Consensus 2025: Policy and Ecological Transformation of Web3 in Hong Kong

The Hong Kong Convention and Exhibition Centre welcomed nearly ten thousand participants, marking the first time the world's top Web3 summit, Consensus, is held in Asia. Hong Kong, as a testing ground for financial innovation and a hub for the flow of values between East and West, has become the prime choice for this grand event. From the tokenization of green bonds to the regulatory sandbox for Hong Kong dollar stablecoins, and from the ecosystem of tokenized physical assets to decentralized artificial intelligence, Hong Kong is driving forward the integration of Web3 concepts with the real world through innovative policies.

I. Regulatory First: Exploring the Compliance Boundaries of Web3

The foundation of the Web3 ecosystem in Hong Kong lies in a reliable and applicable regulatory framework. Since the release of the policy declaration at the end of 2022, Hong Kong has continuously improved its regulatory system to promote the autonomous development of the virtual asset ecosystem under the premise of safety and compliance. By establishing a comprehensive regulatory framework covering virtual asset exchanges, stablecoin issuers, custodial service providers, and over-the-counter trading activities, Hong Kong has laid the groundwork for value interconnectivity and long-term innovation in financial markets.

These measures have not only enhanced the credibility of Hong Kong's virtual asset market but have also continuously attracted capital and enterprise inflow. By the end of 2024, nearly 300 Web3 companies had gathered in Hong Kong's Cyberport, with a total financing scale exceeding 400 million HKD.

However, the global Web3 landscape has undergone significant changes over the past two years. The cryptocurrency regulatory environment in the United States has obviously improved, and regions such as Singapore and Dubai continue to send crypto-friendly signals. In the face of increasingly fierce global Web3 competition, how can Hong Kong seize this wave of innovation? Hong Kong's development of Web3 and virtual assets should not only focus on concepts but also emphasize practical applications: The Hong Kong government is concerned with technological innovation and application innovation that can have a substantial impact on the economy and society.

Although the market share of cryptocurrency assets in the global financial system is less than 1%, their rapid expansion and increasing correlation with mainstream financial assets have made their risks impossible to ignore. The approaches of Hong Kong and the United States at many points in time may seem different, but their goals are the same: to prevent the potential financial risks brought by this new category of assets while maintaining innovative activities.

2. Hong Kong Dollar Stablecoin: Hong Kong's Financial Ambitions

Stablecoins are a hot topic at this year's Consensus conference and a key area of focus for Hong Kong over the past two years. Several financial institutions are planning to apply for licenses under the new regulatory framework to issue stablecoins pegged to the Hong Kong dollar.

Although it is impossible to determine what share the Hong Kong dollar stablecoin will ultimately hold in the current US dollar-dominated market, developing a Hong Kong dollar stablecoin is an inevitable choice for Hong Kong to seize the initiative in Web3 development and capture future financial opportunities. Stablecoins are the infrastructure for building a connection between fiat currencies and cryptocurrencies, and they are also the core link connecting traditional finance with the crypto world, expected to become widely accepted payment tools.

At this stage, non-US dollar-backed stablecoins are unlikely to compete with US dollar stablecoins in the short term. However, through mechanism innovation (such as yield-bearing stablecoins) and application innovation (such as tokenization of physical assets), Hong Kong dollar stablecoins are expected to avoid direct competition with US dollar stablecoins and attract a more diverse range of institutions and users to participate.

It is important to note that the Hong Kong dollar stablecoin is different from the digital HKD. Although there may be potential competition between the two in the short term, there is hope for resource sharing and complementary advantages in the future: the application scope and scalability of the Hong Kong dollar stablecoin in the virtual asset market will far exceed that of the digital HKD, while the digital HKD has advantages in value support and reliability.

3. Tokenization of Physical Assets: From Concept to Leap into a Trillion-Dollar Market

The tokenization of physical assets is undoubtedly the hottest topic at this year's Consensus. Traditional financial giants generally believe that the tokenization of physical assets is not only a trend but also inevitable.

Hong Kong is actively embracing the wave of tokenization of physical assets. The 2024 Policy Address proposes to promote the tokenization of physical assets and the construction of a digital currency ecosystem. The Hong Kong Monetary Authority has launched the "Digital Bond Financing Scheme" to encourage the capital market to adopt tokenization technology. Relevant departments of the Hong Kong SAR government have also stated that they are considering promoting gold tokenization.

At this stage, the dominance of tokenization is mainly in the hands of traditional institutions. The key is whether they have enough motivation to change the status quo and put their assets on-chain and tokenize them. This is not an easy task for traditional institutions, as the incremental value brought by the application of new technologies may be limited, but the costs incurred are often very high. As Wall Street in the United States accelerates its layout in the tokenization market, Hong Kong needs more resourceful and asset-rich institutions to actively participate in innovation to take a proactive position in the transformation.

Hong Kong should focus on the most suitable standardized financial assets for tokenization in the short term, and fully leverage its geographical and institutional advantages as an international financial, trade, and shipping center. It should pay special attention to tokenization applications in trade and cross-border related scenarios, and quickly expand the market size of physical asset tokenization in Hong Kong.

4. ETF and Over-the-Counter Trading: The Dual Evolution of Funding Channels

Another important initiative for the development of Web3 in Hong Kong in 2024 is the launch of virtual asset spot ETFs. From the clear acceptance of applications at the end of 2023 to the formal approval of 6 virtual asset spot ETFs for listing on the Hong Kong Stock Exchange by the end of April 2024, Hong Kong's regulatory authorities have demonstrated efficient execution. By the end of 2024, the total assets under management of Hong Kong's Bitcoin spot ETFs have exceeded 3 billion HKD, accounting for 0.66% of the total ETF market in Hong Kong.

The main advantages of the Hong Kong virtual asset spot ETF are its support for physical subscriptions and being the first to launch an Ethereum spot ETF, but these have not led to sustained increments. Although the share of physically subscribed ETF units accounted for more than 50% of the initial issuance scale, Bitcoin holders are reluctant to easily release their liquidity due to macro expectations. Additionally, the lack of staking support for the Ethereum spot ETF has dampened investor enthusiasm.

In addition to ETFs, Hong Kong has gradually formed a three-tier funding network of "licensed exchanges - compliant over-the-counter trading - banks." Currently, the over-the-counter trading market in Hong Kong processes nearly ten billion US dollars in trading volume each year. At the same time, benefiting from the regionally distinctive physical service of cryptocurrency exchange shops, it attracts investors of all ages from around the world. In recent years, the Hong Kong over-the-counter trading market has also drawn attention from numerous users and institutions in the fields of international trade and cross-border payment, becoming another important channel for Hong Kong to gather global funds.

Hong Kong is considering bringing over-the-counter trading under regulatory oversight. Although this may affect trading activity in the short term, it will help attract more compliant capital in the long run, while also providing another channel for the free flow of funds outside of licensed virtual asset trading platforms. In the future, a safe and compliant over-the-counter trading market may not only improve the liquidity of the Hong Kong market but could also become an important channel connecting the crypto market and the Web3 ecosystem with the real economy.