10 Observations on Hong Kong's Blockchain Regulatory Environment: Short to Medium Term Pessimistic, Long Term Optimistic

Author: Yue Xiaoyu; Source: X, @yuexiaoyu111

The blockchain industry in Hong Kong was previously thriving, but recently it seems to have quieted down.

What is the current state of the cryptocurrency scene in Hong Kong?

Recently, I have been living in Hong Kong, frequently communicating with many friends and projects in Hong Kong, and gradually gaining a clearer understanding of the regulatory environment and policy direction of Web3 in Hong Kong.

This is summarized in 10 points.

1 First, the conclusion: For the development of Hong Kong's Web3 industry, the short to medium-term outlook is pessimistic, while the long-term outlook is optimistic.

2 Short to medium term pessimism is due to the repeated swings in regulatory policies and the internal conflict between the left and right brain.

It’s not just a struggle between the central government and the Hong Kong government; the administrative and regulatory departments of the Hong Kong government are also in conflict.

The central government wants financial stability, the Hong Kong government wants to develop new industries, the executive department wants innovation, and the regulatory department wants conservatism.

The fundamental contradiction lies in the fact that the decentralization and global liquidity of blockchain is inherently incompatible with the government's strict foreign exchange controls and restrictions on capital outflow.

3 Long-term optimism is due to the irreversible nature of the great trend. Stablecoins do have real value, especially for cross-border trade and cross-border payments, representing a significant transformation.

At the same time, the United States is accelerating the legislation of the cryptocurrency industry, taking control and dominance over the legislation. Sooner or later, other countries and regions will be forced to “open their doors.”

It's just that it's not time to make a decision yet, so there can still be some wavering and waiting, but the longer it drags on, the more passive it becomes.

Of course, it is undeniable that Hong Kong has at least taken a crucial step and opened a door, which can be gradually expanded later.

More importantly, Hong Kong remains China's window to the outside world or, so to speak, its financial backdoor. It has just been slightly closed or more tightly controlled, but this window must exist.

4 Hong Kong dollar stablecoin Phase One licenses will only be granted to local consortia, with a maximum of 5 licenses.

JD.com and Ant Group have withdrawn their application for stablecoin licenses, primarily because the mainland government is concerned that these tech companies are too large and the risks are difficult to manage.

Of course, for tech giants like JD and Ant Group, if Hong Kong does not issue licenses, they can apply in other regions.

As a city with a population of 7 million, Hong Kong's market size is not that large, but the stablecoin business of tech giants is still something that must be pursued.

5 The basic difficulty of Hong Kong dollar stablecoins landing is not just a licensing issue; the biggest obstacle is the limitations on business scope under risk control.

For example, one of the biggest limitations of the current stablecoin policy in Hong Kong is that end users must undergo KYC.

This means that the Hong Kong dollar stablecoin has no secondary market and can only circulate within the whitelist address range.

This is actually to further limit the scope of risk, but it also sacrifices the usability of stablecoins, ultimately becoming the Hong Kong version of “digital yuan.”

6. Although Hong Kong dollar stablecoins are not feasible, RWA has great potential!

The regulatory logic in Hong Kong is: layered regulation based on underlying assets.

The underlying asset of stablecoins is fiat currency, so regulatory requirements are the highest;

Secondly, financial assets underlying RWAs may be classified as securities;

Finally, there is RWA backed by physical assets, with the lowest regulatory requirements.

7 Currently, there are many RWA projects based on physical assets, while those based on financial assets are few.

However, RWA based on financial assets is far superior to RWA based on physical assets, as physical assets need to be financialized before tokenization, which involves a long path, high costs, and low yields.

The opacity of real-world assets (RWA) is currently too high, and the physical asset portion is essentially a black box. Most projects either ride on concepts or have money laundering suspicions.

8 I used to think that high-quality assets in the traditional financial world were scarce and would be in high demand.

However, after talking to the entrepreneurial team doing RWA, I found that high-quality assets in the traditional financial world still have a significant lack of financing sources, and it can be said that high-quality assets are greater than the amount of funds.

The value of tokenization lies in its ability to lower the barriers to accessing funds.

Bonds on-chain

Fiat currency on-chain has too high regulatory requirements, and it is not something small businesses can participate in.

On-chain physical assets are not quality assets; just because they are on-chain doesn't make them quality assets.

The standard financial products on the chain in the middle part have enormous potential and truly solve the problem of a lack of funds on the asset side and a lack of assets on the funding side.

10. Do not speculate on regulatory attitudes, it will only lead to significant losses.

Looking at the issue from the other side: the lack of clear and implemented regulations actually serves as a protection and barrier for the existing practitioners in the cryptocurrency space.

If we wait until regulation really takes effect and big companies rush in, what opportunities will we have?

So it is a very good window period now.

Opportunities are reserved for those who are prepared; those who waver will exit, while those who are steadfast will seize the time to build. The road to success is never crowded.

Be well-prepared in terms of technology and products, so that when the regulatory starting gun sounds, you can sprint directly.

The premise is that industry practitioners must believe in this industry and that the projects they undertake truly address market demands and issues.