Organized by: Glendon, Techub News
On October 31, 2022, Hong Kong officially released its Virtual Asset Policy Declaration, marking a solid step forward for Hong Kong in the field of Web3 and virtual assets. Since then, Hong Kong has made steady progress in this emerging field. The second anniversary of the declaration is approaching. Techub News conducted an in-depth exclusive interview with Hong Kong Legislative Council member Wu Jiezhuang to discuss the impact of the implementation of the virtual monetary policy on Hong Kong's banking, securities, exchanges and other industries. Far-reaching impact.
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 Web3 industries has become an obvious development trend. However, the road to transformation is not smooth. Traditional industries need to overcome talent shortages, technology Multiple challenges such as barriers and regulatory adaptability.
When talking about the "Hong Kong Virtual Asset ETF", Wu Jiezhuang admitted that the root cause of the low trading volume of this product is the lack of competitiveness. Specifically, the Hong Kong Virtual Asset ETF faces fierce competition from similar overseas products, and its price advantage is not At the same time, customers can directly purchase virtual currencies, which weakens the necessity of ETF products; brokerage firms participating in ETF transactions are mostly small and medium-sized institutions, lacking the customer appeal of large institutions; the functions of Hong Kong's virtual asset market are relatively single. In addition, Hong Kong retail investors are also relatively less enthusiastic about investing in virtual asset products, which is significantly lower than other Asian countries. In this regard, he suggested that regulators should moderately relax some restrictions on institutional participation in the market, including enriching product categories and innovating trading models. .
In addition, Wu Jiezhuang further looked forward to the key points of the Hong Kong government's future layout of the Web3 industry and the development trend of the virtual asset ecosystem. He emphasized that the Hong Kong government should adjust its strategy in a timely manner and no longer simply strengthen supervision, but should moderately from multiple angles. Relax restrictions on Web3 and the virtual asset industry to seek a reasonable balance between regulation and market development.
The following is the interview transcript, slightly edited:
Techub News: In the two years since the implementation of the Hong Kong Web3 Declaration, which industries in Hong Kong have been specifically affected by the virtual asset policy?
Councillor Ng Kit-chung: It is mainly reflected in two aspects. In the past two years, we can see the phenomenon of large-scale encrypted asset Web3 industry coming to Hong Kong from overseas. In the first year after the release of the virtual asset policy, Hong Kong has emerged Today, the number is close to 1,000, including not only well-known exchanges and basic service providers, but also many emerging companies in the Web3 ecosystem.
In addition, traditional industries have also begun to gradually transform. We have noticed that some Web2 companies have begun to turn to Web3. In the early stages, this transformation was mainly reflected in financial institutions, such as traditional securities firms and asset management companies, which were more willing to engage in virtual asset business. However, recently, we have observed that more and more real economy industries are also exploring how to use Web3 technology to bring themselves some new growth points.
Therefore, the transformation of traditional industries to Web3 industries has become an obvious development trend. Especially after the Hong Kong government launched the Ensemble project sandbox, many traditional products have been seen in the market seeking tokenization. Expand its business to trading scenarios throughout Hong Kong and even the world.
Techub News: In the process of shifting to Web3, what difficulties and challenges have these traditional industries encountered?
Councillor Ng Kit-chung: Actually, there are many difficulties. First of all, we have observed that Hong Kong is not very large, with a population of only over 7 million. Talents in the field of science and technology are relatively scarce, which makes it very difficult to recruit engineers and developers in Hong Kong. And the cost is not low. This is one of the difficulties I have observed in many companies.
Secondly, traditional banks and large multinational banks have a conservative attitude towards the Web3 industry. Many companies lack the support of large financial institutions when adopting traditional financial services, which makes it more difficult for those companies that turn to Web3 to provide daily financial services. Development has also created certain constraints.
Techub News: In the past two years, what is the attitude of foreign financial institutions towards Hong Kong's virtual asset industry? Have they increased their layout efforts? What have Hong Kong's local financial institutions done?
Councillor Wu Jiezhuang: Strictly speaking, the development is not rapid. I just mentioned large multinational financial institutions, most of which are still on the sidelines, and only a few institutions have shown positive attitudes, such as applying for stablecoin licenses and participating in sandbox testing. The reason why some multinational financial institutions are still paying attention is that the entire virtual asset industry requires the implementation of different KYC (know your customer) and AML (anti-money laundering) policies, which is very different from their traditional business models and may require A huge amount of money was invested to rebuild the entire system.
However, I think it is only 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 and invest funds. We have observed some progress in this market. Although traditional overseas brokerages have not actively invested in virtual asset ETF projects, some Internet brokerages have begun to participate in virtual asset transactions in recent months, and the transaction volume is quite good, which shows that Traditional investors are also willing to enter this track. Therefore, when traditional banks, securities firms and other large financial service providers enter this industry one after another, its future development will be faster.
In addition, Hong Kong's local financial institutions, such as banks, are relatively small in size and are not very enthusiastic about participating. In contrast, some newly established virtual asset banks are more active. They hope to find Local securities firms are also very active. As traditional businesses such as stock trading bring them more and more challenges, they are eager to find new growth points, and virtual assets just provide a new way. Development opportunities. We have seen that many medium-sized and even large local securities firms have entered this field to compete. At the same time, some asset management companies are also upgrading their virtual asset businesses. Once they obtain Hong Kong compliance licenses, they can provide virtual asset management services to customers.
Techub News: You mentioned before that Hong Kong should set up a "virtual bank". What pain points of existing banks can be solved by setting up a "virtual bank"?
Councillor Wu Jiezhuang: I just mentioned that traditional banks have a traditional system to perform anti-money laundering and KYC functions in order to meet regulatory requirements. In fact, their cost investment is not small, including manpower and technology. Virtual banks, or virtual financial banks, are designed to serve the virtual asset industry. They come with a set of KYC, AML, and on-chain analysis and data analysis functions, which can not only achieve service diversification, but also Fully meeting regulatory requirements can effectively alleviate some of the pain points of traditional banks. If Hong Kong can provide this service, it will undoubtedly attract more projects in the industry to gather here.
Techub News: At the end of April this year, Hong Kong approved the trading of six virtual currency ETFs under China Asset Management (Hong Kong), Bosera International and Harvest Global. However, the trading volume of these ETFs is somewhat unsatisfactory. Does this reflect the market's lack of interest in virtual asset ETFs? Interest and confidence? What do you think are the main reasons for this sluggish performance?
Councillor Wu Jiezhuang: I think the root cause of the low trading volume of ETFs is the lack of competitiveness, which is mainly reflected in several aspects: first, facing competition from many similar overseas products, the price advantage is not obvious; second, currently customers can directly purchase virtual currencies, but As a bridge for traditional brokerage firms to enter the virtual asset market, the necessity of ETFs has been reduced because brokerage firms can directly purchase virtual assets. For example, we can see that some Internet brokerage firms are directly connected with licensed exchanges, which further reduces the attractiveness of ETFs. After all, cost consideration is a very critical factor.
Third, most of the brokerage firms involved in ETF trading are small and medium-sized, and they lack the customer appeal of large institutions; fourth, Hong Kong retail investors are far less enthusiastic about virtual asset products than other Asian countries, and the differences in product cognition, speculative preferences, etc. are also increasing. The difficulty of promoting retail business; fifth, the function of Hong Kong's virtual asset market is relatively single, lacking diversified operations such as hedging, which also limits the trading volume of some products. The combined effect of the above reasons has led to the trading of Hong Kong ETFs. The quantity is not that large.
Techub News: Will this market see a turnaround in the future, or what changes does Hong Kong need to make in this sector to increase the trading volume of virtual currency ETFs?
Councillor Ng Kit-chung: I advocate reasonable relaxation of regulation on virtual assets from multiple angles. I believe Hong Kong is the most suitable place to be a gathering place for Web3 and financial institutions in Asia, because Hong Kong ranks first in Asia in terms of the breadth and depth of the financial field. Whether it is the scale of asset management or the trading of other financial products, it is actually the largest. Therefore, I propose that the regulators should relax some restrictions on institutional participation in the market, including enriching product categories and innovating trading models, so as to promote the relevant Market activity and growth in trading volume.
Techub News: In the Hong Kong virtual asset market, compliant licensed exchanges are undoubtedly an important component. Compared with overseas exchanges, what advantages do existing compliant exchanges have to attract investors?
Councillor Ng Kit-chung: There are two disadvantages of Hong Kong's compliant licensed exchanges: first, the costs are relatively high. Compared with unlicensed exchanges in Hong Kong, their management fees are more expensive; second, the product variety is limited, which makes it difficult to meet the diversified needs of retail investors. investment needs.
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 have nowhere to turn to when they encounter security issues such as funds. In general, Hong Kong's compliant exchanges can provide 100% security, allowing investors to trade with peace of mind. This is its core value.
In addition, we all know that the virtual asset industry actually has a big explosion every one or two years, but we never know what the next explosion will be? Therefore, the Hong Kong authorities attach great importance to investor protection and take "risk-based" as their The overarching principle of virtual asset policy is to protect the interests of all local and international investors, including institutional and retail investors.
On the other hand, compliant exchanges and overseas exchanges have different positioning and can meet the different needs of different types of investors. And as the policy environment continues to improve, more exchanges may obtain licenses in Hong Kong in the future. In order to improve their competitiveness, they will inevitably actively connect with the target market.
Overall, Hong Kong has shown a firm resolve in investor protection. Of course, I suggest that while strengthening security, exchanges should also take into account market development and introduce some product categories and innovative gameplay to enrich market choices, thereby Promote 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 have brought to the regulation of Hong Kong's virtual asset market? Taking the JPEX exchange crash last year as an example, what do you think of Hong Kong's What are the shortcomings in virtual asset regulation?
Councillor Wu Jiezhuang: I think overseas exchanges can be roughly divided into two categories. The first is exchanges like JPEX, which are essentially scams designed to deceive investors, so retail investors should be highly vigilant against such exchanges. Regulators need to start by strengthening virtual asset investment education and improving the ability of retail investors to identify non-compliant trading platforms.
The other category is exchanges that hold licenses overseas but have not yet obtained a license in Hong Kong. For such exchanges, I think the regulatory authorities should be more proactive and take action. Given the high cost of obtaining a Hong Kong license, these Exchanges need to invest a lot of human, material and technical resources to operate in compliance. If they can contribute to and protect the healthy development of Hong Kong's virtual asset market, regulators should also protect 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 invest their funds in exchanges that are not licensed in Hong Kong. As mentioned earlier, the operating costs of licensed exchanges in Hong Kong are The overseas regulatory environment is relatively loose. If overseas exchanges can freely conduct business in Hong Kong, it will undoubtedly affect the survival space and interests of local licensed exchanges. Therefore, the regulatory authorities need to think deeply and take effective measures to better Meet this challenge well.
Techub News: Will Hong Kong regulators strengthen supervision in the future? In what areas will the Hong Kong government focus its efforts?
Councillor Wu Jiezhuang: I think the Hong Kong government should not continue to strengthen supervision, but moderately relax restrictions on Web3 and virtual asset company banking services to seek a reasonable balance between supervision and market development. At the same time, the Hong Kong government should be more proactive in building an ecosystem. For example, last year’s allocation of HK$50 million for the ecological construction of Cyberport 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, such as by holding large-scale events to achieve this goal. Of course, Hong Kong has also made some progress in this regard: in February next year, the Consensus conference will be held. It will be held in Hong Kong, and I believe it will attract many foreign project participants to Hong Kong. In addition, the Hong Kong Web3 Carnival has been scheduled for April next year. Therefore, I hope that the Hong Kong government can deepen cooperation with Cyberport or other government agencies. Increase efforts to introduce more large-scale events and projects to attract more talents to build the Hong Kong Web3 ecosystem.
Another focus is on talent. For example, in terms of visas, can we provide a green channel for talents in the Web3 industry, or provide better development space for engineers? We need to think about how to attract young people, because with talent, there will be With funds and projects, plus good policies, it will naturally bring a very good economic benefit. As for exchanges, financial institutions, etc., I will not go into details. But my suggestion is that the government should first strengthen institutions and retail investors. We need to increase the promotion of the virtual asset industry in all walks of life in Hong Kong, so that people can understand the nature of this industry and clearly understand the opportunities and risks involved. If the level of knowledge in Hong Kong can be brought closer to that of other Asian countries such as Japan and South Korea, then the Hong Kong crypto industry will become deeper and broader.
Techub News: Hong Kong plans to become the world's Web3 center. Compared with the policies of countries such as Singapore, Japan and the United States, what is the uniqueness of the Hong Kong Special Administrative Region's virtual asset regulatory policy? In what aspects does it need to be improved to better adapt to the Market demand and regulatory requirements?
Councillor Ng Kit-chung: I think Hong Kong’s regulatory system is already quite sound, covering licensed virtual asset exchanges, financial service providers, and stablecoin regulatory licensing records. As the industry develops, it encounters some major problems almost every year, such as exchanges misappropriating customer assets and causing investment losses, corporate bankruptcy and hacker attacks. In this development process, the Hong Kong government has also learned a lot of experience. Under strict supervision, the probability of such problems recurring is extremely low. At the same time, Hong Kong has also introduced insurance company guarantees to fully guarantee the safety of customer assets, strengthen network security supervision and other key links to ensure that listed institutions will not repeat the same mistakes. This is the unique advantage that Hong Kong has in supervision.
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 examples fully demonstrate Hong Kong’s ability to regulate and handle various areas of Web3 affairs, effectively This eliminates the concerns of investors. At the same time, it also means that Hong Kong can more easily attract compliant and economically developed projects from all over the world to develop in Hong Kong. In terms of geographical location, Hong Kong is actually the center of Asia. We did not think It is not going to replace the United States or other developed countries, but at least in Asia, in addition to being a financial center, Hong Kong is also likely to become a true Web3 center.
Techub News: Finally, what do you think about the future development trend of Hong Kong's virtual asset ecosystem? What impact will this change have on the stability and development of Hong Kong's financial system?
Councillor Ng Kit-chung: The scope of virtual assets is very broad. Taking stablecoins as an example, Hong Kong is working on legislating and regulating them. We know that stablecoins are not only trading and investment tools in the crypto world, but also a major change that has not happened in the world for a century. In the 2017 Hong Kong International Monetary Fund (IIBF), the Hong Kong International Monetary Fund (IIBF) has shown great potential as a new payment method for cross-border trade. Under a legal and compliant regulatory framework, Hong Kong is likely to issue a stablecoin as an innovative payment tool to lead the innovation of payment methods.
If this possibility occurs, Hong Kong will be able to widely use stablecoins in many scenarios such as investment, trade, and payment, and cooperate with many innovative projects. I believe this will create more business opportunities for all walks of life in Hong Kong. In addition, The vigorous development of the virtual asset ecosystem will also have a positive impact on Hong Kong's financial system, promote the complementary development of emerging industries and traditional financial markets, and thereby consolidate Hong Kong's position in the financial field, giving it greater vitality and broad development potential.
