Hong Kong's Fork in the Road for Web3: to Innovation or to Regulation—This Is Not a Question
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Hong Kong's Fork in the Road for Web3: to Innovation or to Regulation—This Is Not a Question
Although Hong Kong has maintained a globally leading position in Web3 regulation since the release of its policy declaration, its practical implementation—such as with cryptocurrency exchanges and the previously passed spot Bitcoin and Ethereum ETFs—has consistently been underwhelming.
Navigating Web3 tides with focused insightsAuthor: Babywhale, Techub News
Over the past weekend, discussions were reignited around Hong Kong's Virtual Asset Trading Platform (VATP) licensing framework.
More than a year ago, the Securities and Futures Commission (SFC) of Hong Kong announced that starting June 1, 2023, cryptocurrency exchanges operating in Hong Kong would have one year to apply for regulatory licenses. Any platform still unlicensed after this period would no longer be allowed to operate within the region. In the following months, major Web3 players such as OKX, Huobi, Matrixport, as well as traditional financial institutions like Victory Securities, joined the application race.
Time flies. Today, some applicants once considered "shoo-ins" have voluntarily withdrawn their applications, while newer entrants remain. Amid growing skepticism and speculation, Hong Kong continues to position itself as a global leader in Web3 regulation—yet tangible progress on exchange licensing and recently approved spot Bitcoin and Ethereum ETFs remains underwhelming.
We are left to wonder: What has happened to Hong Kong—the once-promising “Web3 capital”?
The Trolley Problem of Exchange Regulation
In 1967, philosopher Philippa Foot introduced a famous ethical thought experiment: A runaway trolley is heading toward five people tied up on the tracks. You can pull a lever to divert it onto another track where it will kill only one person. Do you pull the lever?
Put simply: sacrifice one or sacrifice five? In my view, Hong Kong’s regulators now face a similar dilemma.
Last week, Wu Blockchain exclusively revealed the reasons several prominent exchanges withdrew their Hong Kong license applications. The core issue: Hong Kong regulators require applicants to guarantee that their existing offshore platforms do not serve mainland Chinese users. However, despite publicly claiming otherwise, these exchanges cannot actually ensure compliance with this requirement. Initially, explanations such as “high costs,” “intense competition,” and “limited market size” circulated—but these flimsy justifications fail to convince: didn’t they conduct due diligence before applying?
In fact, an anonymous source close to Hong Kong regulators told Techub News that the SFC will not easily grant licenses to exchanges carrying “original sin.” While Hong Kong supports Web3 development, it refuses to act as a vehicle for legitimizing past misconduct—an insight consistent with what Wu Blockchain uncovered.
For the SFC, the dilemma lies here: allowing so-called “tainted” exchanges to go legitimate may seem unfair to early retail victims; yet a blanket ban risks hindering the entry of industry giants into Hong Kong.
Right or wrong, light or heavy—the real world has already revealed the regulator’s choice.
The logic behind this stance isn't hard to grasp: Mainland China officially bans cryptocurrency exchanges, which means offshore platforms should not serve mainland users and must actively purge them. If an exchange cannot guarantee its platform is free of non-compliant users, how can it claim to operate legally in Hong Kong? This isn’t an arbitrary rule—it’s a basic prerequisite.
Early exchanges inevitably sacrificed some innocent users during their unregulated growth. We acknowledge that capital accumulation is inherently brutal, and survival of the fittest remains an inescapable law—even in peaceful societies. But objective laws don’t excuse wrongdoing forever. Even Binance admits its early missteps; history’s boomerang always returns, sooner or later—though the cost varies.
Hong Kong’s regulators have shown resolve akin to cutting off a limb to save the body. Such decisions inevitably incur losses—after all, leading exchanges wield undeniable influence. Yet choosing instead to empower new players reflects remarkable courage.
On the other hand, even during the last bull market filled with major exchanges, FTX emerged as a disruptor. In this cycle dominated by Solana, Backpack—a Solana-native exchange—has forged its own path. While legacy exchanges boast maturity and technical strength, emerging ones often bring greater innovation and vitality.
HashKey Exchange told Techub News that since launch, it has processed over HK$440 billion in trading volume with more than 100,000 registered users. Looking ahead, HashKey aims to play a key role in RWA, STO, and OTC services. Judging solely by listed tokens, HashKey’s trading volume already surpasses many tier-two and tier-three offshore exchanges—supporting my argument that emerging platforms need not lag behind established ones. Thus, there’s no need to lower standards.
The Necessity and Liquidity Challenges of ETFs
Having discussed Hong Kong’s approach to exchange regulation, let’s turn to one of its most significant Web3 developments over the past year: spot Bitcoin and Ethereum ETFs.
In principle, launching spot crypto ETFs in Hong Kong is a positive step, offering funds safer and more convenient exposure to digital assets. However, I believe Hong Kong moved too quickly here, overlooking critical considerations.
First, Hong Kong and the institutions behind these ETFs must confront reality rather than resorting to illogical excuses. For instance, both trading volumes and fund sizes of Hong Kong’s spot ETFs significantly trail those of their U.S. counterparts at similar stages. Jupiter Zheng, partner at HashKey Capital’s secondary fund, argues that while absolute figures differ, the proportion of crypto ETFs within each market is comparable: $250 million in Bitcoin ETFs represents 0.5% of Hong Kong’s ETF market, versus $57.3 billion accounting for 0.67% in the U.S.
But consider this: Hong Kong actively promotes Web3, whereas the U.S. frequently cracks down on the sector. Hong Kong’s crypto ETFs launched smoothly with in-kind subscription options, while U.S. Bitcoin ETFs faced years of delays, initial rejections, and prohibitions on in-kind creations—only gaining approval after a decade-long battle. Moreover, Hong Kong leads in institutional product development, offers the highest insurance coverage for crypto holdings, and provides diverse arbitrage opportunities. Given these overwhelming advantages, it’s unacceptable that Hong Kong’s Bitcoin ETFs show negligible market share—and even experience net outflows compared to their launch day.
Industry insiders keep saying “it’ll get better,” but why haven’t we seen even baseline performance given such strong fundamentals—let alone results exceeding expectations?
First, U.S. spot Bitcoin ETFs opened doors for institutions barred from directly holding Bitcoin (despite Coinbase being publicly traded, the SEC has never recognized any crypto exchange as fully compliant). These ETFs also offer ultra-low fees. Second, American institutions and retail investors possess among the highest levels of crypto awareness globally. By contrast, Hong Kong already hosts fully compliant crypto exchanges—HashKey Exchange and OSL. So if funds are permitted to invest in crypto, why would they choose ETFs when they can trade directly on regulated exchanges—with no management fees and equivalent security?
Clearly, Hong Kong hasn’t fully answered the question: Why launch crypto spot ETFs at all?
That said, I don’t argue against ETFs entirely. Rather, Hong Kong’s Bitcoin and Ethereum spot ETFs primarily serve as gateways for foreign capital—something compliant exchanges cannot provide. Instead of making weak excuses, stakeholders should acknowledge current shortcomings and focus on attracting more international capital to Hong Kong’s crypto ETFs rather than letting them flock to U.S. equivalents.
Another critical factor is Hong Kong’s overall market liquidity, which continues to constrain financial asset activity. Without delving into root causes, it’s important to note that cryptocurrencies are highly liquidity-dependent risky assets. In early-stage projects, fundamentals often matter less than hype. As for Bitcoin and Ethereum, their prices correlate closely with U.S. dollar liquidity. On the first day of U.S. spot Bitcoin ETFs, although total assets under management were modest, secondary market trading volume surged past $1 billion. In a deep and liquid market, even small capital inflows can sustain the liquidity of new financial instruments.
By comparison, while Hong Kong’s crypto ETFs may barely meet expectations in terms of assets, their trading volumes are nothing short of dismal. For investors, insufficient secondary market liquidity complicates exits and renders arbitrage impossible. Therefore, boosting overall market liquidity—or at least enhancing liquidity specifically within Hong Kong’s crypto markets—remains a top priority.
Innovation Shouldn’t Be Limited to Infrastructure
Currently, Hong Kong confines Web3 innovation to infrastructure (exchange-related) and integration with traditional finance. Perhaps due to limited understanding or preparedness regarding native Web3 applications, Hong Kong lacks effective leverage points to drive application-level innovation.
From DeFi onward, most cutting-edge Web3 concepts and sectors originate in Western countries. Aside from Terra (now defunct), Asia has produced virtually no large-scale, ecosystem-defining Web3 projects. While we lead in exchanges, asset management, and hardware wallets, we’ve contributed almost zero innovation in real-world applications.
Merely seeking innovation within regulated areas like exchanges or STOs falls far short. To foster a thriving Web3 market, Hong Kong must support pioneering projects at the forefront of the industry. Take trending spaces like the Bitcoin ecosystem or Ethereum restaking—Hong Kong could harness local resources to identify and nurture a few projects capable of becoming category leaders. Once exceptional projects emerge from Hong Kong, they will naturally attract talent, capital, and supporting ecosystems.
As a financial hub, Hong Kong dominates across Asia but still trails the U.S. Accordingly, gradual追赶 in financial and trading sectors makes sense—but these shouldn’t be the primary focus of investment and policy today. Instead, directing subsidies and talent programs toward promising Web3-native startups, or doubling down on niches where Asia holds early advantages—such as RWA tokenization or the Bitcoin ecosystem—could enable Hong Kong to leapfrog ahead.
“True Innovation Cannot Be Regulated”
The pace of Web3 development exceeds most people’s expectations—literally evolving day by day. Facing this novel landscape, I believe Hong Kong prepared thoroughly, yet still underestimated the industry’s uniqueness. That said, I deeply respect the SFC’s firm stance on exchange regulation. However, focusing regulation solely on mature sectors while overlooking the innovative power and ecosystem-building potential of native Web3 fields remains, based on public actions thus far, the most critical blind spot.
To innovate or to regulate? This was never the real question. Current regulations do not truly “restrict” innovation because they haven’t even touched it—they merely formalize previously unregulated behaviors. True innovation cannot be preemptively regulated. Just as no one in 2008 could have foreseen how to regulate a decentralized asset like Bitcoin, genuine breakthroughs in Web3 will always emerge unpredictably from the minds of a few visionaries. Hence, for mature domains—exchanges, asset tokenization, crypto ETFs—strict oversight is justified. But true innovation? That thrives beyond regulation. All we need is to support promising projects and guard against known structural risks.
The path forward lies in genuinely understanding the industry—identifying the most promising native Web3 concepts, exploring how RWA tokenization or DePIN can empower real industries with government support, and mobilizing resources and talent to cultivate high-quality Web3 projects born, raised, and matured in Hong Kong. Only then might we overcome the challenges currently facing every aspect of this journey.
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