Hong Kong Web3 Declaration Two-Year Anniversary Interview: Traditional Enterprises Encounter Obstacles in Transforming to Web3, How Can Hong Kong's Virtual Asset Journey Go Further?

整理：Glendon，Techub News

On October 31, 2022, Hong Kong officially released its virtual asset policy declaration, marking a solid step forward in the Web3 and virtual asset sectors. Since then, Hong Kong has been steadily advancing in this emerging field. As the second anniversary of the declaration approaches, Techub News conducted an in-depth exclusive interview with Legislative Council member Wu Jiezhuang to discuss the profound impacts that the implementation of virtual currency policies has had on various industries in Hong Kong, including banking, securities, and exchanges.

Wu Jiezhuang analyzed the trends and challenges faced by traditional industries transitioning to Web3. He pointed out that the transformation of traditional industries to the Web3 sector has become a clear development trend. However, the road to transformation is not smooth; traditional industries need to overcome multiple challenges such as talent shortages, technological barriers, and regulatory adaptability.

When discussing the "Hong Kong Virtual Asset ETF," Wu Jiezhuang candidly stated that the root cause of the product's sluggish trading volume lies in its lack of competitiveness. Specifically, Hong Kong's virtual asset ETFs face fierce competition from similar overseas products, with no significant price advantage; at the same time, customers can directly purchase virtual currencies, which diminishes the necessity of ETF products; the brokers participating in ETF trading are mostly small and medium-sized institutions, lacking the customer appeal of large institutions; and the functions of the Hong Kong virtual asset market are relatively singular. Moreover, retail investors in Hong Kong show relatively low enthusiasm for virtual asset products, with a noticeable gap compared to other Asian countries. In response, he suggested that regulatory agencies should moderately relax some restrictions on institutional participation in the market, including diversifying product types and innovating trading models.

Additionally, Wu Jiezhuang further envisioned key points in the Hong Kong government's future layout for the Web3 industry and the development trends of the virtual asset ecosystem. He emphasized that the Hong Kong government should timely adjust its strategy, not merely strengthening regulatory measures, but should moderately relax restrictions on the Web3 and virtual asset industries from multiple angles to seek a reasonable balance between regulation and market development.

The following is a transcript of the interview, slightly adjusted:

Techub News: Over the past two years since the implementation of the Hong Kong Web3 declaration, which industries have been specifically impacted by the virtual asset policy?

**Wu Jiezhuang: ** It is mainly reflected in two aspects. Over the past two years, we have seen a phenomenon where a large-scale crypto asset Web3 industry has developed from overseas to Hong Kong. In the first year after the virtual asset policy was released, hundreds of emerging Web3 companies sprang up in Hong Kong. To date, this number has approached 1,000, including not only well-known exchanges and basic service providers but also many emerging enterprises within the Web3 ecosystem.

In addition, traditional industries have also begun to gradually transform. We have noticed that some Web2 companies are starting to shift towards Web3. Initially, this transformation was mainly reflected in financial institutions, such as traditional brokers and asset management companies, which were more willing to engage in virtual asset businesses. However, recently, we have observed that an increasing number of entities in the real economy are also exploring how to leverage Web3 technology to create new growth points.

Therefore, the transformation of traditional industries to the Web3 sector has become a clear development trend. Especially after the Hong Kong government launched the Ensemble project sandbox, many traditional products seeking tokenization can be seen in the market, hoping to expand their business into trading scenarios across Hong Kong and even globally.

Techub News: In this transition to Web3, what difficulties and challenges have these traditional industries encountered?

**Wu Jiezhuang: ** In fact, there are many difficulties. First, we observe that Hong Kong's scale is not large, with a population of just over 7 million, and talent in the technology sector is relatively scarce, making it very difficult and costly to recruit engineers and developers in Hong Kong. This is one of the challenges I have observed many companies facing.

Secondly, traditional banks and large multinational banks hold a conservative attitude towards the Web3 industry. Many enterprises lack the support of large financial institutions when adopting traditional financial services, which makes it difficult for those transitioning to Web3 to provide daily financial services and restricts their development to some extent.

Techub News: Over these two years, what has been the attitude of foreign financial institutions towards Hong Kong's virtual asset industry? Have they increased their investment efforts? What have local financial institutions in Hong Kong done?

**Wu Jiezhuang: ** Strictly speaking, the development has not been rapid. As I mentioned earlier, most large multinational financial institutions are still in a wait-and-see state, with only a few institutions showing a proactive stance, such as applying for stablecoin licenses and participating in sandbox testing. The reason some multinational financial institutions remain in a cautious state is that the entire virtual asset industry requires the implementation of different KYC (Know Your Customer) and AML (Anti-Money Laundering) policies, which diverges significantly from their traditional business models and may require substantial investment to rebuild their entire systems.

However, I believe this is just a matter of time. As more and more developers come to Hong Kong to develop products and industries, these banks and financial institutions will also seize the business opportunities to invest. Moreover, after two years of development, I have observed some progress in this market. Although traditional overseas brokers have not actively invested in virtual asset ETF projects, some internet brokers have started participating in virtual asset trading in recent months, with decent trading volumes, indicating that traditional investors are also willing to enter this sector. Therefore, once traditional banks, brokers, and other large financial service providers gradually enter this industry, its future development will accelerate.

Additionally, regarding local financial institutions in Hong Kong, I would like to take banks as an example. The scale of local banks is relatively small, and their participation attitude is not very proactive. In contrast, some newly established virtual asset banks are more active, hoping to find new breakthrough businesses. Local brokers are also equally proactive, as the challenges posed by traditional businesses like stock trading are increasing, making them eager to find new growth points, and virtual assets provide a new development opportunity. We see that many medium-sized and even large local brokers have entered this field to compete. At the same time, some asset management companies are also upgrading their virtual asset businesses, and once they obtain compliance licenses in Hong Kong, they can provide virtual asset management services to clients.

Techub News: You previously mentioned that Hong Kong should establish a "virtual bank." What existing pain points can the establishment of a "virtual bank" address?

**Wu Jiezhuang: ** I just mentioned that traditional banks have a traditional system for functions like anti-money laundering and KYC to meet regulatory requirements. In fact, their cost investment is not small, including manpower and technology among other aspects. A virtual bank, which can also be referred to as a virtual financial bank, is specifically designed to serve the virtual asset industry. It would come equipped with its own KYC, AML, and on-chain analysis and data analysis functions, enabling diversified services while fully meeting regulatory requirements, effectively alleviating some pain points of traditional banks. If Hong Kong can provide this service, it will undoubtedly attract more projects from this industry to gather here.

Techub News: At the end of April this year, Hong Kong licensed six virtual currency ETFs under Huaxia Hong Kong, Bosera International, and Harvest International. However, the trading volume of these ETFs has been somewhat disappointing. Does this reflect a lack of interest and confidence in virtual asset ETFs in the market? What do you think are the main reasons for this sluggish performance?

**Wu Jiezhuang: ** I believe the root cause of the low trading volume of ETFs lies in insufficient competitiveness, mainly reflected in several aspects: first, facing competition from numerous similar overseas products, with no significant price advantage; second, customers can currently purchase virtual currencies directly, while ETFs serve as a bridge for traditional brokers to enter the virtual asset market, their necessity is diminished as brokers can directly purchase virtual assets. For example, we can see some internet brokers directly connecting with licensed exchanges, further reducing the attractiveness of ETFs, as cost considerations are a very critical factor.

Third, the brokers participating in ETF trading are mostly small and medium-sized, lacking the customer appeal of large institutions; fourth, retail investors in Hong Kong show far less enthusiasm for virtual asset products compared to other Asian countries, and differences in product awareness and speculative preferences increase the difficulty of promoting retail business; fifth, the functions of the Hong Kong virtual asset market are relatively singular, lacking diversified operations such as hedging, which also limits the trading volume of some products. The combined effects of these various reasons have led to the trading volume of Hong Kong ETFs not being as large as expected.

Techub News: Will this market see a turning point in the future, or what changes does Hong Kong need to make in this sector to increase virtual currency ETF trading volume?

**Wu Jiezhuang: ** I advocate for a reasonable relaxation of regulations on virtual assets from multiple angles. I believe Hong Kong is most suited to become a hub for Web3 and financial institutions in Asia because Hong Kong leads Asia in the breadth and depth of the financial sector, whether in terms of asset management scale or trading of other financial products. Therefore, I propose that regulatory agencies should relax some restrictions on institutional participation in the market, including diversifying product types and innovating trading models, to promote the activity and trading volume of related markets in Hong Kong.

Techub News: In the Hong Kong virtual asset market, compliant licensed exchanges are undoubtedly an important component. Compared to overseas exchanges, what advantages do existing compliant exchanges have in attracting investors?

**Wu Jiezhuang: ** Hong Kong compliant licensed exchanges have two drawbacks: first, their costs are relatively high, as their management fees are more expensive compared to unlicensed exchanges in Hong Kong; second, the variety of products is limited, making it difficult to meet the diverse investment needs of retail investors.

These two are obvious pain points, but what benefits do they bring? Security.

In compliant exchanges, whether retail or institutional, funds are comprehensively protected, ensuring worry-free withdrawals. In contrast, users of overseas exchanges may find themselves helpless when encountering security issues with their funds. Simply put, Hong Kong compliant exchanges can provide 100% security guarantees, allowing investors to trade with peace of mind, which is their core value.

Additionally, we all know that the virtual asset industry experiences significant crises every one or two years, but no one ever knows what the next crisis will be. Therefore, the Hong Kong authorities place great importance on investor protection, making "risk-based" the primary principle of virtual asset policy, aiming to safeguard the interests of local and international investors, including both institutions and retail investors.

On the other hand, compliant exchanges and overseas exchanges differ in positioning, catering to the different needs of various types of investors. Moreover, with the continuous optimization of the policy environment, more exchanges may obtain licenses in Hong Kong in the future, and to enhance competitiveness, they will inevitably actively connect with target markets.

Overall, Hong Kong has demonstrated a firm determination in investor protection. Of course, I suggest that exchanges should strengthen security guarantees while also considering market development, launching some product varieties and innovative approaches to enrich market choices, thereby promoting the overall development of the virtual asset industry.

Techub News: Some overseas exchanges have also launched crypto businesses in Hong Kong. What challenges do you think these exchanges pose to the regulation of Hong Kong's virtual asset market? Taking last year's JPEX exchange incident as an example, how do you view the shortcomings of Hong Kong's virtual asset regulation?

**Wu Jiezhuang: ** I believe overseas exchanges can be roughly divided into two categories. The first category includes exchanges like JPEX, which are essentially scams aimed at deceiving investors, so retail investors should be highly vigilant about such exchanges. Hong Kong regulatory agencies need to focus on enhancing virtual asset investment education to improve retail investors' ability to identify non-compliant trading platforms.

The second category consists of exchanges that hold licenses overseas but have not yet obtained licenses in Hong Kong. For these exchanges, I believe regulatory authorities should be more proactive and take action. Given the high costs of obtaining a Hong Kong license, these exchanges need to invest substantial human, material, and technical resources to operate compliantly. If they can contribute to the healthy development of Hong Kong's virtual asset market and provide protection, then regulatory agencies should also protect their interests.

At the same time, regulatory agencies need to take various measures to ensure that Hong Kong investors, whether institutional or retail, do not easily direct funds to exchanges that have not obtained licenses in Hong Kong. As mentioned earlier, the operational costs of licensed exchanges in Hong Kong are high, while the regulatory environment overseas is relatively lenient. If overseas exchanges can freely operate in Hong Kong, it will undoubtedly impact the survival space and interests of local licensed exchanges. Therefore, regulatory authorities need to think deeply and take effective measures to better address this challenge.

Techub News: Will Hong Kong's regulatory agencies strengthen regulatory measures in the future? In which areas will the Hong Kong government focus its efforts?

**Wu Jiezhuang: ** I believe the Hong Kong government should not continue to strengthen regulation but should moderately relax restrictions on banking services for Web3 and virtual asset companies to seek a reasonable balance between regulation and market development. At the same time, the Hong Kong government should be more proactive in building the ecosystem. For example, last year, it allocated HKD 50 million for the development of the Cyberport ecosystem, which was a very good first step.

Next, we need to do a lot of work. The Hong Kong government should attract more ecosystem projects to settle in Hong Kong, such as achieving this goal by hosting large-scale events. Of course, in this regard, Hong Kong has made some progress: in February next year, the Consensus conference will be held in Hong Kong, and I believe it will attract many foreign project participants to come to Hong Kong; additionally, the Hong Kong Web3 Carnival has been scheduled for April next year. Therefore, I hope the Hong Kong government can deepen cooperation with Cyberport or other government agencies to intensify efforts to introduce more large-scale events and projects, thereby attracting more talent to build the Hong Kong Web3 ecosystem together.

Another key point is the talent issue. For example, regarding visas, can we provide a green channel for talents in the Web3 industry or offer better development space for engineers? We need to think about how to attract young people because with talent comes funding and projects, along with good policies, which will naturally bring about very good economic benefits. As for exchanges, financial institutions, etc., I won't elaborate further. But my suggestion is that the government should first strengthen virtual asset investment education for institutions and retail investors. We need to promote the virtual asset industry across various sectors in Hong Kong, helping them understand the essence of this industry and clearly recognize the opportunities and risks involved. If the public in Hong Kong can align their understanding of virtual assets with that of other Asian countries like Japan and South Korea, then Hong Kong's crypto industry will become deeper and broader.

Techub News: Hong Kong plans to become the world's Web3 center. Compared to the policies of countries like Singapore, Japan, and the United States, what are the unique aspects of Hong Kong's virtual asset regulatory policies? In what areas does it still need improvement to better adapt to market demands and regulatory requirements?

**Wu Jiezhuang: ** I believe Hong Kong's regulatory system is already quite sound, covering licensed virtual asset exchanges, financial service providers, and the licensing records for stablecoin regulation. It should be noted that the virtual asset industry has undergone over a decade of development, and this industry has encountered significant issues almost every year, such as exchanges misusing customer assets for investment losses, corporate bankruptcies, and major hacking incidents. Throughout this development process, the Hong Kong government has gained rich experience, and under our strict regulation, the probability of such issues reoccurring is extremely low. At the same time, Hong Kong has also introduced insurance companies to ensure comprehensive protection of customer assets, strengthen cybersecurity regulation, and other critical aspects to ensure that listed institutions do not repeat past mistakes. This can be considered a unique advantage of Hong Kong's regulatory framework.

It is worth mentioning that in August this year, the world's first lawsuit involving a centralized autonomous organization (DAO) was successfully adjudicated in the Hong Kong High Court. These instances fully demonstrate Hong Kong's capability in regulating and handling various affairs in the Web3 sector, effectively alleviating investor concerns. This also means that Hong Kong is relatively easy to attract compliant and economically viable projects from around the world to develop here. Geographically, Hong Kong is actually the center of Asia. We are not aiming to replace the United States or other developed countries, but at least in Asia, besides being a financial center, Hong Kong is also very likely to become a true Web3 center.

Techub News: Finally, how do you view the future development trends of Hong Kong's virtual asset ecosystem? What impact will these changes have on the stability and development of Hong Kong's financial system?

**Wu Jiezhuang: ** The scope of virtual assets is very broad. Taking stablecoins as an example, Hong Kong is working on legislative regulations for them. We know that stablecoins are not only trading and investment tools in the crypto world but also demonstrate great potential as new payment methods for cross-border trade in the unprecedented global changes of the century. Under a legally compliant regulatory framework, Hong Kong is very likely to issue a stablecoin as an innovative payment tool to lead the revolution in payment methods.

If this possibility arises, Hong Kong will be able to widely utilize stablecoins in investment, trade, payments, and many other scenarios, and collaborate with various innovative projects. I believe this will create more business opportunities across various industries in Hong Kong. Furthermore, the vigorous development of the virtual asset ecosystem will also have a positive impact on Hong Kong's financial system, promoting the complementary development of emerging industries and traditional financial markets, thereby consolidating Hong Kong's position in the financial sector and endowing it with greater vitality and broader development potential.