Opportunities and Challenges for Hong Kong to Become a Global Web3 Hub

Recently, the Hong Kong Monetary Authority released a document regarding the regulation of activities related to stablecoins, which aligns with Hong Kong's strategy of connecting the new generation of digital assets with its well-established traditional financial ecosystem. Hong Kong has made steady progress in establishing a clear and comprehensive framework, and the regulation of stablecoins is also within expectations.

However, simply having a sound regulatory framework is not enough for Hong Kong to stand out in the global Web3 hub competition. To gain a sustainable advantage compared to other potential centers, Hong Kong also needs to become a leader in digital infrastructure that supports the creation and trading of digital assets, thereby attracting the best talents in the industry.

Hong Kong was once home to many 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 out on the wild boom and bust of the cryptocurrency industry may not be a bad thing. Some cryptocurrency companies that were once founded in Hong Kong ultimately triggered massive financial disasters, dragging down the entire industry. Most cryptocurrency mining companies that chose to go public overseas are now mired in financial difficulties and facing harsh criticism for their negative impact on the environment.

The cryptocurrency industry has entered a reset mode, providing Hong Kong with an excellent opportunity to redefine how a Web3 center should operate. This year, we have seen more signs that the Chinese government views blockchain and digital assets as potential sources of economic growth. Hong Kong has gained support to explore an innovative and globally integrated path that is not constrained by mainland policies. At the same time, in the wake of the collapse of some large cryptocurrency companies, the US and Europe are tightening their cryptocurrency regulations. This may lead to a shift of more activities around digital assets to the east, creating a good opportunity for Hong Kong to regain its influence.

As one of the world's most powerful capital markets, Hong Kong's comprehensive financial regulatory framework and top-notch financial and technological talent are significant advantages. With its mature capital market, Hong Kong's digital asset industry is also a unique combination of technology and finance. This makes it an ideal place for creating real-world blockchain applications, particularly in the area of asset tokenization.

The goal of the Hong Kong government is to create a favorable environment for public-private collaboration. When government agencies, financial institutions, tech giants, and native cryptocurrency builders work together, digital assets have the potential to better integrate into the real-world economy and generate impacts that extend beyond the virtual world.

Hong Kong can also leverage the resources of technology entrepreneurs from mainland China. Chinese internet companies that have created Web2 products comparable to leading Western companies still possess a wealth of expertise related to digital assets and Web3. Chinese Web2 giants listed in Hong Kong have already begun exploring digital assets. Hong Kong may just be 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. Hong Kong's digital asset regulation principle of "same business, same risks, same rules" means that traditional financial regulations also apply to digital assets. The high difficulty threshold for obtaining licenses has made it a playing field more favorable to mature institutions. Innovation often comes from unpredictable "grassroots" levels, so creating space for bottom-up innovation is an urgent issue that needs to be addressed.

Moreover, fundamentally speaking, Web3 is a technological movement, but Hong Kong does not have the same resources as other tech hubs. Therefore, Hong Kong also needs differentiated technological infrastructure aimed at digital assets.

The security of digital assets differs from that of traditional assets. Their on-chain characteristics mean that digital assets cannot rely on a closed security system like traditional finance. Licenses or regular audits cannot ensure the safety of customer funds on centralized platforms. Advanced technologies like multi-party computation are needed to allow asset owners to have complete control or shared management over their assets.

What kind of Web3 infrastructure does Hong Kong need to develop? Given the heavy losses suffered by retail investors last year, 2023 will be more promising for institutional business. Digital assets are mainly held by exchanges, mining pools, investment funds, and other institutions. To reduce the risks of centralized platforms, a significant portion of these assets will ultimately be transferred to custody platforms that adopt the latest technological solutions.

More importantly, in order to comply with the new regulations, institutions also need solutions that can achieve distributed private key management and fund segregation. Custody, institutional wallets, and digital security are just a few examples of the infrastructure required for the digital asset ecosystem.

The boom and bust cycles of the cryptocurrency industry over the past three years have shown us the potential issues that may arise. Hong Kong is in a favorable position to learn all the lessons and build a Web3 hub with an appropriate regulatory environment and technological infrastructure, promoting innovation while managing risks effectively.