Compiled by: Glendon, Techub News
On October 31, 2022, Hong Kong officially released the virtual asset policy declaration, marking a solid step forward in the field of Web3 and virtual assets. Since then, Hong Kong's development in this emerging field has been steadily progressing. With the second anniversary of the declaration approaching, Techub News conducted an in-depth exclusive interview with Legislative Council member Wu Jiezhuang to discuss the far-reaching impacts on various industries such as banking, securities, and exchanges since the implementation of virtual currency policies in Hong Kong.
Wu Jiezhuang analyzed the trends and challenges of traditional industries transitioning to Web3. He pointed out that the shift of traditional industries to the Web3 sector has become a clear development trend. However, the path of transformation is not smooth; traditional industries need to overcome multiple challenges such as talent shortages, technological barriers, and regulatory adaptability.
When talking about "Hong Kong virtual asset ETFs," Wu Jiezhuang candidly stated that the root cause of low trading volumes for this product is the lack of competitiveness. Specifically, Hong Kong virtual asset ETFs face fierce competition from similar overseas products, and the price advantage is not significant; at the same time, clients can directly purchase virtual currencies, which has weakened the necessity of ETF products; most brokers participating in ETF trading are small and medium-sized institutions, lacking the client appeal of large institutions; the functionality of the Hong Kong virtual asset market is relatively singular. Moreover, retail investors in Hong Kong have a relatively low enthusiasm for virtual asset products, showing a significant gap compared to other Asian countries. In this regard, he proposed that regulatory agencies should moderately relax certain restrictions on institutional participation in the market, including diversifying product types and innovating trading models.
Additionally, Wu Jiezhuang further envisions 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 timely adjust its strategies, no longer simply strengthening regulatory efforts, but moderately relaxing restrictions on the Web3 and virtual asset industries from multiple angles to seek a reasonable balance between regulation and market development.
The following is the transcript of the interview, with slight adjustments:
Techub News: Over the past two years since the implementation of the Hong Kong Web3 declaration, which industries have been specifically impacted by the virtual asset policy?
Legislative Council member Wu Jiezhuang: This is mainly reflected in two aspects. Over the past two years, we can see a phenomenon of large-scale crypto asset Web3 industries coming from overseas to develop in Hong Kong. In the first year after the release of the virtual asset policy, hundreds of emerging Web3 companies surged in Hong Kong. To date, this number has approached 1,000, including not only well-known exchanges and basic service providers but also numerous emerging enterprises within the Web3 ecosystem.
In addition, traditional industries are also gradually transforming. We have noticed that some Web2 companies are beginning to shift towards Web3. In the early stages, this transition was mainly reflected in financial institutions, such as traditional brokerages and asset management companies, which were more willing to engage in virtual asset business. However, recently, we have observed that an increasing number of entities in the real economy are also exploring how to leverage Web3 technology to create new growth points for themselves.
That said, the transition of traditional industries to the Web3 sector has become a clear 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 transitioning to Web3?
Legislative Council member Wu Jiezhuang: In reality, there are numerous challenges. Firstly, we observe that Hong Kong's size is not large, with a population of only over 7 million, and there is a relative scarcity of talent in the technology sector, making it very difficult and costly to recruit engineers and developers in Hong Kong. This is one of the challenges I have observed many enterprises facing.
Secondly, traditional banks and large multinational banks hold a conservative attitude towards the Web3 industry. Many enterprises lack the support of large financial institutions when adopting traditional financial services, which makes it difficult for those transitioning to Web3 to provide daily financial services, thus imposing certain restrictions on their development.
Techub News: In the past two years, what has been the attitude of foreign financial institutions towards the virtual asset industry in Hong Kong, and have they intensified their layout? What have local financial institutions done?
Legislative Council member Wu Jiezhuang: Strictly speaking, development is not rapid. I just mentioned that most large multinational financial institutions are still in a wait-and-see state, with only a few institutions showing positive attitudes, such as applying for stablecoin licenses and participating in sandbox testing. The reason some multinational financial institutions are still in a state of observation is that 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 a large investment to rebuild the entire system.
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 see the business opportunities for investment. Moreover, after two years of development, I have observed some progress in this market. Although traditional overseas brokerages have not actively invested in virtual asset ETF projects, some internet brokerages have recently begun to participate in virtual asset trading, and trading volumes have been decent, indicating that traditional investors are also willing to enter this field. Therefore, once traditional banks, brokerages, and other large financial service providers gradually enter this industry, its future development will be faster.
Additionally, regarding local financial institutions in Hong Kong, taking banks as an example, the size of local banks is relatively small, and their participation is not very proactive. In contrast, some newly established virtual asset banks are more active; they are eager to identify new breakthrough businesses. Similarly proactive are local brokerages, which are eager to find new growth points due to the increasing challenges posed by traditional businesses like stock trading. Virtual assets provide a new development opportunity in this regard. We see that many medium-sized and even large local brokerages 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 compliance 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 pain points can the establishment of a "virtual bank" solve?
Legislative Council member Wu Jiezhuang: I just mentioned that traditional banks have a set of traditional systems for anti-money laundering and KYC functions to meet regulatory requirements. In fact, their cost investments are not small, covering multiple aspects including human and technological resources. Virtual banks, which can also be referred to as virtual financial banks, are specifically designed to serve the virtual asset industry. They come with a set of KYC, AML, as well as on-chain analysis and data analysis functions, which can both achieve service diversification and fully meet 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.
Techub News: At the end of April this year, Hong Kong approved 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 the market towards virtual asset ETFs? What do you think are the main reasons for this lackluster performance?
Legislative Council member Wu Jiezhuang: I believe that the root cause of the low trading volume of ETFs lies in insufficient competitiveness, which is mainly reflected in several aspects: Firstly, there is competition from numerous overseas similar products, with no obvious price advantage; secondly, clients can currently purchase virtual currencies directly, which weakens the necessity of ETFs as a bridge for traditional brokerages to enter the virtual asset market. For example, we can see that some internet brokerages are directly connecting with licensed exchanges, further reducing the attractiveness of ETFs. After all, cost considerations are a very crucial factor.
Third, the brokers participating in ETF trading are mostly small and medium-sized, lacking the client appeal of large institutions; fourth, retail investors in Hong Kong are far less enthusiastic about virtual asset products compared to other Asian countries, and differences in product awareness and speculative preferences have increased the difficulty of promoting retail business; fifth, the functionality of the Hong Kong virtual asset market is relatively singular, lacking diversification such as hedging, which also limits the trading volume of certain products. The combined effect of these various reasons has led to the trading volume of Hong Kong ETFs not reaching significant levels.
Techub News: Will this market see 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?
Legislative Council member Wu Jiezhuang: I advocate for a reasonable relaxation of regulations on virtual assets from multiple perspectives. I believe Hong Kong is most suitable to become a hub for Web3 and financial institutions in Asia, as Hong Kong ranks first in Asia in terms of breadth and depth in the financial sector, whether in terms of asset management scale or trading of other financial products. Therefore, I propose that regulatory agencies should relax certain restrictions on institutional participation in the market, including diversifying product types and innovating trading models, to promote the vibrancy and trading volume of relevant markets in Hong Kong.
Techub News: In the Hong Kong virtual asset market, compliant licensed exchanges are undoubtedly an important component. Compared to overseas exchanges, what advantages do existing compliant exchanges have to attract investors?
Legislative Council member Wu Jiezhuang: Compliant licensed exchanges in Hong Kong have two disadvantages: Firstly, the 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 retail investors.
These two are obvious pain points, but what benefits do they bring? Security.
In compliant exchanges, whether for retail or institutional investors, their funds are fully protected, ensuring worry-free withdrawals. In contrast, users of overseas exchanges may find themselves in a helpless situation when encountering issues related to funds and security. Simply put, Hong Kong compliant exchanges can provide 100% security guarantees, allowing investors to trade with peace of mind, which is their core value.
Furthermore, we all know that the virtual asset industry tends to experience a major incident every year or two, but no one ever knows what the next major incident will be. Therefore, the Hong Kong authorities place great emphasis on investor protection, making "risk-based" the primary principle of virtual asset policy, aimed at safeguarding the interests of local and international investors, including both institutions and retail investors.
On the other hand, compliant exchanges and overseas exchanges differ in positioning, catering to the varying needs of different types of investors. Moreover, with the continuous optimization of the policy environment, more exchanges may obtain licenses in Hong Kong in the future, and in order to enhance competitiveness, they will undoubtedly actively connect with target markets.
Overall, Hong Kong has demonstrated a strong determination in investor protection. Of course, I suggest that exchanges should not only strengthen safety guarantees but also consider market development by launching some product types and innovative gameplay to enrich market choices, thereby promoting the development of the entire virtual asset industry.
Techub News: Some overseas exchanges have also engaged in cryptocurrency business in Hong Kong. What challenges do you think these exchanges bring to the regulation of the virtual asset market in Hong Kong? Taking the JPEX exchange incident that occurred last year as an example, how do you view the shortcomings of Hong Kong in virtual asset regulation?
Legislative Council member Wu Jiezhuang: Overseas exchanges, I believe, can be roughly divided into two categories. First are exchanges like JPEX, whose essence is a scam aimed at deceiving investors, so retail investors should be highly vigilant about such exchanges. Hong Kong's regulatory authorities need to start from enhancing virtual asset investment education to improve retail investors' ability to identify non-compliant trading platforms.
Another type 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 license in Hong Kong, these exchanges need to invest substantial human, material, and technological resources to operate compliantly. If they can contribute to the healthy development of the virtual asset market in Hong Kong and provide protection, then regulatory agencies should also protect their interests.
At the same time, regulatory agencies need to take multiple measures to ensure that investors in Hong Kong, whether institutional or retail, do not easily throw funds into exchanges that have not obtained licenses in Hong Kong. As mentioned earlier, the operational costs of licensed exchanges in Hong Kong are high, while the regulatory environment overseas is relatively lenient. If overseas exchanges can operate freely in Hong Kong, 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 respond to this challenge.
Techub News: Will Hong Kong's regulatory authorities strengthen regulatory efforts in the future? In which areas will the Hong Kong government focus its efforts?
Legislative Council member 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. For example, last year, it allocated 50 million HKD for the development of the Cyberport ecosystem, which was 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, for example, by holding large-scale events to achieve this goal. Of course, in this regard, Hong Kong has 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 come to Hong Kong; in addition, 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 intensify efforts to introduce more large-scale events and projects, thereby attracting more talents to build the Hong Kong Web3 ecosystem.
Another key point is the talent issue. For example, regarding visas, can we provide a green channel for talents in the Web3 industry or offer better development space for engineers? We need to consider how to attract young people, because with talent comes funding and projects, combined with good policies, it will naturally bring about very good economic benefits. As for exchanges, financial institutions, etc., I won't elaborate further. However, my suggestion is that the government should first strengthen the education on virtual asset investment for institutions and retail investors. We need to promote the virtual asset industry in various sectors in Hong Kong, letting them understand the essence of this industry and clearly recognize the opportunities and risks involved. If the public in Hong Kong can align their understanding of virtual assets with other Asian countries like Japan and South Korea, then the Hong Kong crypto industry will become deeper and broader.
Techub News: Hong Kong plans to become a global Web3 hub. How do the regulatory policies of Hong Kong compare uniquely with those of countries like Singapore, Japan, and the United States? In what areas does it need to improve to better adapt to market demands and regulatory requirements?
Legislative Council member Wu Jiezhuang: I believe Hong Kong's regulatory system is already quite sound, covering licensed virtual asset exchanges, financial service providers, and the licensing records for stablecoin regulation. It should be noted that the virtual asset industry has undergone more than a decade of development, and the industry has faced major issues almost every year, such as exchanges misappropriating customer assets for investments leading to losses, corporate bankruptcies, and significant events like hacking attacks. Throughout this development process, the Hong Kong government has also gained valuable experience, and under our strict regulation, the probability of such issues reoccurring is extremely low. Additionally, Hong Kong has introduced insurance companies to safeguard customer asset security, strengthen cybersecurity regulation, and other critical aspects to ensure that listed institutions do not repeat past mistakes. This can be said to be a unique advantage of Hong Kong in terms of regulation.
Notably, this August, the world's first lawsuit involving centralized autonomous organizations (DAOs) was successfully adjudicated in the High Court of Hong Kong. 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 is relatively easier to attract compliant and economically developing projects from around the world. Geographically, Hong Kong is actually the center of Asia; we are not looking to replace the United States or other developed countries, but at least in Asia, Hong Kong is very likely to become a true Web3 hub in addition to being a financial center.
Techub News: Finally, how do you view the future development trends of the virtual asset ecosystem in Hong Kong? What impact will these changes have on the stability and development of Hong Kong's financial system?
Legislative Council member Wu Jiezhuang: The scope of virtual assets is very broad. For example, regarding stablecoins, Hong Kong is working on legislative regulations. We know that stablecoins are not only trading and investment tools within the crypto world, but they also demonstrate enormous potential as new payment methods for cross-border trade in the unprecedented global upheaval of the past century. Under the legal and compliant regulatory framework, Hong Kong is very likely to issue a stablecoin as an innovative payment tool to lead the transformation of payment methods.
If this possibility materializes, Hong Kong will be able to widely use stablecoins in investment, trading, payment, and many other scenarios, achieving cooperation with various innovative projects. I believe this will create more business opportunities for various industries in Hong Kong. Moreover, the vigorous development of the virtual asset ecosystem will also have a positive impact on 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 stronger vitality and broader development potential.
