The Web3 industry is fully compliant, and Hong Kong has become a bridgehead for the East-West game.

The withdrawal policy of virtual asset trading platforms in Hong Kong officially took effect on May 31, and non-compliant exchanges will cease operations. As the deadline approaches, nearly half of the VATP applicants have withdrawn, sparking discussions in the market. Some believe that "Hong Kong has lost its status as a financial center" and that "the Web3 era in Hong Kong has ended before it even began," but is this really the case? How should regulatory authorities embrace the Web3 era?

In fact, Hong Kong, as the bastion of Eastern Web3, is just at the beginning of its game with the West.

The Next Decade of Web3: Comprehensive Compliance

From a global perspective, what stage is Hong Kong currently in? Let's make a horizontal comparison of several major Web3 financial markets worldwide.

Japan is a pioneer in the field of Web3 regulation. After the collapse of the Mt.Gox Bitcoin exchange in 2014, Japan gradually initiated regulation and introduced a licensing system for cryptocurrency exchanges in 2017. A decade later, Japan has a total of 23 approved cryptocurrency exchanges, most of which are domestic enterprises.

There are similarities between operating an exchange in Japan and Hong Kong, such as asset segregation and cold wallet regulations, regular audits, etc. Thanks to strict regulations, Japanese exchanges were largely unaffected by the FTX incident because most user funds were stored in cold wallets. In addition, Japan's regulatory framework for ICOs, IEOs, STOs, CBDCs, and other aspects is also relatively well-developed.

Singapore and the United States began to strengthen regulation in 2022 after the collapse of Three Arrows Capital and the FTX exchange.

Although the United States does not have fully compliant exchanges, the listed company Coinbase is relatively more compliant and has seen significant growth this year. Other offshore exchanges like Kucoin are gradually facing regulatory challenges from the U.S. after the FTX incident.

It can be seen that regulation is gradually penetrating various segments, becoming more refined.

Japan and Singapore have also heard voices claiming that regulations are "too strict," but as regulatory frameworks continue to improve, the Web3 ecosystems in these two regions are becoming increasingly vibrant.

The United States recently issued the FIT21 (Financial Innovation and Technology Act of the 21st Century) regulatory framework, which proposes how to define digital assets (including DeFi and NFTs) and delineate the boundaries between commodities and securities. This could become one of the most far-reaching pieces of legislation impacting the cryptocurrency industry in the future.

Following the United States, Southeast Asia, Dubai, India, Iran, and other regions are planning to introduce Web3 regulatory policies in the coming years. Even countries like Europe and Nigeria, which were previously not very active in the cryptocurrency industry, are also joining this round of cleanup and regulation.

Global regulators do not want to miss the Web3 opportunity. The trend of Compliance has already formed, and regardless of whether the starting point is to embrace or respond to a crisis, each jurisdiction will ultimately move towards precise regulation.

From the perspective of the number of licenses held by exchanges, offshore exchanges in various regions account for almost no more than 30% of the total licenses, and regulators tend to prefer local enterprises.

This is actually not a regulatory challenge, but rather a challenge faced by offshore exchanges. Looking back at the early stages, offshore exchanges could serve nearly 200 million users in a loose regulatory environment. But that is now in the past. In addition to the well-known trading platform that has paid high fines and must comply, some of the exchanges that have withdrawn their applications have gradually laid out their plans and obtained licenses in places like Singapore and Dubai over the years, but some exchanges have obtained relatively few licenses.

It can be said that "it's hard to change from extravagance to frugality." Offshore exchanges wanting to "come onshore" and enter various major financial regulatory jurisdictions still seem to have a difficult road ahead.

The "regulatory arbitrage" of the wild era of the cryptocurrency market is gone for good.

In contrast, Hong Kong adopts a "native regulatory" approach of licensing first and then operating, directly skipping the stage of reckless growth. Since the introduction of Web3 regulatory policies in Hong Kong in 2022, the call for comprehensive Compliance has begun. As of June 1, 2024, the AMLO license has officially been implemented, non-compliant exchanges have completed their exit, and currently more than half of the applicants are still in the market. The trading volume of operating exchanges has surpassed HKD 440 billion, showing a positive development trend.

Therefore, the exit of some exchanges should not be viewed with excessive pessimism. From a historical perspective, this is merely an inevitable phase of clearing and tracing that Hong Kong and other regulatory jurisdictions are experiencing.

More importantly, the policy on May 31 marks that Hong Kong has already tackled the "exchange," the hardest "tough nut" in the industry with the highest concentration and complexity of funds, completing comprehensive regulation.

Hong Kong and the United States: The Battleground of East and West

What will happen next after the regulation is completed? The period of rise is over, and the period of competition has just begun.

Four years ago, the founder of a certain payment platform predicted that significant political conflicts in the future would occur between communist artificial intelligence and liberal cryptocurrency technology.

Today, both AI and Web3 are gaining momentum, with the United States and Hong Kong seen as the bridgeheads of the Web3 industry between the East and West. The competition in regulatory attitudes between the two regions will lead the global direction of Web3 development.

Why gamble? Unlike AI, monopolistic regulation does not work in the Web3 space. The Web3 era has built more business entities based on the network economy, which can easily cross physical boundaries to provide services to customers.

In the future, political leadership may increasingly resemble entrepreneurship, requiring sufficient friendliness to attract capital and talent. It is not that Web3 needs to be regulated, but rather that regulators need Web3.

The recent attitude of the United States has become quite clear. This year, the topic of cryptocurrency has been placed at the center of the political stage in the United States for the first time. According to a certain data platform, about one-third of American voters will consider a candidate's stance on cryptocurrency when deciding how to vote. 77% of voters believe that U.S. presidential candidates should at least have an understanding of cryptocurrency. 44% of voters somewhat agree that "cryptocurrency and blockchain technology are the future of finance."

The pattern of competition between the East and the West has taken shape, with a clear battleground being ETFs. The recent abrupt shift in the U.S. stance towards the approval of ETH ETFs may be related not only to domestic factors but also to Hong Kong's relatively pioneering launch of ETH ETFs in April.

Although there is currently a significant scale gap between Hong Kong and US ETFs, Hong Kong, as one of the world's largest offshore financial centers, is expected to attract more institutions in the future as the ecosystem improves, leading to a wave of institutional bull markets.

Next, the ETH ETF, as a stakable income-generating asset, is expected to become the next focus of competition.

After Ethereum transitioned from PoS to PoW, it can generate passive income similar to interest through staking, with the current market annual interest rate being around 4.5%. If Hong Kong takes the lead in launching a spot ETF for Ethereum that includes staking, subscribing to the ETF will no longer be a paid activity, but rather a profitable one after earning staking rewards. It could also, to some extent, become a "digital US Treasury bond," with an appeal that may even surpass that of Bitcoin ETFs.

The development of the Web3 industry is also related to its local cultural heritage. Although Eastern people seem more reserved and cautious compared to the relatively outgoing and diverse Westerners, it does not mean they have fallen behind.

Hong Kong has currently issued multiple regulatory documents, including the "Guidelines for Virtual Asset Trading Platform Operators" and the "Guidelines for Anti-Money Laundering and Counter-Terrorist Financing". These policies appear clearer and more mature compared to the previously used "Commodity Futures Trading Regulations" in the United States, and there is no need to spend much effort on the question of whether cryptocurrencies are "securities" or "commodities".

As the bull market gradually reaches its peak, the wealth creation effect in the industry will become apparent, and a new batch of millionaires is about to emerge. Hong Kong, a region that naturally possesses the "mystical powers of the East," will also see more mainland and overseas Chinese Web3 core forces and their funds flowing in along with the market.

In the future cycle, there will be a multidimensional integration of Web3 and traditional finance, revitalizing the Hong Kong financial market. Currently, the Hong Kong Securities and Futures Commission has indicated that it may open STO and RWA investments to retail investors, further broadening the virtual asset market. In addition, the regulatory framework for Hong Kong's HKD stablecoins and over-the-counter (OTC) virtual asset shops is also being advanced. After the full chain is connected, Web3 will inject new vitality into the entire Hong Kong market.

The tide of history rolls forward; which enterprises will remain at the table? Exchanges are the most important cornerstone of the Hong Kong Web3 ecosystem.

In the foreseeable future, licensed exchanges that remain in the market will not only engage in their own trading business but will also become key players in bridging various financial sectors in Hong Kong's Web3. For example, in this ETF issuance, certain exchanges also played the role of custodians, providing underlying infrastructure support for the issuers. In the future, they will play an indispensable role in RWA, STO, and OTC businesses.

It is precisely because of this that some offshore exchanges have been driven off the Hong Kong stage. This can also be said as "What goes around comes around."

Development has its ups and downs. Perhaps we should take a broader view of history and make rational judgments during the moment of delisting in Hong Kong.