Author: Compliance Researcher
The Hong Kong virtual asset trading platform withdrawal policy was officially implemented on May 31, and non-compliant exchanges will cease operations thereafter. As the deadline approaches, nearly half of the VATP applicants, including OKX and Kucoin, have withdrawn, sparking market discussions. Among them, there are some voices that FUD Hong Kong: "Hong Kong is already a relic of a financial center" and "Hong Kong Web3 has ended as soon as it began." But is this really the case? What attitude should regulators take to welcome Web3?
Putting the conclusion first, Hong Kong, as the bridgehead of Web3 in the East, has just begun its game with the West.
Web3 next decade, full compliance
If we compare 2022 with now, Hong Kong's attitude does seem to have changed from "embracing" to "relatively cautious". But from a historical perspective, what stage is Hong Kong in now? From a global perspective, we can first make a horizontal comparison of several major Web3 financial markets in the world.
Japan was the first to do so, and it is a true pioneer in Web3 regulation. After the famous Mt.Gox Bitcoin exchange collapsed in 2014, Japan gradually started regulation and introduced a digital currency exchange license system in 2017, which was approved by the Financial Services Agency of Japan. Ten years later, a total of 23 digital currency exchanges in Japan have been approved and are operating, including Binance, but most of the others are local companies.
Operating an exchange in Japan is somewhat similar to operating in Hong Kong. For example, it is necessary to comply with regulations on asset separation and cold wallets, and conduct regular audits. However, thanks to relatively strict regulations, Japanese exchanges were not implicated when FTX collapsed, because a considerable portion of users' money was placed in cold wallets. In addition, Japan's ICO, IEO, STO, CBDC and other regulatory frameworks have been advanced to a relatively complete stage.
Singapore and the United States launched strict supervision in 2022 after the collapse of Three Arrows and FTX Exchange.
Although there are no serious "compliant" exchanges in the United States, the listed company Coinbase 'appears' to be more compliant than other exchanges. It has also achieved significant performance growth this year, and it has successfully "expanded its business" business. After the FTX incident in 2022, other offshore exchanges such as Binance and Kucoin gradually faced regulatory challenges from the United States.
The commonality that can be seen is that supervision is gradually penetrating into vertical fields and becoming a "delicate job."
During this period, there were actually voices of "too strict" and "pessimism" in Japan and Singapore, but as regulatory regulations continued to improve, the Web3 ecosystems in these two places have become increasingly active.
The once "heavy-handed" US regulation has changed its strong pressure trend. Recently, the United States has also released the latest FIT21 (21st Century Financial Innovation and Technology Act) regulatory framework, which proposes how to define digital assets (including Defi and NFT) and divide the boundaries between commodities and securities. This may also become one of the bills with the most far-reaching impact on Crypto in the future.
Following the United States, Southeast Asia, Dubai, India, Iran and other places are planning to launch Web3 regulatory policies in the next few years. Even countries that were not active in the cryptocurrency industry before, such as Europe and Nigeria, which originally had no clear regulatory attitude, have joined this round of cleanup.
Regulators around the world don’t want to miss out on Web3. The compliance trend has already taken shape, and no matter whether it starts with embracing or breaking out, each jurisdiction will eventually move towards precise regulation.
Judging from the number of licensed exchanges, offshore exchanges in various regions account for no more than 30% of the total licenses, and regulators prefer local companies.
Legal cryptocurrency landscape from 2023 to 2024 (by CoinGecko)
This is not a regulatory problem, but a problem for offshore exchanges. Looking back at the grassroots era, offshore exchanges could serve nearly 200 million users under a loose regulatory environment. But this is a thing of the past. In addition to Binance, which is well known for paying a high fine to comply with regulations, among the exchanges that withdrew their applications this time, OKX has gradually laid out its plans and obtained licenses in Singapore, Dubai and other places in the past few years, but Gate and Kucoin have relatively fewer licenses.
To use an inappropriate analogy, “it is difficult to go from luxury to frugality.” It seems that offshore exchanges have encountered many setbacks in their attempts to “go ashore” and enter the major financial regulatory jurisdictions.
As cycles change, the "regulatory arbitrage" of the wild era of the crypto market is gone forever.
After a round of travel, let's take a look at Hong Kong. Compared with the "extended supervision" of the United States, which is to start business first and then be fined, Hong Kong adopts the "native supervision" of first obtaining a license and then starting business. It directly skips the wild growth stage.
Since Hong Kong introduced the Web3 regulatory policy in 2022, it has begun to sound the clarion call for full compliance in the Web3 industry. On June 1, 2024, the AMLO license was officially landed, and informal exchanges were officially cleared. Currently, more than half of the applicants are still present. The trading volume of exchanges that have already started business, such as HashKey Exchange, has exceeded 440 billion Hong Kong dollars, showing a good development pattern.
Therefore, it seems that the withdrawal of some exchanges is not worth being overly pessimistic. Looking at the overall historical situation, this is just an inevitable stage of clearing the roots that Hong Kong and other regulatory jurisdictions are going through.
More importantly, the 531 policy also indicates that Hong Kong has taken on the challenge of overcoming the "hard nut to crack" of the "exchange," the industry with the highest concentration of capital and the most complexity, and has completed comprehensive supervision.
Hong Kong and the United States, bridgeheads for East-West competition
Regulation, then what? The start-up period has passed, and the game period has just begun.
Four years ago, the founder of PayPal predicted that the major political conflict in the future would be between communist artificial intelligence and liberal encryption technology.
Now that AI and Web3 have both gained momentum, the United States and Hong Kong are seen as the bridgeheads between the East and the West of the Web3 industry. The game between the two places' regulatory attitudes will lead the direction of global Web3 development.
Why do we need to gamble? Unlike AI, monopoly-style regulation does not work in Web3. In the Web3 era, more commercial entities based on the network economy have been built, which can easily cross physical boundaries to provide services to customers.
The Web3 Bible, The Sovereign Individual, which inspired Satoshi Nakamoto to invent Bitcoin, once described this scenario: "Thanks to the development of information technology, you will soon be able to create wealth in cyberspace and be completely free from the plunder of nation-states. This will form a de facto meta-constitutional requirement, that is, the government must actually provide you with satisfactory services before asking you to pay the bill."
In the future, political leadership may become more and more like entrepreneurship. Only by being friendly enough can it attract capital and talent. It is not that Web3 needs to be regulated, but that regulators need Web3.
The recent attitude of the United States has been very clear. This year, the topic of cryptocurrency was placed at the center of the American political stage for the first time. According to CoinDesk, about one-third of American voters will consider the political candidates' stance on cryptocurrency before making a voting decision. 77% of voters believe that US presidential candidates should at least understand cryptocurrency. 44% of voters believe to some extent that "cryptocurrency and blockchain technology are the future of finance." Trump even shouted: "Make sure the future of cryptocurrency happens in the United States!"
The East-West game has taken shape, and one of the more obvious battlefields is ETF. In addition to local factors, the sharp turn in the US's attitude towards approving ETH ETF may also be due to the fact that Hong Kong has relatively pioneered the launch of ETH ETF in April.
Although there is a large gap in the size of ETFs between Hong Kong and the United States at present, Hong Kong, as one of the world's largest offshore financial centers, is expected to attract more institutions to enter the market as the ecosystem improves in the future, forming a round of institutional bull market.
Next, the development prospects of ETH ETF as a pledgeable interest-bearing asset will become the next focus of the game.
After Ethereum switched from POS to POW, it can generate passive income similar to interest after staking. The current market annual interest rate is about 4.5%. If Hong Kong is the first to land Ethereum spot ETF with staking, after obtaining staking income, subscribing to ETF will no longer be a paid behavior, but a profitable behavior. It can also become a "digital US bond" to a certain extent, and its attractiveness will even exceed that of Bitcoin ETF.
The development of the Web3 industry is also related to its local cultural heritage. Although Easterners appear to be more introverted and cautious compared to the relatively extroverted and diverse Westerners, it does not mean that they have fallen behind.
Hong Kong has currently issued a number of regulatory documents, including the "Guidelines for Virtual Asset Trading Platform Operators", the "Guidelines on Combating Money Laundering and Terrorist Financing (Applicable to Licensed Corporations and Virtual Asset Service Providers Licensed by the SFC)", the "Guidelines on Anti-Money Laundering and Terrorist Financing Issued by the Securities and Futures Commission Applicable to Associated Entities of Licensed Corporations and Virtual Asset Service Providers Licensed by the SFC" and the "SFC Disciplinary Penalties Guidelines".
The regulatory policy appears to be clearer and more mature than the Commodity Futures Trading Regulations currently used in the United States, and there is no need to spend too much time on the question of whether cryptocurrencies are "securities" or "commodities."
As the bull market gradually reaches its peak, the industry's wealth-creating effect will emerge, and a new batch of wealthy people will be born. Hong Kong, a region that is naturally endowed with the advantage of "Eastern Mysterious Power", will also attract more backbone forces of Web3 from the mainland and overseas Chinese, as well as their funds, as the market moves.
The next cycle will be a multi-dimensional integration of Web3 and traditional finance to revitalize the Hong Kong financial market. At present, the Hong Kong Securities and Futures Commission has stated that it may open STO and RWA investments to retail investors to further expand the virtual asset market. In addition, the regulatory framework for Hong Kong's Hong Kong dollar stablecoins and over-the-counter virtual asset stores (OTC) is also being promoted. After the full link is opened, Web3 will inject new vitality into the entire Hong Kong market.
As the tide of history rolls forward, which companies will remain on the table? Exchanges are the most important cornerstone of Hong Kong’s Web3 ecosystem.
In the foreseeable future, licensed exchanges such as Hashkey Exchange, in addition to their own trading business, will also become the key to Hong Kong Web3 connecting various financial industries. For example, in this ETF issuance, Hashkey Exchange also played the role of a custodian, providing underlying infrastructure support for the issuer. In the future, it will play an indispensable role in RWA, STO and OTC businesses.
It is precisely because of this that some offshore exchanges have been driven off the Hong Kong table. This is also known as, "You will pay for what you have done sooner or later."
HashKey actually made a very smart move. For offshore exchanges, it is difficult to "go from luxury to frugality" in terms of compliance, but if it is a native compliant exchange, "compliance" will even become a shortcut from the jurisdiction to the offshore exchange. HashKey also obtained a license from the offshore center Bermuda, and launched the international station HashKey Global a month ago, which will be open to overseas users. We also look forward to the future, such powerful exchanges as HashKey will break through more physical boundaries and bring more secure and convenient Web3 business support to individuals.
Development has its ups and downs. Perhaps we should experience the moment of clearance in Hong Kong, look at the overall historical situation, and make rational judgments.