Original source: Glendon, Techub News
Reprinted: Koala, Mars Finance
On October 31, 2022, Hong Kong officially released the virtual asset policy declaration, marking a solid step for Hong Kong in the Web3 and virtual asset field. Since then, Hong Kong's development in this emerging field has been steady. As the second anniversary of the declaration approaches, Techub News conducted an in-depth exclusive interview with Hong Kong Legislative Council member Wu Jiezhuang to explore the far-reaching impacts that the implementation of virtual currency policies has had on various industries in Hong Kong, including banking, securities, exchanges, and more.
Wu Jiezhuang analyzed the trend of traditional industries transforming to Web3 and the challenges they face. He pointed out that the transformation of traditional industries to the Web3 industry has become an obvious development trend. However, the path of transformation is not smooth; traditional industries need to overcome multiple challenges, such as talent shortages, technical barriers, and regulatory adaptability.
When discussing the 'Hong Kong Virtual Asset ETF,' Wu Jiezhuang frankly stated that the root cause of the low trading volume of this product lies in its lack of competitiveness. Specifically, Hong Kong's virtual asset ETFs face fierce competition from similar overseas products, with no significant price advantage; at the same time, customers can directly purchase virtual currencies, making the necessity of ETF products weaker; brokers participating in ETF trading are mostly small and medium-sized institutions, lacking the customer appeal of large institutions; the functions of the virtual asset market in Hong Kong are relatively singular. Moreover, individual investors in Hong Kong have relatively low enthusiasm for virtual asset products, showing a clear gap compared to other Asian countries. In response to this, he proposed that regulatory agencies should moderately relax some restrictions on institutional participation in the market, including enriching product varieties and innovating trading models.
In addition, Wu Jiezhuang further anticipated the key points of the Hong Kong government's future layout in the Web3 industry and the development trends of the virtual asset ecosystem. He emphasized that the Hong Kong government should adjust its strategy in a timely manner, not merely intensifying regulatory efforts but should moderately relax restrictions on Web3 and the virtual asset industry from multiple angles to seek a reasonable balance between regulation and market development.
The following is the interview transcript, with slight adjustments:
Techub News: After two years of implementation of the Hong Kong Web3 Declaration, which industries have been specifically impacted by the virtual asset policy in Hong Kong?
Legislator Wu Jiezhuang: This is mainly reflected in two aspects. Over the past two years, there has been a phenomenon of large-scale crypto asset Web3 industries coming to Hong Kong for development. In the first year after the virtual asset policy was released, hundreds of emerging Web3 companies surged in Hong Kong. As of today, this number has approached 1,000, including not only well-known exchanges and basic service providers but also many emerging enterprises within the Web3 ecosystem.
In addition, traditional industries are gradually transforming. We have noticed that some Web2 companies are turning to Web3. Initially, this transformation was mainly reflected in financial institutions, such as traditional brokers and asset management companies, which were more willing to engage in virtual asset business. However, recently, we have observed that more and more entities in the real economy are also exploring how to leverage Web3 technology to create new growth points.
Therefore, the transformation of traditional industries to the Web3 industry has become an obvious development trend. Especially after the Hong Kong government launched the Ensemble project sandbox, many traditional products seeking tokenization can be seen in the market, hoping to expand their business into trading scenarios across Hong Kong and even globally.
Techub News: What difficulties and challenges have these traditional industries encountered in the process of shifting to Web3?
Legislator Wu Jiezhuang: In fact, there are many difficulties. First, we observe that Hong Kong's size is not large, with a population of just over 7 million, and talent in the technology field is relatively scarce, making it very difficult and costly to recruit engineers and developers in Hong Kong. This is one of the difficulties I have observed for many enterprises.
Secondly, traditional banks and large multinational banks adopt a conservative attitude towards the Web3 industry, and many enterprises lack the support of large financial institutions when adopting traditional financial services, which subsequently makes it difficult for those turning to Web3 enterprises to provide daily financial services, thereby imposing certain constraints on their development.
Techub News: What is the attitude of foreign financial institutions towards Hong Kong's virtual asset industry in the past two years? Have they intensified their layout efforts? What have local financial institutions in Hong Kong done?
Legislator Wu Jiezhuang: Strictly speaking, the development is not rapid. As I mentioned earlier, most large multinational financial institutions are still in a wait-and-see state, with only a few institutions showing proactive attitudes, such as applying for stablecoin licenses and participating in sandbox tests. Some multinational financial institutions remain in a watchful state because the entire virtual asset industry requires the implementation of different KYC (Know Your Customer) and AML (Anti-Money Laundering) policies, which are vastly different from their traditional business models and may require significant investment to rebuild their entire systems.
However, I believe this is just a matter of time. As more and more developers come to Hong Kong to develop products and industries, these banks and financial institutions will also recognize the business opportunities and invest funds accordingly. Moreover, after two years of development, I have observed some progress in this market. Although traditional overseas brokers have not actively invested in virtual asset ETF projects, some internet brokers have started participating in virtual asset trading in recent months, with decent trading volumes, indicating that traditional investors are also willing to enter this space. Therefore, once traditional banks, brokers, and other large financial service providers gradually enter this industry, its future development will be faster.
In addition, local financial institutions in Hong Kong, taking banks as an example, are relatively small in scale and their attitudes towards participation are not very proactive. In contrast, some newly established virtual asset banks are more active, seeking to identify new breakthrough businesses. Local brokers are also similarly active; as the challenges posed by traditional businesses such as stock trading become greater, they are eager to find new growth points, and virtual assets provide a new opportunity for development. We see that many medium and even large local brokers have entered this field to compete. At the same time, some asset management companies are also upgrading their virtual asset businesses, and once they obtain compliant licenses in Hong Kong, they can provide virtual asset management services to clients.
Techub News: You previously mentioned that Hong Kong should establish a 'virtual bank.' What existing banking pain points can setting up a 'virtual bank' resolve?
Legislator Wu Jiezhuang: I just mentioned that traditional banks have a traditional system for functions like anti-money laundering and KYC to meet regulatory requirements. In fact, their cost investments are not small, involving various aspects including human resources and technology. Virtual banks, or virtual financial banks, are designed specifically to serve the virtual asset industry; they come equipped with their own KYC, AML, and on-chain analysis and data analytics functions, which can achieve service diversification while fully meeting regulatory requirements, effectively alleviating some pain points of traditional banks. If Hong Kong can provide this service, it will undoubtedly attract more projects from this industry to gather here.
Techub News: At the end of April this year, Hong Kong licensed six virtual currency ETFs under Huaxia Hong Kong, Bosera International, and Harvest International. However, the trading volume of these ETFs has been somewhat disappointing. Does this reflect a lack of interest and confidence in virtual asset ETFs in the market? What do you believe are the main reasons for this sluggish performance?
Legislator Wu Jiezhuang: I believe the root cause of the sluggish ETF trading volume lies in insufficient competitiveness, mainly reflected in several aspects: first, facing competition from many similar overseas products, with no clear price advantage; second, customers can currently purchase virtual currencies directly, which diminishes the necessity of ETFs as a bridge for traditional brokers to enter the virtual asset market; for example, we can see some internet brokers directly connecting with licensed exchanges, further reducing the attractiveness of ETFs, as cost considerations are a key factor.
Thirdly, the brokers participating in ETF trading are mostly small and medium-sized, lacking the customer appeal of large institutions; fourthly, individual investors in Hong Kong are far less enthusiastic about virtual asset products than those in other Asian countries, and differences in product awareness and speculative preferences also increase the difficulty of promoting retail business; fifthly, the functionality of the virtual asset market in Hong Kong is relatively singular, lacking diversified operations such as hedging, which also limits the trading volume of certain products. The combined effects of these reasons have led to the trading volume of Hong Kong ETFs not reaching significant levels.
Techub News: Will this market welcome a turning point in the future, or what changes does Hong Kong need to make in this sector to increase the trading volume of virtual currency ETFs?
Legislator Wu Jiezhuang: I advocate for a reasonable relaxation of regulations on virtual assets from multiple angles. I believe Hong Kong is the most suitable place to become a hub for Web3 and financial institutions in the Asia region because Hong Kong ranks first in Asia in terms of the breadth and depth of the financial field, whether in terms of asset management scale or trading of other financial products, it is actually the largest. Therefore, I propose that regulatory agencies should relax some restrictions on institutional participation in the market, including enriching product varieties and innovating trading models, to promote the activity and trading volume growth of relevant markets in Hong Kong.
Techub News: In the Hong Kong virtual asset market, compliant licensed exchanges are undoubtedly an important part. Compared to overseas exchanges, what advantages do existing compliant exchanges have to attract investors?
Legislator Wu Jiezhuang: Compliant licensed exchanges in Hong Kong have two drawbacks: first, their costs are relatively high; compared to unlicensed exchanges in Hong Kong, their management fees are more expensive; secondly, the variety of products is limited, making it difficult to meet the diverse investment needs of individual investors.
These two are obvious pain points, but what benefits do they bring? Security.
In compliant exchanges, whether individual investors or institutions, their funds are fully protected, ensuring worry-free withdrawals. In contrast, users of overseas exchanges may find themselves helpless when encountering safety issues such as fund security. In simple terms, compliant exchanges in Hong Kong can provide 100% security guarantees, allowing investors to trade with peace of mind, which is their core value.
In addition, we all know that the virtual asset industry experiences a major explosion every one or two years, but no one ever knows what the next explosion will be. Therefore, the Hong Kong authorities attach great importance to investor protection, making 'risk-based' the primary principle of the virtual asset policy, aiming to safeguard the interests of local and international investors, including both institutions and individual investors.
On another note, compliant exchanges differ in positioning from overseas exchanges and can meet the different needs of various types of investors. Moreover, with the continuous optimization of the policy environment, more exchanges may obtain licenses in Hong Kong in the future. To enhance competitiveness, they will inevitably actively connect with target markets.
Overall, Hong Kong has shown a strong determination in investor protection. Of course, I suggest that exchanges should enhance security guarantees while also taking market development into account, launching various product types and innovative approaches to enrich market choices, thereby promoting the development of the entire virtual asset industry.
Techub News: Some overseas exchanges have also engaged in crypto business in Hong Kong. What challenges do you think these exchanges pose to the regulation of Hong Kong's virtual asset market? Taking the JPEX exchange incident that occurred last year as an example, how do you view Hong Kong's shortcomings in virtual asset regulation?
Legislator Wu Jiezhuang: Overseas exchanges, in my opinion, can generally be divided into two categories. The first is exchanges like JPEX, which are essentially scams designed to deceive investors, so individual investors should be highly vigilant about such exchanges. Hong Kong's regulatory agencies need to enhance virtual asset investment education to improve individual investors' ability to identify non-compliant trading platforms.
Another category is exchanges that hold licenses overseas but have not yet obtained licenses in Hong Kong. For such exchanges, I believe regulatory authorities should be more proactive and take action. Given the high cost of obtaining a Hong Kong license, these exchanges need to invest substantial human, material, and technical resources to operate compliantly. If they can contribute to the healthy development of the Hong Kong virtual asset market and provide protection, then regulatory agencies should also safeguard their interests.
At the same time, regulatory agencies need to take various measures to ensure that Hong Kong investors, whether institutions or individual investors, do not easily allocate funds to exchanges that have not obtained licenses in Hong Kong. As mentioned earlier, the operating costs of licensed exchanges in Hong Kong are high, while the overseas regulatory environment is relatively relaxed. If overseas exchanges can conduct business in Hong Kong at will, it will undoubtedly affect the survival space and interests of local licensed exchanges. Therefore, regulatory authorities need to think deeply and take effective measures to better address this challenge.
Techub News: Will Hong Kong's regulatory agencies strengthen regulatory efforts in the future? Which areas will the Hong Kong government focus on?
Legislator Wu Jiezhuang: I believe the Hong Kong government should not continue to strengthen regulation but should moderately relax restrictions on banking services for Web3 and virtual asset companies to seek a reasonable balance between regulation and market development. At the same time, the Hong Kong government should be more proactive in building the ecosystem, such as the 50 million Hong Kong dollars allocated last year for the construction of Cyberport's ecosystem, which is a very good first step.
Next, we need to do a lot of work; the Hong Kong government should attract more ecological projects to settle in Hong Kong, such as achieving this goal through hosting large-scale events. Of course, in this regard, Hong Kong has also made some progress: in February next year, the Consensus Conference will be held in Hong Kong, and I believe it will attract many foreign project participants to Hong Kong; additionally, the Hong Kong Web3 Carnival is already scheduled for April next year. Therefore, I hope the Hong Kong government can deepen cooperation with Cyberport or other government agencies to strengthen efforts to bring in more large events and projects, thereby attracting more talent to build Hong Kong's Web3 ecosystem together.
Another key point is the talent issue. For example, regarding visas, can we provide green channels for talents in the Web3 industry or offer better development space for engineers, etc.? We need to think about how to attract young people because with talent comes funding and projects, along with good policies, naturally leading to very good economic benefits. As for exchanges, financial institutions, etc., I won’t elaborate further. But my suggestion is that the government should first strengthen virtual asset investment education for institutions and individual investors. We need to intensify efforts to promote the virtual asset industry across various sectors in Hong Kong, helping them understand the essence of this industry and clearly recognize the opportunities and risks involved. If the awareness level of the Hong Kong public regarding virtual assets can align with that of other Asian countries like Japan and South Korea, then the Hong Kong crypto industry will become richer and broader.
Techub News: Hong Kong plans to become the world's Web3 center. Compared to the policies of countries such as Singapore, Japan, and the United States, what are the unique aspects of Hong Kong's virtual asset regulatory policies? In what areas does it still need improvement to better meet market demands and regulatory requirements?
Legislator Wu Jiezhuang: I believe that Hong Kong's regulatory system is quite sound, covering licensed virtual asset exchanges, financial service providers, and licensing records for stablecoin regulation, among others. It should be noted that the virtual asset industry has undergone more than a decade of development, and this industry has encountered significant issues almost every year, such as exchanges misappropriating customer assets for investment losses, corporate bankruptcies, and major incidents of hacking. Throughout this development process, the Hong Kong government has also gained rich experience, and under our strict regulation, the probability of such problems reoccurring is very low. At the same time, Hong Kong has also introduced insurance companies for protection, comprehensively ensuring the safety of customer assets, strengthening cybersecurity supervision, and other key aspects to ensure that listed institutions do not repeat past mistakes. This can be said to be a unique advantage that Hong Kong possesses in terms of regulation.
It is worth mentioning that in August this year, the world's first lawsuit involving a centralized autonomous organization (DAO) was successfully heard in the Hong Kong High Court. These instances fully demonstrate Hong Kong's capability in regulating and handling affairs in various fields of Web3, effectively alleviating investors' concerns. At the same time, this also means that Hong Kong can more easily attract compliant and economically developing projects from around the world to develop here. Geographically, Hong Kong is actually the center of Asia; we are not trying to replace the United States or other developed countries, but at least in Asia, besides being a financial center, Hong Kong is also very likely to become a true Web3 center.
Techub News: Finally, how do you view the future development trends of Hong Kong's virtual asset ecosystem? How will these changes impact the stability and development of Hong Kong's financial system?
Legislator Wu Jiezhuang: The scope of virtual assets is very broad. For example, regarding stablecoins, Hong Kong is working on legislation to regulate them. We know that stablecoins are not only trading and investment tools in the crypto world but have also shown great potential as a new payment method for cross-border trade amid unprecedented global changes over the past century. Under a legitimate and compliant regulatory framework, Hong Kong is likely to issue a stablecoin as an innovative payment tool to lead the revolution in payment methods.
If this possibility arises, Hong Kong will be able to widely utilize stablecoins in various scenarios such as investment, trade, and payments, and collaborate with many innovative projects. I believe this will generate more business opportunities for various industries in Hong Kong. Additionally, the vigorous development of the virtual asset ecosystem will positively impact Hong Kong's financial system, promoting complementary development between emerging industries and traditional financial markets, thereby consolidating Hong Kong's position in the financial sector and endowing it with greater vitality and broad development potential.