Can Hong Kong Become a Global Web3 Hub? Challenges and Opportunities Coexist

Recently, the Hong Kong Monetary Authority released a document regarding the regulation of activities related to stablecoins. This move aligns with Hong Kong's strategy to combine the new generation of digital assets with its mature traditional financial ecosystem, showcasing Hong Kong's core advantages in becoming a Web3 hub. Hong Kong has made steady progress in establishing a clear and comprehensive regulatory framework, and the regulation of stablecoins is also to be expected.

However, merely having a sound regulatory framework is not enough for Hong Kong to gain a sustainable advantage in the competition with rivals such as Silicon Valley, Dubai, and Singapore. Hong Kong also needs to become a leader in the technological infrastructure that supports the creation and trading of digital assets to attract the best talent in the industry.

Hong Kong was the birthplace of several well-known cryptocurrency exchanges and still has the most Bitcoin ATMs among Asian cities. However, since 2019, due to the pandemic and cautious policies, Hong Kong's position in the global cryptocurrency industry has declined.

Missing the boom and bust cycles of the cryptocurrency industry may not be a bad thing. Some cryptocurrency companies that were originally established in Hong Kong but later relocated have ultimately triggered massive financial disasters, negatively impacting the entire industry. Cryptocurrency mining companies that chose to go public overseas are now mostly in financial distress and have faced severe criticism for their negative impact on the environment.

As the cryptocurrency industry enters a reset phase, Hong Kong has a good opportunity to redefine the model that a Web3 center should have. This year, we have seen more signs indicating that the Chinese government views blockchain and digital assets as potential drivers of economic growth. Hong Kong has gained support to explore a path of innovation and global integration that is not restricted by mainland policies. Meanwhile, after the collapse of some major cryptocurrency platforms, the US and Europe are tightening regulations. This may prompt more activities related to digital assets to shift eastward, creating opportunities for Hong Kong to regain influence.

As one of the world's most powerful capital markets, Hong Kong has a comprehensive financial regulatory framework and top-notch financial and technical talent, which is a significant advantage. With a mature capital market, Hong Kong's digital asset industry is a unique combination of technology and finance. This makes it an ideal place for developing real-world blockchain applications, especially in the area of asset tokenization.

The Hong Kong government is committed to creating a favorable environment for collaboration between the public and private sectors. When government agencies, financial institutions, tech giants, and native cryptocurrency enterprises work together, digital assets have the potential to better integrate into the real economy and have an impact that transcends the virtual world.

In addition, Hong Kong can also leverage the technological entrepreneurship resources of mainland China. Those Chinese internet companies that have created Web2 products comparable to leading Western firms still possess rich expertise in the field of digital assets and Web3. Some Chinese Web2 giants listed in Hong Kong have already begun to venture into the digital asset space, and Hong Kong may be just the development incubator they need.

However, Hong Kong also faces challenges in becoming a Web3 hub. First, the existing regulatory framework designed for traditional assets may not be suitable for the rapidly evolving digital assets and cutting-edge technologies. The "same business, same risks, same rules" principle of Hong Kong's digital asset regulation means that traditional financial regulations also apply to digital assets. The high barriers to obtaining a license have made it a playing field more favorable to established institutions. Innovation often comes from unpredictable "grassroots" levels, so creating space for bottom-up innovation is an urgent problem that needs to be addressed.

Secondly, Web3 is essentially a technological movement, but Hong Kong does not have the rich technological resources like Shenzhen or Silicon Valley. Therefore, Hong Kong needs to develop differentiated technology infrastructure geared towards digital assets.

The security of digital assets is different from traditional assets. Their on-chain characteristics mean that digital assets cannot rely on closed security systems like traditional finance. Licenses or regular audits cannot ensure the safety of customer funds on centralized platforms. Advanced technologies such as multi-party computation are needed to give asset owners full control or joint management rights over their assets.

Considering the significant losses suffered by retail investors last year, 2023 may hold more promise for institutional business. Currently, digital assets are primarily held by exchanges, mining pools, investment funds, and other institutions. To reduce the risks of centralized platforms, a large portion of these assets will eventually be transferred to custody platforms that adopt the latest technological solutions. More importantly, to comply with new regulatory requirements, institutions also need solutions that enable distributed private key management and fund isolation. Custody, institutional wallets, and digital security are just a few examples of the infrastructure needed in the digital asset ecosystem.

The boom and bust cycles experienced by the cryptocurrency industry over the past three years have revealed many potential issues. Hong Kong is well-positioned to learn from these lessons to establish a Web3 hub with an appropriate regulatory environment and technological infrastructure, effectively managing risks while promoting innovation.