Original source: Gyro Finance

Hong Kong is once again in the spotlight.

The last time the spotlight was on the virtual asset spot ETF that caused a media sensation in April, if we look back more than a year ago, the excitement of Hong Kong's first official announcement of the virtual policy declaration and the subsequent carnival of activities are still ringing in our ears. But unfortunately, every time the attention starts with a much-anticipated high opening, it ends with an unsatisfactory low.

On June 1, the new Hong Kong virtual asset regulations have been implemented for a year, and the Hong Kong Securities and Futures Commission has updated the licensing list of virtual asset platforms. With the end of the transition period, platforms that have not obtained licenses will set sail again and leave this Chinese Web3 holy land that was once highly anticipated.

Another surprise is that on the eve of the license announcement, native platforms such as OKX and Huobi, which had entered the market as a group, left in large numbers despite the high sunk costs of their applications. It seems that their strong crypto-native background does not provide any added value in Hong Kong.

Amid the endless discussions, the question arises once again: Can Hong Kong Web3 work?

01

The list of the China Securities Regulatory Commission is released, local institutions gain the upper hand, and native platforms leave

On June 1, the Hong Kong Securities and Futures Commission officially announced the licensing results. The two original licensed platforms No. 1 and No. 7, HashKey Exchange and OSL Exchange, successfully obtained VATP official licenses. HKbitEX, PantherTrade, Accumulus, DFX Labs, Bixin.com, xWhale, YAX, Bullish, Crypto.com, WhaleFin, Matrixport HK and other 11 platforms were "deemed as licensed applicants"; while BGE, HKVAX, VDX, bitV, HKX, bitcoinworld, a total of 6 platforms were not considered as licensed applicants.

It is worth noting that the deemed licensing does not necessarily mean that the license will be issued, but it is indeed one step closer to the licensing. The deemed licensed platform will still need to undergo a series of tests on the CSRC’s policies, procedures, systems and monitoring measures before it can be officially licensed. If problems arise in the process, the CSRC also has the right to withdraw or cancel its compliance license.

As for why it specifically named as deemed licensing, the core reason is that according to the previously issued "Anti-Money Laundering and Terrorist Financing Ordinance", May 31 is the last day of the transition period for applying for platforms. After that, platforms that have not obtained a license must stop operating in Hong Kong and complete the liquidation of Hong Kong customer assets before August 31, otherwise they will be held criminally liable. Platforms deemed as licensed can continue to operate after the transition period ends, and the Hong Kong Securities and Futures Commission will conduct a simultaneous review.

The facts are exactly the same. On June 3, in order to avoid the public's misunderstanding of being considered as a license applicant, the Hong Kong Securities and Futures Commission adjusted the list and merged 11 platforms with platforms that are applying for licenses, collectively known as the "Virtual Asset Trading Platform Applicant List", and once again emphasized that there are only two platforms that have been licensed, urging investors to only buy and sell virtual assets on virtual asset trading platforms licensed by the Securities and Futures Commission. It is worth mentioning that the 6 platforms that were not considered to have obtained licenses have not withdrawn their applications, but they are currently unable to operate in Hong Kong.

Overall, Hong Kong’s considerations for applications for virtual asset platform licenses are quite comprehensive, retaining inclusiveness while emphasizing boundaries. While trying not to hinder the normal operation of the platform, it conducts strict review of licensing, reflecting the professionalism of Hong Kong’s financial center.

Judging from the approved platforms, scale and professionalism were undoubtedly taken into consideration during the approval process, and financial institutions with local advantages have taken the lead in complying with regulations. Among the approved platforms, two are owned by traditional Hong Kong brokerages, three platforms have parent companies or executives from local Hong Kong companies, three are relatively native crypto platforms, and xWhale and Accumulus have advantages in mainland resources.

After the license was issued, the market was full of discussions. In the year of the license application, many well-known crypto-native offshore exchanges such as OKX, Gate and Bybit announced their applications for Hong Kong licenses, but at the end of the license issuance, they announced their withdrawal one after another, which also caused hesitation in the market.

According to Wu, the reason is that the Hong Kong SFC requires all applicants for virtual asset trading platform licenses to sign a letter of commitment, promising that none of its entities can have mainland Chinese users in any region. Obviously, offshore exchanges cannot meet this condition, and OKX tried to form an industry alliance to oppose this requirement but ultimately failed.

This rumor seems to have been confirmed. A Hong Kong regulatory practitioner who did not want to be named mentioned that "it is important for the SFC's application to have no historical baggage, and it cannot deny the gray practices that existed in offshore exchanges before and still exist now."

Hashkey Exchange CEO Weng Xiaoqi also responded in the interview, "The reason for the platform to withdraw the application may be related to customer service in sensitive areas, or it may be because the Hong Kong Securities Regulatory Commission has limited regulatory manpower, so it chose to cooperate with a more familiar traditional financial field platform."

Of course, there is nothing wrong with this move. In any financial center with regulatory transparency in the world, not violating the regulatory regulations of other regions is a natural boundary. In the context of the mainland's explicit prohibition of virtual currency regulation, obtaining a compliance license in Hong Kong must also comply with regional requirements, otherwise it would be suspected of contempt for order. In contrast, the official website of Coinbase mentions inaccessible areas.

From a regulatory perspective, with the completion of the first batch of licenses, Hong Kong's regulation has entered a new stage. The transitional period of rent-seeking without a license has ended, and compliant platforms have officially stood up. The withdrawal of non-licensed institutions will also bring more customer traffic and dividends to compliant platforms. According to Weng Xiaoqi, driven by the new regulations, the number of new APP activations increased by 267% month-on-month last week. According to the latest data, the cumulative transaction volume of HashKey Exchange has exceeded HK$440 billion, and user custody assets have exceeded the US$500 million mark.

Back to the crypto community, the departure of native platforms has dealt a heavy blow to the confidence of native crypto personnel. Most platform applicants have expressed obvious disappointment. On the one hand, this disappointment comes from ineffective waste. According to disclosures, the application cost of the entire compliance process is as high as tens of millions of Hong Kong dollars. On the other hand, it also reflects reality. As it moves further and further away from the mainland, Hong Kong seems to be moving away from the crypto utopia.

02

The limited market is difficult to bypass, liquidity is a hidden concern, but the difference advantage still exists

Whenever we talk about Hong Kong Web3, we can’t avoid mentioning the limited market that is criticized by everyone.

This has aroused strong concern when the Hong Kong virtual asset spot ETF was listed. Due to the explicit prohibition of mainland customers, the trading volume of Hong Kong virtual asset ETF has been questioned. Before the listing, Eric Balchunas, senior analyst of Bloomberg ETF, predicted that it would take two years for the Hong Kong virtual asset ETF market to reach the $1 billion level. However, on the first day of the launch, although the trading volume was still an order of magnitude lower than that of the United States, the total assets on that day reached $292 million.

Hong Kong Bitcoin spot ETF trading volume, source: SOSO Value

As of May 31, the total market value of Hong Kong virtual asset spot ETFs reached US$301 million, and the average daily trading volume since its listing has reached US$5.8 million. In fact, this performance is not bad. In terms of market size, the proportion of virtual asset category transactions in Hong Kong ETFs is almost the same as that in the United States, both at around 0.5-0.6%.

Although Hong Kong's performance was crushed by the United States in many data, it performed quite well compared with spot ETFs in other regions.

On June 4, the Australian Bitcoin spot ETF announced its official listing. According to HODL15Capital monitoring, only 1 Bitcoin flowed into Australia's Monochrome Bitcoin ETF on the first day of trading. In fact, this is not the first Bitcoin ETF in Australia as rumored in the market. It launched a batch of ETFs in 2022, one of which was even closed due to insufficient demand. From the perspective of Europe, since the beginning of this year, Bitcoin ETPs registered in Europe have had a net outflow of US$506 million. Jacobi FTWilshire, the first European Bitcoin spot ETF announced to be listed in Amsterdam last year, had an asset management scale of only US$2.83 million as of May 31.

Performance of Europe’s first Bitcoin spot ETF, source: Jacobi official website

This seems to confirm what an insider mentioned before the ETF was listed: "Hong Kong's market is not in the mainland." In the applicant's statement, Hong Kong's scale market restrictions have long been known, but the reason for the huge cost of entering the market is undoubtedly also a driver of future expectations. "The competition landscape of crypto-native market trading platforms has stabilized, but the combined share of traditional capital in this market is even less than 5%. Traditional capital still has foreseeable prospects. Foreign capital and traditional capital are our main customers." A small platform applicant mentioned.

On the other hand, away from the mainland, the shrinkage of the market is indeed obvious, and Hong Kong's criticized liquidity market has become the main bottleneck for the development of virtual assets. Judging from the trading volume alone, Hong Kong ETFs are only in the millions, which is in sharp contrast to the US daily average of over 100 million US dollars. This huge difference in liquidity is difficult or even impossible to be eliminated, because it is not only a problem of capital, but also a problem of the entire Hong Kong market.

In 2023, the number of companies with zero daily trading volume on the Hong Kong Stock Exchange will increase from more than 400 to more than 700. According to data from the Hong Kong Stock Exchange, the average daily trading volume of the Hong Kong securities market in 2023 will be HK$105 billion, a year-on-year decrease of 16%. This year, with the recovery of the market, coupled with policy stimulus such as stamp duty reduction and exemption, and the lifting of restrictions on Hong Kong Stock Connect, the situation has eased. The 60-day average daily trading volume of the Hong Kong stock market has rebounded from the low of HK$87 billion in the fourth quarter of last year to HK$120 billion. But on June 3, the trading volume of Nvidia alone was US$49.326 billion, equivalent to HK$385.211 billion. One stock has crushed the entire Hong Kong stock market, which is still the lowest level in the past five days.

Nvidia 5-day trading volume, source: Tonghuashun

With limited liquidity, it is urgent to increase the attractiveness of local products to foreign investors in the face of competition from similar products in the United States. Although Hong Kong ETFs have made many innovations and changes, such as considering allowing pledges and physical subscriptions, it is difficult to solve this fundamental challenge. What is more subtle is that due to high compliance costs, the current fees of Hong Kong ETFs are generally higher than those in the United States.

On the other hand, some industry insiders believe that the main problem in Hong Kong is the lack of innovation on the application side. This is indeed an objective fact and a common challenge faced by the Chinese crypto community, but it is difficult to evaluate whether this problem is caused by a lack of soil or by some profit-seeking reasons. It is worth noting that Chinese people are not without excellent innovation. In fact, there are excellent Chinese projects in the fields of public chains, Defi, ZK, data middleware, etc. To give an inappropriate example, before StepN, there was also a similar concept in my country, Fun Step, but what was the final result? Looking at the Western world, after Defi, many fields including public chains have not produced paradigmatic innovations for a long time, and entrepreneurs can only devote themselves to the market of unlimited volume traffic and volume growth. It is difficult to gain legitimacy when talking about Chinese innovation in the current Western-dominated context.

03

With stable policies, compliance and security, Hong Kong is on the road to upgrading its traditional

Hong Kong has its own drawbacks that are difficult to get rid of, but it also has its own unique advantages. As a gathering place for Chinese people, it is not easy to open a loophole in virtual assets. Interestingly, recently, Bybit, the world's third largest offshore exchange, changed its previous cautious attitude and suddenly opened registration and certification for users in mainland China. Although Bybit issued a statement saying that it would expand its service scope to overseas Chinese communities, that is, overseas Chinese living outside China and restricted jurisdictions, some insiders said that it was a move to expand customers due to market obstruction. It is really difficult to comment on this act of pulling teeth from the tiger's mouth, which may be the reason why Bybit withdrew from Hong Kong.

Bybit registration interface adds China, source: X platform

Back to Hong Kong, despite the lack of liquidity, Hong Kong has adhered to the consistency of policies very well. The US has politicized encryption, and changing its policies every day has become a daily routine. The supervision is sometimes tight and sometimes loose, making the entire industry like riding a speeding roller coaster. However, Hong Kong operates in accordance with regulations and systems, relaxes supervision before the gray area, and after establishing regulatory goals, continuously improves the path, forming a regulatory framework with licensing and permitting as the core, and gradually establishing boundaries to the service support end and the product end. If compliance is taken into account, it can be said that Hong Kong is also among the best in the world. For big capital, safety is always more important than efficiency. In terms of safety, Hong Kong has a natural advantage.

Perhaps it is because of this that Hong Kong chose to start from the traditional capital side rather than the native crypto application side, linking the content of Web3 in the context of Web2 to fill this asset gap. Even from the beginning, perhaps Hong Kong did not want to seize the crypto market, but explored the transformation of Web3 asset categories in the traditional field from another dimension. Judging from Hong Kong’s recent actions, RWA, digital Hong Kong dollar, digital RMB, stable currency supervision, etc., all provide relatively realistic theoretical basis.

In her speech, Fung-yee Leung, CEO of the Hong Kong Securities and Futures Commission, mentioned that “the SFC’s support for Hong Kong’s Web3 ecosystem does not mean endorsement of virtual assets as an asset class. It remains to be seen whether the provision of traditional financial services on traditional infrastructure will one day be replaced by smart contracts and distributed ledger technology.”

Judging from the current situation, the performance of Hong Kong Web3 is not satisfactory, but the future may not always be unsatisfactory. After all, there is still a long way to go for the collision between the decentralized market and the traditional institutions.

And the onlookers may need to give Hong Kong more time.