The era of Web3 regulation has arrived, and Hong Kong remains the eastern stronghold.

On May 31, the delisting policy for virtual asset trading platforms in Hong Kong was officially implemented, and non-compliant exchanges will cease operations. As the deadline approaches, nearly half of the VATP applicants have chosen to withdraw, sparking widespread discussion in the market. Some believe this marks the "decline of Hong Kong's status as a financial center" or the "end of Web3 development in Hong Kong," but is that really the case? What attitude should regulators adopt to embrace the Web3 era?

In fact, Hong Kong, as an important hub for Web3 in the East, has only just begun its game with the West.

The Next Decade of Web3: Comprehensive Compliance

Compared to 2022, Hong Kong's attitude towards Web3 seems to have shifted from "enthusiastic embrace" to "cautious approach". But from a broader historical perspective, what stage is Hong Kong currently at? We can gain some insights by comparing major global Web3 financial markets.

Japan is undoubtedly a pioneer in the Web3 regulatory field. Following the collapse of the Mt.Gox exchange in 2014, Japan swiftly initiated regulatory measures and introduced a licensing system for digital currency exchanges in 2017. After ten years of development, Japan currently has 23 approved digital currency exchanges, the majority of which are domestic companies.

Operating an exchange in Japan has some similarities with Hong Kong, such as the need to comply with regulations on asset separation and cold wallet management, as well as regular audits. It is precisely because of these strict regulations that Japanese exchanges were able to better protect user assets during the FTX collapse. Moreover, Japan's regulatory framework in various areas such as ICOs, IEOs, STOs, and CBDCs is also relatively well-established.

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

Although the United States currently does not have a fully compliant exchange, the publicly listed company Coinbase is relatively more in line with regulatory requirements compared to other exchanges, and its performance has shown significant growth this year. Meanwhile, certain offshore exchanges are gradually facing regulatory challenges from the U.S. following the FTX incident in 2022.

These cases reflect a common trend: regulation is gradually deepening in various subfields and becoming more refined.

During this process, there have been voices in Japan and Singapore expressing concerns about "overly strict regulations" and "unfavorable development," but as the regulatory system continues to improve, the Web3 ecosystem in these two regions is becoming increasingly vibrant.

The United States has recently adjusted its regulatory stance. The latest released FIT21 (Financial Innovation and Technology Act of the 21st Century) regulatory framework proposes how to define digital assets (including DeFi and NFTs) and how to delineate the boundaries between commodities and securities, which could have a profound impact on the crypto industry.

Following the United States, regions such as Southeast Asia, Dubai, India, and Iran are planning to introduce Web3 regulatory policies in the coming years. Even some countries that were not previously active in the cryptocurrency industry, such as certain European countries and Nigeria, have joined this wave of regulation.

It can be seen that global regulators do not want to fall behind in the wave of Web3. Whether starting with active embrace or passive response, jurisdictions will ultimately move towards precise regulation.

From the perspective of the number of licensed exchanges, offshore exchanges in various regions account for almost no more than 30% of the total licenses, and regulatory agencies are more inclined to support local enterprises.

This is not only a challenge faced by regulators but also a dilemma for offshore exchanges. Looking back at the early development of the industry, offshore exchanges served nearly 200 million users in a lax regulatory environment. But that era has passed. Aside from some exchanges paying hefty fines to seek compliance, among the others that withdrew their applications, some have begun to establish themselves and obtained licenses in places like Singapore and Dubai over the years, while some exchanges have obtained relatively few licenses.

In simple terms, "it is difficult to go from luxury to frugality." Offshore exchanges that want to "come ashore" and enter major financial regulatory areas seem to have a long and difficult road ahead.

With the changing cycles, the early era of "regulatory arbitrage" in the crypto market is long gone.

Let's take a look at the situation in Hong Kong. Unlike the "regulatory sandbox" approach of the United States, which allows for initial freedom followed by regulation, Hong Kong adopts a "native regulation" model where licenses are issued before operations, directly skipping the phase of unchecked growth.

Since the introduction of Web3 regulatory policies in Hong Kong in 2022, the clarion call for full compliance in the Web3 industry has been sounded. By June 1, 2024, the AMLO license will be officially implemented, and irregular exchanges have completed their exit, while more than half of the applicants are still present. Exchanges that have obtained licenses and commenced operations have seen their trading volume exceed 440 billion HKD, showing a positive development trend.

Therefore, the exit of some exchanges should not be overly pessimistic. From a historical perspective, this is just a necessary cleansing phase that Hong Kong and other regulatory jurisdictions are experiencing.

More importantly, the 531 policy marks a key step in comprehensive regulation, indicating that Hong Kong has resolved the most concentrated and complex issue of the "exchange" industry.

Hong Kong and the United States: The East-West Web3 Game

What will happen after the regulation is completed? The bullish period is over, and the game theory period has just begun.

Four years ago, a well-known entrepreneur predicted that major conflicts in politics in the future would occur between artificial intelligence and encryption technology.

The momentum of AI and Web3 is now evident, with the US and Hong Kong regarded as important battlegrounds for the Web3 industry in the East and West. The competition in regulatory attitudes between the two places will lead the direction of global Web3 development.

Why is competition necessary? Unlike AI, monopolistic regulation is no longer feasible in the Web3 space. The Web3 era has established more business models based on the network economy, which can easily cross physical boundaries to provide services to customers.

A work that is considered to have inspired the invention of Bitcoin once depicted such a scenario: "Due to the development of information technology, you will soon be able to create wealth in cyberspace, completely free from the plundering of nation-states. This will establish a de facto requirement for a meta-constitution, meaning that the government must genuinely provide satisfactory services before asking you to pay your bills."

In the future, political leadership may become increasingly similar to entrepreneurship; only by being sufficiently friendly can it attract the influx of funds 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 very clear. This year, the topic of cryptocurrency has been placed at the center stage of American politics for the first time. According to statistics from a certain data platform, about one-third of American voters consider the political candidates' stance on cryptocurrency before making their voting decisions. 77% of voters believe that U.S. presidential candidates should at least understand cryptocurrency. 44% of voters think to some extent that "cryptocurrency and blockchain technology are the future of finance." There are even politicians calling for: "Ensure that the future of cryptocurrency happens in the United States!"

The game pattern between the East and the West has taken shape, and ETFs have become a clear battlefield. The sudden shift in the U.S. stance on approving ETH ETFs may be due not only to domestic factors but also because Hong Kong relatively took the lead in launching ETH ETFs in April.

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

Next, the ETH ETF, as a stakable income-generating asset, is expected to become the next focal point of speculation.

After Ethereum switched from POS to POW, it can generate passive income similar to interest through staking, with the current market annual interest rate being about 4.5%. If Hong Kong takes the lead in launching a spot ETF for Ethereum with staking, subscribing to the ETF will no longer be a paid action but a profit-making one after earning staking rewards. It could also become a "digital U.S. Treasury bond" to some extent, and its attractiveness may even surpass that of Bitcoin ETFs.

The development of the Web3 industry is also related to its local cultural heritage. Although Easterners appear to be 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 guidelines for virtual asset trading platforms, anti-money laundering and counter-terrorist financing measures, prevention of money laundering and terrorist financing related to associated entities, as well as disciplinary sanctions and fines.

These regulatory policies are clearer and more mature compared to the relevant regulations previously used in the United States, and there is no need to waste words on whether cryptocurrencies are "securities" or "commodities."

As the bull market gradually peaks, the wealth effect in the industry will become evident, and a new batch of billionaires is about to emerge. Hong Kong, as a region inherently endowed with the "mystical Eastern power" advantage, will also attract more core forces and funds from the mainland and overseas Chinese in Web3 with the market trend.

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

The tides of history are rolling 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 are still in operation will not only engage in trading activities but will also become key players in connecting various financial sectors within Hong Kong's Web3 ecosystem. For example, in this ETF issuance, certain exchanges played the role of custodians, providing underlying infrastructure support for the issuers. In the future, they will play an indispensable role in areas such as RWA, STO, and OTC businesses.

It is precisely for this reason that some offshore exchanges have been driven off the Hong Kong trading table. This is also known 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 withdrawal experienced in Hong Kong.