HashKey Livio: Where will Hong Kong go after the licensing dispute?

Source: FT Chinese Network

On June 1, Hong Kong's virtual asset regulation entered a new era. According to the Anti-Money Laundering and Terrorist Financing Ordinance (AMLO), any institution that has not obtained a "Virtual Asset Service Provider" license issued by the Hong Kong government will be prohibited from operating in Hong Kong.

A few days ago, several large global cryptocurrency exchanges that had previously applied for Hong Kong Virtual Asset Trading Platform (VASP) licenses announced the withdrawal of their applications, including OKX, Gate, Huobi, etc., which caused a strong response in the market. At the same time, Hashkey Exchange, one of the two institutions that had previously obtained Hong Kong VASP licenses, announced that it had obtained the AMLO license issued by the Hong Kong Securities and Futures Commission, becoming a full-licensed virtual asset exchange in Hong Kong. In response to this "ice and fire" situation after the regulatory deadline and the development prospects of Hong Kong's virtual asset industry, FT Chinese Network Editor-in-Chief Wang Feng interviewed the company's CEO Weng Xiaoqi (Livio Weng) at Hashkey Exchange's Hong Kong headquarters. The following is the full text of the interview.

FT Chinese Network Editor-in-Chief Wang Feng: Thank you very much, Mr. Weng, for accepting our interview. First of all, I would like to ask you to talk about Hong Kong's "May 31 regulatory deadline". HashKey is a Hong Kong virtual asset full-license unicorn. What impact do you expect the regulatory deadline to have on the market?

Weng Xiaoqi:According to the official disclosure of the Hong Kong Securities and Futures Commission, a total of 28 institutions have applied for exchange licenses. In addition to the two that have officially been licensed, 11 have obtained the qualifications to be licensed (deemed-to-be-licensed).

In 2022, after Hong Kong issued its virtual asset policy declaration, it was highly expected. In the entire virtual asset industry, Oriental Power accounts for at least half of the country. From a global perspective, the top 20 exchanges, except for a few like Coinbase that "collect money by order" in the regional market with compliance barriers (because of the long-arm jurisdiction of the United States and recent regulatory crackdowns, they cannot enter the US market), most of the global exchanges are still closely related to Oriental Power. Many currency circle platforms overflowing from mainland China have chosen to apply for licenses in Hong Kong after seeing that Hong Kong Web3 may have a future. Another force in the application for licenses is the derivative institutions of traditional financial companies in Hong Kong, such as securities and payments. The number of applications is roughly the same.

In terms of the ownership of the licenses to be issued this time, it can be clearly felt that local institutions without historical risk burdens, familiar with Hong Kong regulatory rules, and with traditional financial experience and capabilities have gained more inclinations, which has also caused a certain degree of controversy among the Native Web3 people who have migrated here. I had informal exchanges with the heads of several license-applying institutions over the weekend, and generally reflected a sense of disappointment. Some institutions that chose to go to Hong Kong because of the Hong Kong policy declaration in 2022 may fall into a wait-and-see state or even leave the market.

The root cause behind this situation is that according to market observations and evaluations, the Securities and Futures Commission may not be equipped with enough staff to conduct a comprehensive review of all Native Web3 institutions. Because many institutions have a long history of development, how to avoid similar FTX incidents and ensure that there are no customers in sensitive areas, these issues that the Securities and Futures Commission is concerned about are difficult to verify in a substantive manner. If a hasty choice is made, it may bury risks for the future. If one part is chosen and the other part is abandoned, it is difficult to form a clear standard.

Because risks cannot be seen clearly, risks will be resisted. However, all new tracks and new opportunities have risks. It is unrealistic and undesirable to innovate without risks. This is a very complex game and trade-off between risks and opportunities.

However, from another perspective, no matter what choice the regulator makes for the licensed institutions, it will cause certain controversy:

Choosing all Native Web3 institutions will make local enterprises dissatisfied;

Choosing some Native Web3 institutions will cause doubts from the Native Web3 institutions that failed to be selected;

Choosing all will cause dissatisfaction among the licensed institutions, and will also cause concerns that all licensed institutions are "too many monks and too little porridge";

Choosing none of them will cause everyone to criticize.

Different choices will only cause dissatisfaction and debate among different groups.

On the contrary, I personally have another expectation for the subsequent development of Hong Kong: Hong Kong has at least clearly embraced a development route, which is better than the previous stage of crossing the river by feeling the stones and following the steps step by step and being cautious. Hong Kong regulators finally took a key step from the dilemma of "whether to do it" and "how to do it", changing their thinking and focusing on choosing "who to do it" - letting financial institutions with a trust foundation take the lead and take the development path of cross-circle integration of traditional finance and new tracks. As for whether this decision is correct, time will verify it.

Optimistically, after the risk control level is determined, supervision will enter a new stage. Now, the "steady and prudent period" of "steady and prudent development" has ended in stages and entered the development period. After all, development is the hard truth. If Hong Kong does not develop Web3, the future of the entire city will need more people to find the direction.

Next, Hong Kong is expected to try to break through at a relatively fast speed:

List more mainstream currencies to break the embarrassing situation that retail investors can only invest in BTC and ETH;

Promote the implementation of low-risk derivatives of BTC and ETH, such as low leverage and contracts, for hedging, spot arbitrage and other non-speculative and reasonable trading needs;

Market rumors say that it is possible to launch an Ethereum spot ETF that supports Staking;

Greatly lower the entry threshold for traditional financial companies, accelerate the license upgrade speed of No. 1, 4, and 9 licenses, and allow local financial giants such as securities and banks and mainstream traffic to enter the market faster;

Accelerate the entry of RWA/STO, give play to the advantages of institutions to be licensed, and accelerate the integration of traditional finance and Web3 in assets.

Wang Feng: What is the current situation of the Hashkey user group? How is the regional distribution?

Weng Xiaoqi:Among the licensed exchanges in Hong Kong, we have the largest user scale and market share. Our main user groups are still two parts, one is from local customers in Hong Kong, and the other is overseas Chinese customers around the world.

After "5.31", customers of unlicensed platforms in Hong Kong will be gradually withdrawn, and most of them will enter licensed institutions. Overall, "5.31" will benefit the currently licensed exchanges.

In the first round of application process, the two licensed exchanges paid a lot of costs, first to build a compliant structure, and also invested a lot of manpower and financial resources in materials and processes during the application process. Running out of chaos also gambles on the future and hope. The predecessors planted trees and the descendants enjoyed the shade. The institutions that apply for licenses later have a trace to follow, and the certainty is much higher, but they still need to complete many links to complete the process.

Wang Feng: Many institutions that are applying will complain that the waiting time is too long now.

Weng Xiaoqi: HashKey may have waited longer for the license application that year. We applied from 2019, and received the AIP (approval in principle) in April 2022. We were not officially licensed and completed the upgrade of retail investors until 2023. Whether it is the SFO or the current AMLO license, including the process of business trial operation and the process of formal operation, we also explored and groped with the regulators, and took many detours from 0 to 1. In comparison, in fact, the institutions that applied for licenses later were faster. But we feel the anxiety of whether we can get a license and whether we can realize commercial value.

Essentially, everyone is looking forward to the future of Hong Kong in different dimensions and forms.

Wang Feng: It is said in the market that if all the application costs are included, it will be at the level of tens of millions of dollars?

Weng Xiaoqi: Tens of millions of dollars may not be, but tens of millions of Hong Kong dollars are definitely there. The costs corresponding to the stage of preparing materials for license review and the stage of operation are different. For HashKey, which is already in actual operation, our entire exchange sector has indeed invested tens of millions of US dollars, but it is not expected that there will be so much for platforms that are still in the application stage.

Wang Feng: After May 31, what kind of structure do you expect the market to have next? When do you think the next wave of licenses will be issued?

Weng Xiaoqi:Before May 31, the actual situation in the Hong Kong market was still dominated by unlicensed exchanges, although we have the largest market share among licensed exchanges. Globally, our CoinGecko ranking is stable in the TOP10 (ranked 7th on June 2), but it is not shy to say that the actual scale is still dominated by unlicensed exchanges. However, the more this is the case, the more it means that the market still has potential.

Especially this time, unlicensed institutions are facing a round of liquidation, because unlicensed institutions or those who have not obtained licenses this time, or those who have given up their licenses, must choose to clear Hong Kong customers. Trading will be suspended on June 1, and all customer assets will be cleared on August 31, so from June to August is a clearing period, and correspondingly, licensed exchanges will receive dividends to accept customers. We can see obvious changes from the recent data. The number of activated customers this week is more than 267% year-on-year compared with last week, and the number of newly activated customers has more than doubled.

We have also prepared a real money "safe haven" event for users this time. New users who come to HashKey Exchange for trading can get VIP experience, HSK, BTC and other rewards, which is also full of sincerity.

Currently, the customer capital of HashKey Exchange has exceeded 500 million US dollars and is still growing rapidly. Since the official operation started in August last year, we have completed a total of 440 billion Hong Kong dollars in transactions. We are also the only licensed exchange in Hong Kong that can conduct pending orders, and we have achieved full licenses and full functions.

So although there will be some turbulence in the short term, in the long run it means that Hong Kong has officially entered a stage of full licensing, which is more secure for potential customers who have not yet entered the venue. This round of policy promotion of "531" is also a broad education for the entire market, laying the foundation for the long-term development of Hong Kong Web3.

Currently, 11 companies on the list of deemed-to-be-licensed have not yet obtained formal licenses. Some of them may eventually be eliminated, and the rest will obtain formal licenses. The specific situation still needs to observe the subsequent resolution of the CSRC.

One of the key factors is that throughout history, exchanges often achieve huge growth in bull markets. It is clear that the licensed exchanges can catch up with this bull market, but it is hard to say for the unlicensed ones. There is a certain probability that they will not catch up. The number of licensed institutions in the end must also be matched according to the potential of the Hong Kong market. It is not a good thing to have only one license. After all, in the traditional securities market, Hong Kong has also experienced the chaotic situation of "nine sons competing for the throne". It was eventually merged into the Hong Kong Stock Exchange and gradually standardized the market.

Wang Feng: What is your judgment on this round of cryptocurrency bull market?

Weng Xiaoqi: This round of bull market is a typical institutional bull market. From the perspective of traditional finance, Hong Kong is not a retail market, but an institutional market. The issuance of ETFs in the United States this year has brought a huge influx of new funds into the market. Although the first wave of ETFs in Hong Kong was not as popular as the market expected, there are many internal and external factors, but it is important to sit at the table.

If the market breaks through further in the future, it is also foreseeable that new institutions, including those in Hong Kong and the entire Eastern market, will enter the market on a large scale. We have recently invested a lot of our business energy in popularizing industry knowledge for traditional finance and big families, because a large number of Eastern capitals are intensively studying how to enter the market, how large the scale of entry is, where the potential risks are, and where the prospects are.

From the perspective of the Web3 industry, the entry of Chinese institutions seems to be a beat slower, but compared with their past behavior patterns, it is already very fast. Previously, Hong Kong issued the first Ethereum spot ETF in the world's major financial market, and supported physical subscription and redemption, which can better integrate traditional "old money" with "new money". So from these perspectives, it is much faster than traditional finance. With further breakthroughs in the market in the second half of this year, this acceleration trend will become increasingly significant.

Several major ETF funds in Hong Kong have already entered. Now they have only one foot in. Once the bull market is further established, they may have both feet in, and the volume they bring will be much larger than it is now.

Wang Feng: What is the significance of physical redemption for virtual assets accumulated in the mining industry?

Weng Xiaoqi: Originally, the Web3 industry did not feel popular in the mainstream world, and was more marginal and free. Traditional finance used to think that Bitcoin and Ethereum were too risky and stayed away from them. This time, because of the ETF and the government's policy encouragement, traditional "old money" has begun to change its views, increase the sense of security and reliability, and increase asset allocation.

For mining practitioners, being able to exchange BTC and ETH for ETFs is a benefit to their identity: if they are in Hong Kong, holding these ETFs can be regarded as an investment, which is in line with the investment immigration policy launched by the Hong Kong government, and they can obtain Hong Kong identity. Another is that these ETFs can be sold through the stock market, adding an industry access channel. In addition, in many financial institutions in Hong Kong, if you want to buy some relatively medium-to-high-risk products, you need to prove that you are a PI (professional investor), and holding these ETF assets can also be used to prove your PI identity.

In the past, immigration status and PI status were extremely difficult for Web3 people to solve. Now that there is a channel, Hong Kong will be more friendly to these Web3 practitioners. For the old "OG" and invisible rich people in the currency circle, after the release of ETF, we can observe that they are indeed gradually migrating to Hong Kong.

The development of regional policies can still bring a lot of new space for licensed exchanges like us. Hong Kong entered into full compliance after May 31, which is also an important part of the global regulatory trend, including the implementation of various policies around the world and the implementation of major infrastructure such as ETFs.

First, the regulatory stance of the United States has been clear, and it has begun to punish those institutions that do not follow the rules; mainland China has determined not to engage in the virtual asset industry after September 24, 21, which is also a very clear policy; the other is that Hong Kong has ended the transition period and entered the formal compliance period, representing the third policy route.

Major emerging markets in other parts of the world, such as Dubai, Europe's MiCA (Markets in Crypto-Assets Regulation Act, Europe's cryptocurrency market regulation), and even Bermuda, Nigeria, etc., which were not originally major markets, have all launched their own propositions. For example, Coinbase obtained the fourth license in Bermuda, and HashKey obtained the fifth license.

In the past, the world was only a few major players who set the rules of the game. Now, other countries in the world are gradually entering full compliance. The previous era of "regulatory arbitrage" is gone forever. In the future, everyone will have to operate with a license, obtain a license, abide by the rules, and ensure the safety of customers' assets. This approach is becoming the mainstream in the world. We are now intensively obtaining global licenses and plan to surpass Coinbase in the licensed exchange track in the next five years to become the world's largest licensed exchange cluster.

Wang Feng: The last question is about regulation. Now the world seems to be basically following the regulatory direction of the United States. Do you think Hong Kong will take a different regulatory direction from the United States in the future?

Weng Xiaoqi: In fact, there is already a difference. In fact, Hong Kong's license was implemented earlier than that of the United States. The United States has been using the Commodity Futures Management Regulations for a long time. For example, there are many uncertainties about whether Ethereum is a security or a commodity, and there are regulatory disputes and lawsuits. The recent FIT21 Act (the "21st Century Financial Innovation and Technology Act" passed by the U.S. House of Representatives on May 22) is also a situation in which the U.S. SEC and CFTC compete for regulatory power.

Although Hong Kong's supervision seems to be stricter, it clearly tells you what you can and cannot do. This is called native supervision. The United States has extended the original regulations, which is called extended supervision. The recent accelerated implementation of FIT21 may also be related to pressure from Hong Kong. Including this time, Hong Kong first approved the issuance of Ethereum spot ETFs, which may challenge the regulatory nerves of the United States. The industry originally expected that the United States might delay approval for a few more months, but it was unexpectedly approved in May.

Hong Kong and the United States actually have their own leading places, but the characteristic of this round of bull market is that large American financial institutions have entered the market, further consolidating the United States' position as the world's largest single market and consolidating its pricing power, so its influence is greater.

Hong Kong still has some potential in the future: for example, Hong Kong first launched Ethereum spot ETF, and the United States followed suit, but Hong Kong has a big opportunity to launch Ethereum ETF with staking rights, because the current regulatory attitude of the United States does not support ETF holders staking.

Whether Hong Kong can have staking while ensuring the safety of customer assets may be a good topic. The advantage of staking is that it has safe and native returns, and it will form an emerging species similar to "digital US bonds". If Hong Kong can be the first to land, it is expected to siphon the global ETF market, especially the Ethereum ETF market. In the past, people had to spend money to buy ETFs (subscription fees and transaction costs). If the Ethereum ETF can support staking, there will be returns, which may give birth to a new market that has not yet been formed.

In addition, the Hong Kong government currently hopes to further open RWA/STO to retail investors to accelerate the cross-circle integration of traditional finance and Web3. Because after the bull market reaches its peak, investors in virtual assets will consider allocating some traditional assets, but they do not want the funds to go out of the circle. RWA/STO is a good choice to help the funds in the currency circle stay in the currency circle and invest in the traditional capital market. Such investment will further revitalize the entire traditional financial ecosystem of Hong Kong. Therefore, this group of people is still very important to Hong Kong. The development of Web3 is not just a slogan, but a real benefit, which is imperative.

Others include the Hong Kong dollar stablecoin and the money changer license currently being considered by the Customs, which may further promote the retailization and diversification of Hong Kong's crypto market after implementation.

So, if all these are implemented, we believe that Hong Kong will still be worth looking forward to tomorrow. I firmly believe that the current attitude of the Hong Kong government is to correct the root cause first, and then stimulate industrial development after there is a clear route.

From the current perspective, it seems to be a "darkest moment". But often after experiencing darkness, there will be good times. After all, everything has just begun. We are still optimistic about the future.