Hong Kong Legislative Council member Yiu Tak-ken: Are we seriously pursuing financial innovation?

Author: Qiu Dagen, Member of the Legislative Council of Hong Kong

Source: Hong Kong Economic Journal

The new licensing regime specifically designed for Virtual Asset Trading Platforms (VATP) by the Hong Kong Securities and Futures Commission came into effect on June 1, 2023. The transitional arrangements of the new regime allowed operators to submit license applications before February 29 of this year and to comply with new regulatory requirements starting from June 1, continuing to provide virtual asset services in Hong Kong until a final decision is made on their license applications.

However, as the transition period came to an end (May 31), an increasing number of operators decided to abandon the Hong Kong market. At the time of writing, 11 firms have withdrawn or returned their license applications. When the SFC initially introduced the licensing conditions, it failed to attract large exchanges like Coinbase to apply for licenses in Hong Kong. Subsequently, from February onwards, several internationally renowned exchanges such as Gate and Huobi gradually exited the market. By May, the situation worsened, with six operators announcing their withdrawal, including OKX, which ranks among the top three in global trading volume. Among the remaining 18 applicants, most are small in scale. Some lack industry experience, while others are traditional financial institutions attempting to venture into VATP business without deep engagement in the Web3 space.

The exit of OKX has sparked widespread discussion in the industry, questioning whether Hong Kong truly has the determination to develop and embrace Web3. My WeChat circle has seen numerous related comments, with some titled "Has Hong Kong's Web3 Ended Before It Even Started?" and "The Arrogance of Hong Kong People Has Hurt OKX's Heart." They criticize the authorities for being overly cautious and conservative in implementing the new regime, weakening the competitiveness and flexibility of the licenses from a traditional financial perspective. Some operators, despite having invested significant resources and upfront costs, ultimately decided to withdraw their applications at the final stage.

Many industry insiders are concerned that the new licensing regime may turn into a repeat of the "food truck incident," or even resemble the government's previous push to develop virtual banks, which was loud in rhetoric but minimal in action. They worry that the authorities may repeat past mistakes, and even if operators are granted licenses, it would be difficult to develop a profitable model.

Based on industry opinions, I believe the new licensing regime reveals several areas of concern. First, several policies and measures related to the development of the local virtual asset market (such as VATP, stablecoin issuance, and virtual asset over-the-counter trading) are designed by different departments, lacking a comprehensive strategic consideration for industry development. Relevant policies enter consultation phases or legislative processes at different times, resulting in a fragmented approach to the entire Web3 layout, taking too long and failing to keep pace with the rapid evolution of technology.

Second, the SFC requires operators to meet standards in asset custody, avoiding conflicts of interest, cybersecurity, accounting and auditing, risk management, and combating money laundering and terrorist financing. Many of these approval conditions borrow from traditional financial operating concepts and conditions, which become excessively stringent when applied to Web3 finance. Some applicants have expressed to me that the authorities lack a forward-looking vision for developing the next generation of financial technology, and pushing Web3 "financial innovation" with traditional financial thinking is even more inflexible.

Third, many industry insiders believe that the government and regulatory bodies lack an innovative DNA. Currently, the authorities require the management of licensed operators to have years of experience in virtual asset business. On the other hand, officials and the boards and management of regulatory bodies lack personnel with practical experience in operating Web3 businesses, leading to a disconnect in technical background, market experience, and innovative spirit, making communication difficult.

The recent turmoil surrounding the licensing regime has shaken market confidence in Hong Kong's push to develop Web3. To restore market confidence, I hope the SFC will make timely decisions on license applications, allowing investors to have long-term confidence in virtual asset trading platforms. Additionally, the products offered by trading platforms must achieve breakthroughs, balancing the need to maintain a sound legal framework, protect investors, and foster financial innovation. The authorities must demonstrate a new mindset and determination to encourage Web3 finance when approving new products in the future.

Ultimately, innovation is both a mindset and an action. If we are passionate about promoting innovation but fearful of failure when taking action, how can we innovate? The essence of innovation is to try and allow for failure to occur. The most important thing is how to reflect on mistakes and accumulate experience from failures, rather than retreating to a "safe line" from the very beginning, hoping to implement a so-called "innovation" with zero risk!