Consensus 2025 Revelation: Policies and Ecological Fission of Hong Kong Web3

Nearly ten thousand participants gathered at the Hong Kong Convention and Exhibition Centre to witness the grand occasion of the global Web3 industry's top summit, Consensus, being held for the first time in Asia. Hong Kong was chosen as the venue for this event not only because of its role as a testing ground for financial innovation but, more importantly, due to its position as a hub for the flow of values between the East and West. From the tokenization of green bonds to the regulatory sandbox for Hong Kong dollar stablecoins, from the RWA ecosystem to decentralized AI, Hong Kong is driving the narrative of Web3 forward with innovative policies, pushing it from a technical experiment towards a deep integration with the real world.

I. Regulatory First: Exploring the Compliance Boundaries of Web3 in an Orderly Manner

If the Hong Kong Web3 ecosystem is compared to a building, a reliable and highly applicable regulatory framework is the foundation. Since the release of the policy declaration at the end of 2022, Hong Kong has been continuously reviewing and improving its regulatory system to promote the autonomous evolution of the virtual asset ecosystem within the boundaries of safety and compliance. By establishing a comprehensive regulatory framework that covers virtual asset exchanges, stablecoin issuers, custodial service providers, and over-the-counter trading activities, Hong Kong has paved the way for value interchange and long-term innovation in the financial market.

These measures have not only enhanced the credibility of Hong Kong's virtual asset market but have also continued to attract capital and enterprises. By the end of 2024, nearly 300 Web3 companies had gathered at Hong Kong's Cyberport, accumulating a total financing scale of over 400 million HKD.

The global Web3 landscape has undergone significant changes in the past two years. With Trump returning to the White House, the regulatory environment for cryptocurrencies in the U.S. has clearly improved, as the high-pressure punitive regulatory model that persisted for many years is fading away. Regions such as Singapore and Dubai are also continuously sending friendly signals towards cryptocurrencies. Against the backdrop of increasingly fierce global Web3 competition, how Hong Kong can seize this wave of innovation has become a key issue.

The Chief Executive Officer of the Hong Kong Securities and Futures Commission, Ashley Alder, stated during her speech at the Consensus conference, "The second trend shaping the future financial landscape is integrating Web3 innovation into the real economy."

Although the market for crypto assets accounts for less than 1% of the global financial system, its rapid expansion and increasing correlation with mainstream financial assets have made its risks impossible to ignore. In the past, while Hong Kong and the United States seemed to be on different paths at many points in time, they were actually pursuing the same goal: to maintain innovative activities while preventing the potential financial risks posed by this new category of assets.

2. Hong Kong Dollar Stablecoin: Hong Kong's "Financial" Ambition

Stablecoins are a hot topic at this year's Consensus conference and have been a key area of focus and investment in Hong Kong over the past two years. Several financial institutions are actively preparing to issue stablecoins pegged to the Hong Kong dollar.

Although it is impossible to determine how much of the cake the Hong Kong dollar stablecoin will ultimately secure in an environment where US dollar stablecoins occupy an absolute market share, 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. The connection channel with fiat currency is currently the most worthwhile scenario to develop in the crypto ecosystem and the easiest to consolidate value, while stablecoins are essential infrastructure for building these channels. At the same time, the next phase of Hong Kong's Web3 development focuses on breaking the barriers between the virtual world and the real world, and stablecoins serve as the core link connecting traditional finance with the crypto world, potentially becoming widely accepted payment tools.

Currently, stablecoins not backed by the US dollar cannot compete with US dollar stablecoins in the short term. However, through mechanism innovation (such as interest-bearing stablecoins) and application innovation (such as RWA), Hong Kong dollar stablecoins are expected to avoid direct competition with US dollar stablecoins, thus attracting 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 Hong Kong dollar. Although there may be potential competition between the digital Hong Kong dollar and the Hong Kong dollar stablecoin in the short term, there is hope for resource sharing and complementary advantages in the future: the utilization rate, scalability, and friendliness of the Hong Kong dollar stablecoin in the virtual asset market will far exceed that of the digital Hong Kong dollar, while the digital Hong Kong dollar will lead in value support and reliability.

III. RWA Tokenization: From Concept to a Trillion Market Split

RWA is undoubtedly the hottest concept at this year's Consensus. The head of digital assets at a major financial institution asserted at the "Institutional Investor Summit": "RWA tokenization is not a trend, but an inevitability." This reveals the general strategic shift of traditional financial giants today.

Hong Kong is actively embracing the wave of RWA tokenization. The 2024 policy address proposed to promote RWA tokenization and the development of a digital currency ecosystem. The Hong Kong Monetary Authority launched the "Digital Bond Financing Scheme" to encourage the capital market to adopt tokenization technology. The Secretary for Financial Services and the Treasury, Christopher Hui, also stated at the Consensus conference that Hong Kong is considering promoting gold tokenization.

At this stage, the initiative of tokenization narratives does not lie with Web3, but rather depends more on Web2 institutions, seeing if they have enough motivation to change the status quo by putting the assets they hold on-chain and tokenizing them. This is not easy for traditional institutions: any new technology attempting to migrate traditional assets/businesses to new domains often struggles to achieve quick success, as the incremental value it creates may not be large enough, while the costs incurred are often quite high. The same applies to RWA. However, as Wall Street in the United States accelerates its layout of the tokenization market, Hong Kong urgently needs more resource-rich and asset-holding institutions to actively participate in tokenization innovation, in order to gain more initiative in the transformation and avoid being quickly outpaced in the competition with the U.S. How to stimulate market vitality remains an important proposition.

In the short term, Hong Kong should focus on the most suitable standardized financial assets for tokenization, and make full use of its geographical and institutional advantages as an international financial, trade, and shipping center. It should pay close attention to tokenization applications in trade and cross-border scenarios, and rapidly expand the scale of Hong Kong's RWA tokenization market.

4. ETF and OTC: The "Light and Dark Clash" of Capital Channels

Another key initiative for the development of Web3 in Hong Kong in 2024 is the launch of virtual asset spot ETFs. From the clear acceptance of related applications at the end of 2023 to the formal listing of six virtual asset spot ETFs approved by the Hong Kong Securities and Futures Commission on the Hong Kong Stock Exchange by the end of April, it took just over a hundred days, demonstrating the "speed" and "efficiency" of Hong Kong's regulatory authorities. The launch of virtual asset spot ETFs has opened up another funding channel for a wide range of investors to lay out their cryptocurrency assets. 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 overall Hong Kong ETF market.

Compared to the United States, the main advantages of Hong Kong's virtual asset spot ETFs lie in supporting physical subscriptions and being the first to launch Ethereum spot ETFs, but these have not resulted in sustained incremental growth. Although the share of physically subscribed ETF units exceeded 50% of the initial issuance scale, the Bitcoin holding community is reluctant to easily release their liquidity due to macro expectations, while the Ethereum spot ETF's lack of support for staking has dampened investor enthusiasm. Although the current yield from Ethereum staking is only around 3%, the additional returns brought about by staking are likely to be an important factor in attracting investors, especially traditional financial investors, and are a key differentiator between Bitcoin and Ethereum.

In addition to the ETF channel, Hong Kong has gradually formed a three-tier funding network of "licensed exchanges - compliant OTC - banks." At this stage, the focus of liquidity is in the off-exchange market. Although trading platforms remain the most important infrastructure in the cryptocurrency market, recent trends indicate that cryptocurrency liquidity is gradually converging towards the OTC (over-the-counter) market. Currently, the Hong Kong OTC market handles nearly tens of billions of dollars in transaction volume annually, and thanks to the regionally distinctive physical product of cryptocurrency exchange shops, it attracts not only young investors from around the world but also appeals to participants in the middle-aged and older age groups. In recent years, the Hong Kong OTC market has also attracted attention from numerous users and institutions in international trade and cross-border payment sectors, becoming another important channel for Hong Kong to gather global funds.

The Hong Kong government is considering bringing OTC under regulatory oversight. Although this may impact trading activity in the short term, in the long run, it can help Hong Kong attract more compliant capital inflows, while also providing another channel for the free movement of funds beyond licensed VATPs. Perhaps in the near future, a safe and compliant OTC market will not only help improve liquidity in the Hong Kong market but also become an important channel connecting the crypto market and Web3 ecosystem to the real liquidity market.