI and Web3 have emerged, with the United States and Hong Kong seen as the bastions of East-West relations in the Web3 industry. The competition between the regulatory attitudes of these two regions will guide the global direction of Web3 development.

Unlike AI, monopolistic regulation is no longer feasible in the Web3 era. Web3 has built more networked economic entities that transcend physical boundaries. The book "The Sovereign Individual" once depicted that in the future, governments must provide satisfactory services to gain support, and political leadership will be more akin to entrepreneurship.

The recent attitude of the United States has become very clear. The topic of cryptocurrency has for the first time become a focal point in American politics. According to a data platform, about one-third of American voters would consider a candidate's stance on cryptocurrency, 77% of voters believe that presidential candidates should understand cryptocurrency, and 44% of voters think that cryptocurrency is the future of finance.

The game pattern between the East and West has taken shape, and ETFs have become a clear battleground. The sudden shift in the U.S. attitude towards the ETH ETF may partly stem from Hong Kong's early launch of the ETH ETF in April. Although there is currently a gap in scale, Hong Kong, as one of the world's largest offshore financial centers, may attract more institutions in the future.

As a stakable income-generating asset, the development prospects of ETH ETF are expected to become the next focal point of competition. If Hong Kong is the first to launch a spot ETH ETF with staking, its attractiveness may surpass that of Bitcoin ETF.

The development of Web3 is also closely related to local culture. Compared to the open and diverse West, the East may seem cautious, but it is not lagging behind. Hong Kong has released multiple detailed regulatory documents, and its policies are clearer and more mature than those of the United States.

As the bull market approaches, the wealth-creating effect in the industry will become apparent. Hong Kong, with its "mystical Eastern power" advantage, may attract more Web3 talent and funds from the mainland and overseas Chinese.

The future cycle will witness a multidimensional integration of Web3 and traditional finance, revitalizing the Hong Kong financial market. The Hong Kong Securities and Futures Commission has indicated that it may open up STO and RWA investments to retail investors. The regulatory framework for HKD stablecoins and over-the-counter virtual asset stores is also in progress. Once the full chain is connected, Web3 will inject new vitality into the Hong Kong market.

In the foreseeable future, licensed exchanges will become an important cornerstone of Hong Kong's Web3 ecosystem. In addition to trading operations, they will also play a key role in ETF issuance, RWA, STO, and OTC businesses. A certain exchange acting as a custodian in ETF issuance is one example.

This is why some offshore exchanges have been forced to leave the Hong Kong market. This also confirms the truth of "what goes around comes around."

Development always has its ups and downs. We should view the current regulatory changes in Hong Kong from a more macro historical perspective.