**Policy and Ecological Evolution of Web3 in Hong Kong**
The global spotlight on Web3 is now focused on Hong Kong. The top-tier event in the Web3 industry, Consensus, has landed in Hong Kong for the first time this week, attracting over ten thousand professionals to the convention center, reigniting the cryptocurrency enthusiasm along both banks of the harbor.
The Hong Kong Consensus conference is not only a showcase for global Web3 innovation but also represents a significant milestone in Hong Kong’s Web3 strategy. Since the release of the “Policy Declaration on the Development of Virtual Assets in Hong Kong” in October 2022, Hong Kong has been accelerating the construction of a bridge connecting traditional finance with the crypto world through a “regulation first, ecosystem concurrently” strategy, becoming an indispensable part of the global Web3 landscape.
As an industry observer, OKG Research has been tracking the development of Hong Kong’s Web3 policies since 2022, focusing on ecological and technological innovation practices. It has produced over 30 in-depth articles on hot topics such as VASP, stablecoins, and the tokenization of real-world assets (RWA), and has established content collaboration with mainstream media groups such as Sing Tao Group and Ta Kung Wen Wei Media Group, continuously providing industry insights.
Taking the Consensus conference as an opportunity, we systematically review the core context of Hong Kong’s Web3 ecosystem and launch the “HK Web3 Frontline” special topic, hoping to provide a comprehensive understanding of the evolution of Hong Kong’s Web3 ecosystem.
**I. Regulation First: An Ordered Exploration of Web3 Compliance Boundaries**
If we compare the Hong Kong Web3 ecosystem to a building, a reliable and applicable regulatory framework serves as its foundation. Since the issuance of the policy declaration at the end of 2022, Hong Kong has continuously reviewed and improved its regulatory system to promote the autonomous evolution of the virtual asset ecosystem within a safe and compliant boundary.
By establishing a comprehensive regulatory framework covering virtual asset exchanges, stablecoin issuers, custodial service providers, and over-the-counter trading activities, Hong Kong has paved the way for value interconnectivity and long-term innovation in the financial market.
These measures not only enhance the credibility of Hong Kong’s virtual asset market but also continue to attract capital and businesses. By the end of 2024, nearly 300 Web3 companies had already gathered in Hong Kong’s Cyberport, with cumulative financing exceeding 400 million HKD.
However, the global Web3 landscape has undergone significant changes over the past two years. With Donald Trump returning to the White House, the regulatory environment for cryptocurrencies in the United States has notably improved, as the long-standing high-pressure punitive regulatory model is fading away, while regions like Singapore and Dubai continue to release crypto-friendly signals.
As the narrative of “East Rising, West Falling” becomes less mentioned, and as global Web3 competition intensifies, how should Hong Kong seize this wave of innovation?
OKG Research has previously suggested that Hong Kong’s development of Web3 and virtual assets must be not only theoretical but also practical: the government is focused on technological innovation and application innovation that can have a substantial impact on the economic society. In her speech at the Consensus conference, the CEO of the Hong Kong Securities and Futures Commission, Ashley Alder, expressed a similar view, stating, “The second trend shaping the future financial landscape is integrating Web3 innovation into the real economy.”
At the same time, although the market share of crypto assets in the global financial system is less than 1%, their rapid expansion and increasing correlation with mainstream financial assets have led to risks that cannot be ignored. In many temporal points, Hong Kong and the United States may seem to be on different paths, but in reality, they share the same goal: to maintain innovative activities while preventing the potential financial risks brought by this new category of assets.
**II. HKD Stablecoin: Hong Kong’s “Financial” Ambition**
Stablecoins have been a hot topic at this Consensus conference and are also a key area of continuous focus and investment for Hong Kong over the past two years. Recently, Standard Chartered Hong Kong, ANZ Group, and Hong Kong Telecommunications have been reported to establish a joint venture aimed at applying for a license from the Hong Kong Monetary Authority under the new regulatory regime to issue a stablecoin pegged to the Hong Kong dollar. The issuer of USDC, Circle, had also announced a partnership with the three major note-issuing banks in Hong Kong to launch HKDCoin, pegged 1:1 to the Hong Kong dollar.
While it is uncertain how much market share the HKD stablecoin can capture in an environment dominated by USD stablecoins, developing an HKD stablecoin is an inevitable choice for Hong Kong to seize the initiative in Web3 development and gain a competitive edge in future finance.
The connection channel with fiat currency is currently the most valuable and easiest scenario to develop within the crypto ecosystem, and stablecoins are essential infrastructure for constructing that channel. Furthermore, the next phase of development for Hong Kong’s Web3 focuses on breaking the barriers between the virtual world and the real world, where stablecoins serve as the core link connecting traditional finance and the crypto world, potentially becoming a widely accepted payment tool.
However, how the HKD stablecoin should be issued, how Hong Kong will regulate it, and which institutions will be the first “pioneers” remain unanswered questions. The report titled “Seven Questions on HKD Stablecoin: Issuance Logic, Regulatory Rules, and Potential Impacts” provides insights and argues that stablecoins not backed by USD assets will struggle to compete with USD stablecoins in the short term. However, through mechanism innovation (such as interest-bearing stablecoins) and application innovation (such as RWA), the HKD stablecoin is expected to avoid direct competition with USD stablecoins, thereby attracting a more diverse range of institutions and users to participate.
Of course, we must also distinguish between the HKD stablecoin and the digital HKD. Although there may be potential competition between the digital HKD and the HKD stablecoin in the short term, they are expected to achieve resource sharing and complementary advantages in the future. The HKD stablecoin will far exceed the digital HKD in terms of utilization, scalability, and friendliness within the virtual asset market, while the digital HKD will hold a leading position in terms of value support and reliability.
**III. RWA Tokenization: From Concept to Trillion-Dollar Market Split**
RWA is undoubtedly the hottest concept at this year’s Consensus. “RWA tokenization is not a trend, but a necessity,” asserted John Cahill, head of digital assets at Morgan Stanley, at the “Institutional Investor Summit,” revealing the strategic shift among traditional financial giants.
OKG Research suggested in 2023 that RWA is an important area for long-term focus and investment in Hong Kong, with the biggest development opportunity for Hong Kong’s virtual asset industry lying in how to tokenize a vast array of traditional assets.
Now, Hong Kong is actively embracing the wave of RWA tokenization. The 2024 Policy Address proposed promoting RWA tokenization and the construction of a digital currency ecosystem, while the Hong Kong Monetary Authority launched the “Digital Bond Financing Scheme” to encourage the capital market to adopt tokenization technology. During the Consensus conference, Paul Chan, Secretary for Financial Services and the Treasury of the Hong Kong SAR Government, also indicated that Hong Kong is considering promoting gold tokenization.
However, the current narrative of tokenization is not driven by Web3 but is primarily dependent on Web2 institutions and whether they have sufficient motivation to change the status quo by bringing their assets on-chain and tokenizing them. This is not an easy task for traditional institutions: any new technology attempting to migrate traditional assets/businesses to new domains often struggles to succeed quickly, as the incremental value created may not be sufficiently large, but the costs incurred are often high. The same applies to RWA.
However, as Wall Street accelerates its layout in the tokenization market, Hong Kong urgently needs more resource-rich and asset-holding institutions to actively participate in tokenization innovation to gain a greater initiative in the transformation and avoid being rapidly outpaced in competition with the United States. Finding ways to stimulate market vitality remains an important proposition.
**IV. ETFs and OTC: The “Visible and Invisible Clash” of Funding Channels**
Another key initiative for the development of Web3 in Hong Kong in 2024 is the launch of virtual asset spot ETFs. From the clear acceptance of related applications at the end of 2023 to the official listing of six virtual asset spot ETFs approved by the Hong Kong Securities and Futures Commission on the Hong Kong Stock Exchange by the end of April, it took little more than a hundred days, reflecting the “speed” and “efficiency” of Hong Kong’s regulatory authorities.
The introduction of virtual asset spot ETFs has opened up another funding channel for a broad range of investors to lay out their investments in crypto assets. By the end of 2024, the total asset management scale of Bitcoin spot ETFs in Hong Kong has surpassed 3 billion HKD, accounting for 0.66% of the total ETF market in Hong Kong.
Compared to the United States, the main advantages of Hong Kong’s virtual asset spot ETFs lie in supporting physical redemptions and being the first to launch Ethereum spot ETFs. However, these have not led to sustained incremental growth. Although the share of physical redemptions exceeded 50% in the initial issuance scale, the macroeconomic expectations have led Bitcoin holders to be reluctant to easily release their liquidity, while the Ethereum spot ETF’s inability to support staking has dampened investor enthusiasm.
Although the current staking yield for Ethereum is only around 3%, whether from a narrative perspective or an economic perspective, the additional yield brought by staking is likely a significant factor in attracting investors, particularly traditional financial investors, and is a main distinguishing feature between Bitcoin and Ethereum.
In addition to the ETF channel, Hong Kong has also gradually formed a three-tier funding network of “licensed exchanges-compliant OTC-banks.” OKG Research stated in the report “How Can the Hong Kong Crypto Market Improve Liquidity?” that the current focus of liquidity is in the OTC market.
Although trading platforms remain the most important infrastructure in the crypto market, recent trends indicate that crypto liquidity is gradually converging towards the OTC market. Currently, the OTC market in Hong Kong handles trading volumes of nearly 10 billion USD annually, and thanks to local crypto exchange stores—unique physical entities—it attracts young investors from around the globe while also appealing to participants in the middle to older age brackets.
In recent years, the Hong Kong OTC market has also attracted attention from users and institutions in international trade and cross-border payment sectors, becoming another important channel for gathering global capital in Hong Kong.
The Hong Kong government is considering bringing OTC under regulatory oversight. Although this may impact trading activity in the short term, in the long term, it can help Hong Kong attract more compliant capital inflows and increase another channel for capital to flow freely beyond licensed VATPs. Perhaps in the near future, a safe and compliant OTC market could not only help improve liquidity in the Hong Kong market but also become an important channel connecting the crypto market and the Web3 ecosystem with the real liquidity market.
Under the spotlight of Consensus 2025, Hong Kong has proven itself not only as a policy innovator but also as an ecosystem builder. Regulations can be designed, technologies can iterate, but only a profound respect for market laws is the ultimate weapon to navigate through cycles.
This article is collaboratively reprinted from: OKG Research