The global regulatory landscape for Web3 has become as shifty as the Web3 industry itself. But one thing that has stayed constant, at least until recently, is China’s hostile approach towards crypto exchanges, crypto mining operations, and many other sectors of Web3.

However, in recent months, we have witnessed something of a reversal in this trend, if what we’re seeing in Hong Kong is any indication. Since late last year, a series of actions by the Hong Kong government has paved the way for more Web3 companies to operate legally and with greater liberty in the city, highlighted by its decision to legalize retail crypto trading in June 2023. Hong Kong’s recent friendly stance on Web3 starkly contradicts the increasingly heavy-handed approach of the U.S. towards the industry. 

In this article, we explore the actions that Hong Kong has done to become the next big global Web3 hub, assuming it plans to do so.

A Timeline of Hong Kong’s Recent Web3 Regulations

In the early days of Web3, Hong Kong was considered one of the industry’s global hubs, Major crypto companies such as FTX and Crypto.com were founded in the city. But in 2017, China cracked down on initial coin offerings (ICOs) and banned cryptocurrency exchanges. As a Chinese territory, Hong Kong followed suit, starting with the establishment of a voluntary licensing system by Hong Kong’s Securities and Futures Commission (SFC).

Since then, crypto trading platforms in Hong Kong were only allowed to provide services to institutional investors and professional clients with portfolios of at least HK$8 million (US$1 million) under this licensing system. Only two exchanges opted into the system, which effectively prohibited Hong Kong retail investors from legally dealing with crypto as an investment. This approach was pretty much in line with China’s generally anti-crypto stance, intensified in September 2021 by a pledge to root out crypto mining operations.

In October 2022, Hong Kong released the first of many pro-Web3 statements with a policy statement that calls for “promoting [the] sustainable and responsible development of the [virtual assets] sector in Hong Kong,” in reference to Web3 digital assets such as cryptocurrencies, NFTs, and more. “We recognize the potential of [distributed ledger technology] and [Web3] to become the future of finance and commerce, and under proper regulation, they are expected to enhance efficiency and transparency, which in turn will reduce or resolve existing frictions across clearing, settlement, and payments,” according to the statement.

In December 2022, Hong Kong’s Legislative Council amended its Anti-Money Laundering and Counter-Terrorist Financing Ordinance, giving the SFC direct regulatory oversight over cryptocurrency exchanges operating in the city. The amendment, which specifies the granting of licenses only to Hong Kong-formed corporations or registered non-Hong Kong companies with a permanent place of business in Hong Kong, was made effective in April 2023.

In May 2023, the Hong Kong Monetary Authority reportedly encouraged major banks HSBC, Standard Chartered, and Bank of China to accept crypto exchanges as clients. Hong Kong lawmaker Johnny Ng, a member of China’s top political advisory body, was also said to have invited Coinbase and other crypto exchanges to set up in the city.

In June 2023, Hong Kong introduced a new regulatory regime for virtual assets, allowing retail investors to trade major digital tokens at licensed crypto exchanges. The new rules require crypto exchanges to obtain a license with the SFC after a one-year transition period. Around 150 companies were said to have applied for a crypto license in Hong Kong, reportedly spending up to US$25 million to secure a license. By the end of that month, the Hong Kong government established a task force for promoting Web3, consisting of 15 non-official members from relevant market sectors, including Animoca Brands Chairman Yat Siu.

In addition, Hong Kong regulators have created a stablecoin issuance playbook, signaling the potential creation of a Hong Kong Dollar-based stablecoin. There are also reports of ongoing discussions regarding the formation of a stablecoin based on the CNH, the overseas version of the Chinese Yuan.

Hence, in less than a year, Hong Kong made a 180-degree pivot from skepticism to support of Web3. 

Hong Kong’s Impact on the Global Web3 Landscape

To understand Hong Kong’s actions toward Web3, it’s important to be aware of a few catalysts at play: the post-COVID reopening and recovery of Hong Kong and the heated geopolitical rivalry between the U.S. and China. 

Over the past few years, Hong Kong faced an exodus of capital and talent, driven by events related to political unrest and strict pandemic-related restrictions. As COVID-19 subsided worldwide, the Chinese territory has been eager to reopen for business, with several incentives being placed on multiple industries, including Web3. Last year, Hong Kong Financial Secretary Paul Chan called cryptocurrencies and other virtual assets “unstoppable new financial innovations” and called for wider acceptance. By forming a clear regulatory policy on Web3, Hong Kong is aiming to reclaim its reputation as a major, future-forward financial hub. 

When asked about Hong Kong’s new Web3 rules, Yat Siu commented that Web3 rules are starting to become more consistent in Hong Kong. According to him, Hong Kong had seen an opportunity to take a leadership position in terms of driving Web3 development. The timing is crucial, as other major financial hubs such as Japan, the Middle East, and Europe are also crafting their respective Web3 regulations and providing more clarity for the industry in terms of how to safely operate globally. 

The favorable atmosphere towards Web3 is seen as a surprising development in the city that serves as the international economic gate to China, which has long been hostile towards Web3 but is also seeing changes in this stance. Earlier this year, Chinese economist Huang Yiping, a former high-ranking official of the People's Bank of China, urged the country to reconsider whether the ban on cryptocurrency trading is sustainable in the long run. He argued that a permanent ban on cryptocurrencies could result in many missed opportunities for the formal financial system.

Whether Hong Kong’s Web3 moves are isolated instances that apply only to the city or a prelude to a more significant change in China, it has been clear enough that the new Web3 rules contrast the recent hostile stance of the U.S. towards the industry. Over the past few weeks, the U.S. Securities and Exchange Commission (SEC) filed charges against Binance.US and Coinbase for alleged unregistered securities offerings. Siu noted that many Web3 is operating “under a regime of fear” due to the lawsuits.

In fact, the opposite directions that the U.S. and Hong Kong (and China by extension) are taking regarding Web3 may usher major shifts in the crypto market. In a commentary piece, Omer Ozden, chairman of Web3 investment fund RockTree Capital, noted that several Web3 companies have started preparing for an eventual move outside of the U.S., including Coinbase, perhaps the biggest Web3 name in America. “(U.S. Dolllar-based stablecoin) USDC has lost US$27 billion in market cap from its peak 12 months ago, or nearly 50%. Since this is a U.S. regulated stablecoin, some see the metric as a measure of market consensus on U.S. regulatory confidence: the crypto industry is leaving fast,” Ozden said. 

The contrast between the U.S. and China with regards to Web3 can also be seen as another front of conflict and brinksmanship between the two major global powers. The economic rivals have been at odds in several areas, including territorial waters, semiconductor manufacturing, military escalations, and even finance. Recently, China is promoting the global usage of the Chinese Yuan in an effort to make it one of the world’s reserve currencies, potentially even challenging the US Dollar. While it is too early to see whether Web3 becomes a major part of this rivalry, the opposing regulatory approaches between the two countries is undeniable.

Facts on the Ground: Cautious Optimism and Challenges in Hong Kong

While many people in the global Web3 see the developments in Hong Kong as good news, the devil may be hiding in the details. The Web3 rules that Hong Kong has created may lead towards general clarity, but the territory’s regulators have not yet provided details on how to oversee several Web3 innovations such as decentralized finance (DeFi), derivatives, staking, NFTs, and utility tokens. The SFC has said that decisions on these details will be made on a case-by-case basis, which means virtual asset firms operating in these areas are still in the dark on whether they will need licenses to operate. 

The new rules do include some stipulations that may be seen as restrictive to some. For instance, according to the SFC, licensed operators should also perform client checks to ensure that retail traders from mainland China are banned from trading. Companies are also required to set an exposure limit for retail investors and to limit the retail trading of highly liquid tokens to permit only those that have been issued for at least one year. This can result in high costs for licensed companies and further constraints in pursuing more avenues for growth, especially given the massive market potential in China. 

Hence, instead of unanimous approval, Web3 companies operating or planning to set up shop in Hong Kong are exhibiting cautious optimism towards Hong Kong’s new regulatory stance. “Potential investors are proceeding conservatively in setting up virtual-asset trading platforms in Hong Kong. They want to be sure that they don’t end up burning cash,“ said Vince Turcotte, director of digital assets at regulatory technology firm Eventus.

This cautious optimism is reflected in what Web3 companies are and aren’t doing at the moment in Hong Kong. For instance, the new Web3 rules in the city have not resulted in the increase of jobs in the sector, at least in the short term. While the lack of Web3 job openings is seen as the result of the crypto market dip that started last year, factors such as lack of venture capital activity and general hesitation towards working in Web3 following massive layoffs in the industry have dampened the expected resurgence in Web3 activity in Hong Kong. Interestingly, human resource observers have noticed a slight uptick in legal and compliance jobs for Web3 companies in Hong Kong, but whether this leads to more growth across other categories remains to be seen. 

In addition, not everyone in Web3 shares Hong Kong’s optimism and welcome attitude. Web3 pioneer Bobby Lee, who opened China’s first Bitcoin exchange only and was forced to shut it down amid China’s crackdown in 2017, cautioned that Hong Kong may change its stance in a whim. “I wouldn’t be surprised if Hong Kong did a reversal and put a red light in front of everyone,” he said, adding that the city can still impose significant restrictions or completely ban cryptocurrencies in the future, citing his experience. 

Another area of concern for the Web3 industry is China’s capability to overrule regulations in Hong Kong. In theory, the Chinese territory’s regulators can push back on China’s moves by citing the “one country, two systems” principle that protects the city’s economic and political autonomy. In addition, there are speculations that China is quietly supporting Hong Kong’s Web3 embrace and that Chinese officials have been attending Web3 gatherings in the city. Nevertheless, China’s actions will cast a significant shadow on Hong Kong’s activities. Recently, Pan Gongsheng was named the top Communist Party official at the People’s Bank of China (PBOC), in a move that is seen as a negative for the Web3 industry. In 2017, he made scathing remarks about Web3, saying “If you sit by the river and watch, one day the corpse of Bitcoin will float in front of you.” Appointing a person like that as a potential candidate for PBOC governor is undoubtedly bearish news.

But regardless of what happens in China, the Hong Kong market will ultimately decide the fate of Web3 in the city more than any regulator could. Web3 observers in Hong Kong noted that while the new regulations prove to be beneficial to Web3 companies that are already operating in the city, new entrants may still see a high barrier for entry, especially if the implementation of rules end up leaning towards a more restrictive approach. Many companies are still on a wait-and-see approach, while others have already moved on to other countries where the market potential is higher. 

Some Web3 observers note that in the past few months, Web3 companies have found it difficult to successfully open a corporate account in Hong Kong, despite the regulations. They also shared that the systems mandated by the new Hong Kong regulations require a lot of technical personnel, which will be difficult to source especially given the perceived lack of incentives in Hong Kong for IT professionals. Ultimately, some Web3 companies may not be swayed enough to open retail investor services in Hong Kong, because the city’s market is dominated by professional investors, and retail investment may not move the needle enough for them to reconsider.

Closing Thoughts

In theory, the new Web3 regulations in Hong Kong can put the major city in a position to become a global Web3 hub. Hong Kong’s Web3 embrace can also be seen as a litmus test for potential policy shifts in China as it competes fiercely with a U.S. that is increasingly becoming restrictive of Web3. However, in practice, regulation is just one of the many factors being considered by Web3 builders when it comes to where they plan to operate and grow their businesses. And this early, the response to the new Web3 rules is more muted than expected. Nevertheless, regulatory clarity in many jurisdictions such as Hong Kong is a positive step towards the global mainstream adoption of Web3. 

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Sources

Bitcoinist, Bloomberg [1] [2] [3],

Coindesk, Cointelegraph [1] [2] [3],

Financial Services and the Treasury Bureau of Hong Kong,

Financial Times, FXMAG, Hong Kong Government, Nixon Peabody, Reuters, Tencent Technology