Compiled by: Glendon, Techub News
On October 31, 2022, Hong Kong officially released the virtual asset policy declaration, marking a solid step forward for Hong Kong in the Web3 and virtual asset fields. Since then, the development of Hong Kong in this emerging area has been steadily advancing. As the second anniversary of this declaration approaches, Techub News conducted an in-depth exclusive interview with Legislative Council member Wu Jiezhuang to discuss the profound impacts brought to various industries such as banking, securities, and exchanges in Hong Kong since the implementation of cryptocurrency policies.
Wu Jiezhuang analyzed the trends and challenges faced by traditional industries transitioning to Web3. He pointed out that the transformation of traditional industries into the Web3 sector has become a noticeable development trend. However, the road to transformation is not smooth, as traditional industries need to overcome multiple challenges such as talent shortages, technological barriers, and regulatory adaptability.
When discussing 'Hong Kong virtual asset ETFs,' Wu Jiezhuang candidly stated that the root cause of the low trading volume of these products lies in a lack of competitiveness. Specifically, Hong Kong virtual asset ETFs face fierce competition from similar overseas products, and the price advantage is not obvious; at the same time, clients can directly purchase virtual currencies, which weakens the necessity of ETF products; the brokers participating in ETF trading are mostly small to medium-sized institutions, lacking the customer appeal of large institutions; the Hong Kong virtual asset market has relatively singular functions. Moreover, retail investors in Hong Kong also show relatively low enthusiasm for virtual asset products, which is significantly different from other Asian countries. In response, he suggested that regulatory agencies should moderately relax some restrictions on institutional market participation, including enriching product types and innovating trading models.
Additionally, Wu Jiezhuang further outlined 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 strategy, no longer purely strengthening regulatory measures but should moderately relax restrictions on the Web3 and virtual asset industries from multiple angles to seek a reasonable balance between regulation and market development.
The following is a 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 virtual asset policies?
Member Wu Jiezhuang: This is mainly reflected in two aspects. Over the past two years, we have observed a phenomenon of large-scale crypto asset Web3 industries coming to develop in Hong Kong. In the first year after the release of the virtual asset policy, hundreds of emerging Web3 companies sprang up in Hong Kong. To date, this number has approached 1000, which includes 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 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 an increasing number of entities in the real economy are exploring how to leverage Web3 technology to create new growth points.
Therefore, the transformation of traditional industries into the Web3 sector has become a noticeable development trend. Especially after the Hong Kong government launched the Ensemble project sandbox, we can see many traditional products seeking tokenization, hoping to use this to expand their business into trading scenarios across Hong Kong and even globally.
Techub News: In this transition to Web3, what difficulties and challenges have these traditional industries encountered?
Member Wu Jiezhuang: In fact, there are many difficulties. First, we observe that Hong Kong is not very large, with a population of just over 7 million, and talents in the technology sector are 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 in many enterprises.
Secondly, traditional banks and large multinational banks hold a conservative attitude towards the Web3 industry, and many companies lack the support of large financial institutions when adopting traditional financial services, which leads to a certain degree of constraint on the development of those companies transitioning to Web3.
Techub News: Over the past two years, what has been the attitude of foreign financial institutions towards Hong Kong's virtual asset industry, and have they intensified their layout? What have local financial institutions in Hong Kong done?
Member Wu Jiezhuang: Strictly speaking, development is not rapid. I just mentioned that large multinational financial institutions are mostly still in a wait-and-see mode, with only a few institutions showing proactive attitudes, such as applying for stablecoin licenses and participating in sandbox testing. The reason some multinational financial institutions remain in a cautious state 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 their entire systems.
However, I believe this is just a matter of time. As more developers come to Hong Kong to develop products and industries, these banks and financial institutions will also seize the business opportunities for investment. Moreover, after two years of development, I have observed some progress in this market. Although traditional overseas brokers are currently not actively investing in virtual asset ETF projects, some internet brokers have started participating in virtual asset trading in recent months, with trading volume being quite decent, indicating that traditional investors are also willing to enter this field. Therefore, once traditional banks, brokers, and other large financial service providers gradually enter this industry, its future development will accelerate.
In addition, regarding local financial institutions in Hong Kong, taking banks as an example, local banks are relatively small in size and their participation attitude is not very proactive. In contrast, some newly established virtual asset banks are more proactive, as they seek to identify new breakthrough businesses. Local brokers are also equally proactive; as challenges from traditional businesses like stock trading become more significant, they are eager to find new growth points, and virtual assets provide a new development opportunity. We see that many medium-sized and even large local brokers have entered this field to compete. Additionally, some asset management companies are upgrading their virtual asset business, and once they obtain compliant licenses in Hong Kong, they can provide virtual asset management services to clients.
Techub News: Previously, you mentioned that Hong Kong should establish a 'virtual bank.' What existing pain points can the establishment of a 'virtual bank' address?
Member Wu Jiezhuang: I previously mentioned that traditional banks have a conventional system for anti-money laundering and KYC functions to meet regulatory demands. In fact, their cost input is not small, including multiple aspects such as manpower and technology. Virtual banks, which can also be referred to as virtual financial banks, are specifically designed to serve the virtual asset industry. They come equipped with KYC, AML, and on-chain analysis and data analysis functions, achieving diversified services 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.
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 virtual asset ETFs in the market? What do you think are the main reasons for this lackluster performance?
Member Wu Jiezhuang: I believe the root cause of the low trading volume of ETFs lies in insufficient competitiveness, primarily reflected in several aspects: first, facing competition from many similar overseas products with no obvious price advantage; second, currently clients can directly purchase virtual currencies, and the necessity of ETFs as a bridge for traditional brokers entering the virtual asset market has diminished because brokers can directly purchase virtual assets. For instance, we can see some internet brokers directly connecting with licensed exchanges, further reducing the attractiveness of ETFs, as cost considerations are a crucial factor.
Thirdly, most brokers participating in ETF trading are small to medium-sized, lacking the customer appeal of large institutions; fourthly, Hong Kong retail investors' enthusiasm for virtual asset products is far less than that of other Asian countries, and differences in product awareness and speculative preferences have increased the difficulty of promoting retail business; fifthly, Hong Kong's virtual asset market has relatively singular functions and lacks diversified operations such as hedging, which also limits the trading volume of some 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 turnaround in the future, or what changes does Hong Kong need to make in this sector to enhance the trading volume of virtual currency ETFs?
Member Wu Jiezhuang: I advocate for a reasonable relaxation of regulations on virtual assets from multiple perspectives. I believe Hong Kong is most suited to become a hub for Web3 and financial institutions in Asia, as it ranks first in Asia in terms of the breadth and depth of the financial sector, whether in terms of asset management scale or trading of other financial products. Therefore, I propose that regulatory agencies should relax some restrictions on institutional market participation, including enriching the types of products and innovating trading models, to enhance the activity and trading volume of related markets in Hong Kong.
Techub News: In Hong Kong's virtual asset market, compliant licensed exchanges are undoubtedly an important component. Compared to overseas exchanges, what advantages do existing compliant exchanges possess to attract investors?
Member Wu Jiezhuang: Compliant licensed exchanges in Hong Kong have two drawbacks: first, the costs are relatively high; compared to unlicensed exchanges in Hong Kong, their management fees are quite expensive; second, the types of products are limited, making it difficult to meet the diverse investment needs of retail investors.
These two are obvious pain points, but what are the benefits they bring? Security.
In compliant exchanges, whether retail or institutional, their funds are fully protected, ensuring worry-free withdrawals. In contrast, users of overseas exchanges may find themselves without recourse when encountering issues such as funding or security. In simple terms, Hong Kong compliant exchanges can provide 100% security guarantees, allowing investors to trade with peace of mind; this is their core value.
Moreover, we all know that the virtual asset industry experiences major collapses every year or two, but no one ever knows what the next collapse will be. Therefore, the Hong Kong authorities place great importance on investor protection, making 'risk-based' the primary principle of virtual asset policies, aiming to protect the interests of local and international investors, including both institutions and retail investors.
On the other hand, compliant exchanges and overseas exchanges differ in their positioning, catering to 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, and to enhance competitiveness, they will actively connect with target markets.
Overall, Hong Kong has shown a strong determination in investor protection. Of course, I suggest that exchanges should strengthen security guarantees while also considering market development, launching a variety of products and innovative plays to enrich market options, thereby promoting the development of the entire virtual asset industry.
Techub News: Some overseas exchanges have also launched crypto businesses in Hong Kong. What challenges do you think these exchanges pose for the regulation of Hong Kong's virtual asset market? Taking the JPEX exchange collapse incident that occurred last year as an example, how do you view the shortcomings of Hong Kong's virtual asset regulation?
Member Wu Jiezhuang: Overseas exchanges can be roughly categorized into two types. The first is exchanges like JPEX, which are essentially scams designed to deceive investors, so retail investors should be highly vigilant about such exchanges. Hong Kong regulatory authorities need to enhance investor education on virtual assets to improve the ability of retail investors to identify non-compliant trading platforms.
Another category refers to 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 technological resources to operate in compliance. If they can contribute to the healthy development of Hong Kong's virtual asset market and provide protection, then regulatory bodies should also safeguard their interests.
At the same time, regulators need to take various measures to ensure that Hong Kong investors, whether institutional or retail, will not easily direct their funds to 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 freely operate 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 address this challenge.
Techub News: Will Hong Kong regulatory authorities strengthen regulation in the future? In which areas will the Hong Kong government focus its efforts?
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 instance, last year, it allocated 50 million HKD for the construction of the Cyberport ecosystem, which is a very good first step.
Next, we need to do a lot of work. The Hong Kong government should attract more ecosystem projects to settle in Hong Kong, such as by organizing 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 international project participants to come to Hong Kong; in addition, the Hong Kong Web3 Carnival is also scheduled for April next year. Therefore, I hope the Hong Kong government can deepen cooperation with Cyberport or other government agencies and intensify efforts to introduce more large-scale events and projects, thereby attracting more talent to build the Hong Kong Web3 ecosystem together.
Another focus is the talent issue. For example, regarding visas, can we provide a green channel for Web3 industry talents or offer better development space for engineers? We need to think about how to attract young people because having talent leads to funding and projects, combined with good policies, will naturally bring about excellent economic benefits. As for exchanges and financial institutions, 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 intensify the promotion of the virtual asset industry across various sectors in Hong Kong, letting them understand the essence of this industry and clearly recognize the opportunities and risks within it. If the public in Hong Kong can align their understanding of virtual assets with that of 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. Compared to the policies of countries like Singapore, Japan, and the United States, what are the unique aspects of Hong Kong's regulatory policies on virtual assets? In which areas does it still need improvement to better adapt to market demands and regulatory requirements?
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, during which the industry has faced major issues almost every year, such as exchanges misappropriating customer assets for investment losses, corporate bankruptcies, and major hacking incidents. Throughout this development process, the Hong Kong government has also gained rich experience, and under our strict regulation, the probability of such issues reoccurring is extremely low. Additionally, Hong Kong has introduced insurance companies to guarantee customer asset safety, strengthen cybersecurity regulation, and other key 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.
It is worth mentioning that in August of this year, the world's first lawsuit involving a centralized autonomous organization (DAO) was successfully adjudicated in the Hong Kong High Court. These instances fully demonstrate Hong Kong's capability in regulating and handling various affairs in the Web3 sector, effectively alleviating investors' concerns. This also means that Hong Kong is comparatively more capable of attracting compliant and economically viable projects from around the world to develop here. Geographically, Hong Kong is actually the center of Asia; we are not looking to replace the U.S. or other developed countries, but at least in Asia, besides being a financial center, Hong Kong is also likely to become a true Web3 hub.
Techub News: Finally, how do you view the future development trend of Hong Kong's virtual asset ecosystem? What impact will these changes have on the stability and development of Hong Kong's financial system?
Member 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 also demonstrate great potential as a new payment method for cross-border trade in this unprecedented global transformation. Under a legal and compliant regulatory framework, Hong Kong is likely to issue a stablecoin as an innovative payment tool, leading the innovation of payment methods.
If this possibility arises, Hong Kong will be able to widely use stablecoins in investment, trade, payments, and many other scenarios, and reach cooperation with many innovative projects. I believe this will create more business opportunities across various industries in Hong Kong. In addition, the vigorous development of the virtual asset ecosystem will positively impact Hong Kong's financial system, promote the complementary development of emerging industries and traditional financial markets, thereby consolidating Hong Kong's position in the financial field and endowing it with stronger vitality and broader development potential.