Opportunities and Challenges for Hong Kong to Become a Global Web3 Center

Recently, the Hong Kong Monetary Authority released a document regarding the regulation of activities related to stablecoins. This aligns with Hong Kong's strategy to connect digital assets with the traditional financial ecosystem and is one of its core advantages in becoming a Web3 hub. Hong Kong has made steady progress in establishing a clear and comprehensive regulatory framework, and the regulation of stablecoins is also anticipated.

However, merely having a sound regulatory framework is not enough for Hong Kong to stand out in the global Web3 competition. Compared to potential competitors like Silicon Valley, Dubai, and Singapore, Hong Kong also needs to become a leader in digital infrastructure that supports the creation and trading of digital assets in order to attract top talent in the industry.

Hong Kong was once the birthplace of many well-known cryptocurrency exchanges and still has the most Bitcoin ATMs among Asian cities. However, since 2019, affected by the pandemic and cautious policies, Hong Kong's position in the global cryptocurrency industry has declined. Nevertheless, missing out on the wild boom and bust cycles of the cryptocurrency industry may not be a bad thing. Some exchanges that were founded in Hong Kong and later moved elsewhere ultimately triggered massive financial disasters, dragging down the entire industry.

As the cryptocurrency industry enters a reset mode, Hong Kong has the opportunity to redefine the development direction of the Web3 center. Recent signs indicate that the Chinese government is beginning to view blockchain and digital assets as potential drivers of economic growth. Hong Kong has received support for exploring innovation and a path of global integration. Meanwhile, after the collapse of some large cryptocurrency institutions, the US and Europe are tightening regulations, which may prompt more digital asset-related activities to shift eastward, creating opportunities for Hong Kong to regain influence.

As one of the world's most powerful capital markets, Hong Kong has a comprehensive financial regulatory framework and top financial and technological talent. The digital asset industry in Hong Kong is a unique combination of technology and finance, making it an ideal place to create real-world blockchain applications, particularly in the field of asset tokenization.

The Hong Kong government is committed to creating a favorable environment for public and private sector collaboration. When government agencies, financial institutions, technology giants, and native cryptocurrency builders work together, digital assets have the potential to better integrate into the real economy and create impacts that extend beyond the virtual world.

In addition, Hong Kong can also leverage the technological entrepreneurship resources from mainland China. Chinese internet companies that have created Web2 products comparable to leading Western firms still possess rich expertise in the digital asset and Web3 fields. Chinese Web2 giants listed in Hong Kong have already begun to venture into the digital asset sector, and Hong Kong may be the development incubator they need.

However, Hong Kong also faces challenges on its path to becoming a Web3 hub. Firstly, the existing regulatory framework designed for traditional assets may not be applicable to the rapidly evolving digital assets and cutting-edge technologies. The principle of "same business, same risks, same rules" in Hong Kong's digital asset regulation means that traditional financial regulations also apply to digital assets. This could create a regulatory environment that is more favorable to established institutions, while being detrimental to grassroots innovation. Creating space for bottom-up innovation is an urgent issue that needs to be addressed.

Secondly, Web3 is essentially a technological movement, but Hong Kong does not have the rich technological resources like Shenzhen or Silicon Valley. Therefore, Hong Kong needs to develop differentiated digital asset technology infrastructure.

The security of digital assets is different from that of traditional assets. Their on-chain characteristics mean that one cannot rely solely on closed security systems. Licenses or regular audits cannot fully ensure the safety of customer funds on centralized platforms. Advanced technologies like multi-party computation are needed to give asset owners complete control or co-management over their assets.

In 2023, institutional business may have better development prospects. To reduce the risks of centralized platforms, a large amount of digital assets may be transferred to custody platforms that adopt the latest technological solutions. Additionally, to comply with new regulatory requirements, institutions need solutions that can achieve distributed private key management and fund isolation. Custody, institutional wallets, and digital security are just a few examples of the infrastructure needed for the digital asset ecosystem.

The ups and downs of the cryptocurrency industry over the past few years have provided us with valuable lessons. Hong Kong is in a favorable position to learn from these lessons and establish a Web3 hub with an appropriate regulatory environment and technological infrastructure, effectively managing risks while promoting innovation.