Web3 Insights: How Can Hong Kong's Crypto Market Improve Liquidity?
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Web3 Insights: How Can Hong Kong's Crypto Market Improve Liquidity?
Hong Kong may rely on tokenization in the future, but it needs more immediate liquidity solutions now.
Navigating Web3 tides with focused insightsAuthor: Jiang Zhaosheng, Senior Researcher at OKG Research
Since the second half of 2021, the Hang Seng Index has been on a continuous downward trend, losing over 10,000 points cumulatively. The Hong Kong Stock Exchange's average daily trading volume declined from over HK$160 billion in 2021 to around HK$100 billion in 2023. IPO (initial public offering) numbers and fundraising amounts in Hong Kong have also dropped year by year, while foreign investor participation in IPO cornerstone investments fell to single digits in 2023. Insufficient liquidity has become a widely recognized issue in the Hong Kong market over the past three years.
To resolve Hong Kong’s liquidity challenges, institutional reform and expectation recovery are essential first steps—aimed at attracting a return of existing global capital. Measures such as reducing stamp duty rates, optimizing trading mechanisms, expanding market outreach, and implementing GEM reforms reflect the Hong Kong SAR government’s determination. Furthermore, Hong Kong is accelerating financial technology innovation, aiming not only to reshape its stereotype of “finance without tech,” but also to attract new capital and assets through innovation—ultimately improving, or even reshaping, market liquidity. Virtual assets and Web3 are areas where Hong Kong places high hopes for generating incremental liquidity.
However, the virtual asset market itself currently suffers from significant liquidity issues. Despite Bitcoin reaching new price highs in March, trading volumes and turnover rates have remained low. Stablecoin growth continues to slow, on-chain liquidity has gradually decreased, and Bitcoin spot ETFs showed relatively weak performance in June, experiencing net outflows for several consecutive days. Against this backdrop, Hong Kong’s attempt to improve—or even transform—market liquidity via virtual assets has not gone smoothly.
Recently, Professor Chen Chun, an academician of the Chinese Academy of Engineering, stated at Hong Kong’s Legislative Council: “Given Hong Kong’s technological infrastructure and unique advantages, Web3 development should primarily serve the real economy and promote explorations in application innovation.” In my view, using Web3 technology to serve the real economy does not merely mean cost reduction and efficiency improvement through process optimization. Rather, it means leveraging Web3’s unique tokenization systems to uncover and unlock the latent value of existing assets, enabling their free circulation via blockchain technology. At its core, this approach aims to enhance the liquidity of real-world assets through tokenization.
I recognize the long-term value and potential of tokenization. However, much of its appeal as a “trillion-dollar narrative” stems precisely from how distant its full realization remains—leaving ample room for imagination. While Hong Kong may one day rely on tokenization, today it needs more immediate solutions for liquidity.
Currently, the focus of liquidity lies in the over-the-counter (OTC) market. Although trading platforms remain the most critical infrastructure in the crypto market, recent trends indicate that crypto liquidity is increasingly concentrating in OTC markets. According to the latest data from CryptoQuant, the amount of Bitcoin held in OTC market reserves has recently risen significantly: over the past six weeks, more than 103,000 Bitcoins have been added to OTC reserves—an amount worth over $6 billion at current prices. A large portion of this comes from selling pressure by Bitcoin miners, many of whom are forced to sell due to sharply reduced mining profit margins following the Bitcoin halving. Data shows that Bitcoin miners’ OTC sales volume has recently reached a three-month high.
Significant Growth Potential in OTC Markets
It is foreseeable that, amid tight on-exchange liquidity, institutional investors and major holders ("whales") will increasingly favor OTC markets for large-volume, high-frequency transactions to avoid price slippage.
Moreover, whether Hong Kong seeks immediate liquidity gains from the crypto market or aims to generate new forms of liquidity in the future through tokenized assets, it must begin now to build robust and secure products and channels connecting the crypto and traditional financial markets. Hong Kong has already established a licensing regime for Virtual Asset Trading Platforms (VATPs) and completed its transitional period. This demonstrates the Hong Kong SAR government’s willingness to provide a stable and secure trading environment for virtual assets—and potentially many more tokenized assets in the future—under relatively clear regulatory rules.
However, compliant on-exchange trading alone is insufficient. Hong Kong also needs a safer and freer OTC market to absorb and channel liquidity. Fortunately, Hong Kong holds a comparative advantage in the OTC space. According to incomplete statistics from OKG Research, Hong Kong’s crypto OTC market handles annual transaction volumes of up to nearly RMB 10 billion. Thanks to the presence of physical cryptocurrency exchange shops—a uniquely Hong Kong phenomenon—these venues attract not only young global investors but also participants from middle and older age groups.
More importantly, in recent years, Hong Kong’s OTC market has drawn growing attention from users and institutions in international trade and cross-border payments, gradually becoming another key vehicle for pooling global capital into Hong Kong. Indeed, the OTC market—epitomized by these crypto exchange shops—has become a distinctive part of Hong Kong’s crypto culture and regional identity.
Hong Kong should continue to maintain and strengthen its competitiveness in the OTC sector, thereby enhancing its global influence within the virtual asset and Web3 ecosystem. Currently, the Hong Kong SAR government is considering bringing OTC activities under regulatory oversight. While this may temporarily affect trading activity, in the long run it could help attract more compliant capital into Hong Kong and create an additional channel for free capital flow beyond licensed VATPs. Perhaps in the near future, a secure and compliant OTC market will not only improve liquidity in Hong Kong’s financial markets but also serve as a vital bridge connecting the crypto and Web3 ecosystems with real-world liquidity sources.
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