Hong Kong took the world by storm after announcing that it will allocate HKD 50 million (USD 6.4 million) in the 2023/24 Budget to develop the city’s Web3 ecosystem.
Considering the cautious approach adopted by many nations towards this emerging technology, it is intriguing that Hong Kong remains steadfast in its commitment. What are the motivations behind the city’s aspiration to establish itself as a frontrunner in this industry, despite its inherent volatility?
Why does Hong Kong want to be a hub for Web3?
In 2018, Hong Kong took a tough stance on cryptocurrencies, when it restricted the retail trading of digital assets. However, it has since changed course and signaled its intention to allow retail participation in crypto investments. Under the new licensing regime slated to be implemented in June 2023, the Hong Kong Securities and Futures Commission (SFC) plans to require all cryptocurrency exchanges to be licensed before they are allowed to operate in the city.
After multiple crashes that happened in the sector in 2022, Financial Secretary of Hong Kong Paul Chan likened this to the dot-com crash that happened before the Internet evolved to what it is today and sees this as the best time to promote the development of Web3.
Amidst experiencing slow growth in 2022, a crypto-friendly stance could be the key to revitalizing the economy, as their fiercest competitor, Singapore, has overtaken the city to become the top financial center in Asia. Nevertheless, Hong Kong possesses the resources to capitalize on developments within the crypto sector, and aims to be at the forefront of cryptocurrency innovation and adoption to establish itself as a prominent player in the global digital economy.
Moreover, this stance could attract digital currency firms to establish their headquarters in the city, especially after a period of political turmoil that led to a mass talent exodus. As foreign companies are looking to expand their presence in Asia, Hong Kong’s favorable position in contrast to other countries with negative stances towards cryptocurrencies makes it an attractive destination.
China has cracked down hard on crypto by implementing a blanket ban on cryptocurrencies since 2021, while the Reserve Bank of India also believes that cryptocurrencies should be banned. Meanwhile, Singapore has started to tighten regulations after some companies based in the country defaulted, including Terraform Labs and Three Arrows Capital.
This offers a significant opportunity for Hong Kong to surpass Singapore if it can strike a balance between a supportive regulatory environment and effective risk management measures. With its ability to attract cryptocurrency businesses and investors seeking a blend of stability and innovation, Hong Kong is well-positioned to become the thriving Web3 hub it aspires to be.
How turmoil in the US can benefit Hong Kong
Furthermore, regulatory uncertainty is prevalent in the US, which is losing its position as one of the major crypto hubs worldwide. The collapse of FTX has led to more calls for tougher regulation in the country, but progress has been limited.
The Securities and Exchange Commission (SEC) is still in the midst of a lawsuit with Ripple over selling the XRP token via an unregistered securities offering. Similarly, the SEC is engaged in a dispute with Coinbase, alleging the platform violated laws around its spot market, staking service, and the Coinbase Lend program.
Moreover, regulatory bodies in the United States have yet to reach a consensus on whether cryptocurrencies should be classified as securities. While the SEC’s Chair, Gary Gensler, previously suggested that Ethereum and other proof-of-stake tokens should be regulated as a security, the Chairman of the Commodities and Futures Trading Commission (CFTC) — Rostin Behnam — labeled Ethereum as a commodity.
This has led to a lot of uncertainty, as digital assets that are classified as securities will have to comply with stricter regulations, leading to an additional regulatory burden for cryptocurrency companies. Some have mulled over leaving the country, with Bittrex being the latest to announce it will shut down operations in the US.
Hong Kong can leverage this opportunity and has been aggressively making efforts to make this a reality. Multiple forums have been organized in the city — including the HK Web3 Festival and the 2023 Global Digital Economy Web3.0 Summit Forum — to attract key players in the industry. Furthermore, the Institute of Web 3.0 Hong Kong was established to bring together companies and professionals in the sector and foster the development of Web3 technology.
Major Web3 developments in Hong Kong
Hong Kong’s path towards becoming a global crypto hub has propelled it towards a promising Web3 future.
The SFC aims to implement regulatory measures that balance innovation in the sector and protect investors from harm. Some initiatives include the segregation of customers’ virtual assets from the exchange so that their funds are protected even when the business fails, and strict due diligence is to be conducted on any tokens they intend to list on their platform.
Companies such as OSL Crypto and Hashkey have already received approval from the SFC to operate as a licensed virtual asset trading platform, but none have been approved to provide services to retail investors. With the new guidelines set to be implemented starting June 1, 2023, the SFC is encouraging companies who wish to continue operating in the city to apply for a license.
While banks in Hong Kong have been unfriendly towards virtual asset firms, the Hong Kong Monetary Authority (HKMA) and the SFC are encouraging them to align with the crypto-friendly stance and not reject applications based on anti-money laundering concerns.
The government’s regulatory approach has been well received by the market, with several companies declaring their intention to establish a base in Hong Kong, including crypto exchanges like Huobi and Bitget.
However, Hong Kong is taking a stricter approach when it comes to stablecoins. The crash of algorithmic stablecoins like Terra USD has prompted the HKMA to assert that stablecoins must be backed by high-quality, liquid assets so that holders can redeem them for the referenced fiat currency.
Furthermore, the HKMA has proposed an interesting requirement for stablecoin issuers that wish to operate in the city, where they are required to establish a locally incorporated entity. While this move may enhance the HKMA’s oversight capabilities, it may impose a heavier regulatory burden on stablecoin companies. The HKMA is still keen on this requirement but will further evaluate the different options before finalizing the bill later this year.
The SFC is also of the view that decentralized finance (DeFi) should be regulated, as stated by Keith Choy, interim head of intermediaries at the statutory body. If any decentralized applications allow the trading of digital assets on their platform, Choy believes they should be required to obtain a Type 7 license to provide automated trading services.
Finding the right balance in regulating the DeFi sector is crucial to protect investors from risks such as hacks and scams. However, it is important to adopt a measured approach that avoids excessive regulation, as it could hinder innovation and limit access to these technologies for those who stand to benefit the most from them.
Overall, Hong Kong seems poised to be one of the frontrunners of the Web3 revolution with its crypto-friendly stance and financial investments in the sector. If the city is able to implement regulatory policies that balance innovation and investor safety, this could play a pivotal role in revitalizing its economy and becoming a thriving hub for this latest technology.