I. The Implication of the US Joint Statement: New Trends in Regulatory Convergence
On September 2nd, the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) issued a joint statement, clearly indicating for the first time that: “Current laws do not prohibit US registered exchanges from listing certain spot crypto asset products.” This statement marks coordinated unity among US regulators and reflects the global trend of convergence between traditional finance and crypto finance regulation. In contrast, Hong Kong’s regulatory framework still lags and must accelerate its pace to keep up with this trend.
II. Re-examining the Principle of “Same Business, Same Risk, Same Rules”
Hong Kong regulators often cite the principle of “same business, same risk, same rules” to handle crypto assets, but this approach is misguided in practice. Although cryptocurrency trading and stock trading are superficially both “trading” businesses, their risks stem from structural differences, not the similarity of business types.
1. Similar Business, Different Structures Lead to Different Risks
Both involve five elements: trading, brokerage, settlement, banking, and users.
But they are worlds apart structurally. The stock market features multi-party checks and balances, while centralized crypto exchanges are often highly integrated, amplifying potential risks.
2. The Check-and-Balance Mechanism of the Five Elements in Hong Kong’s Stock Market
Users deposit funds into banks, which are then transferred to the securities company’s account at a Hong Kong bank. The securities company cannot misappropriate client funds; fund flows follow the “return to source” principle and are strictly reconciled. The securities company holds a seat on the stock exchange and is responsible for placing orders; the exchange matches orders from various parties but cannot engage in proprietary trading; the central clearing company handles clearing between the exchange and securities companies; the securities company is responsible for settling client assets.
Banks can access securities company funds, but the exchange, central clearing company, and securities company itself lack this authority. The exchange ensures fairness, and the Securities and Futures Commission (SFC) oversees overall compliance, forming a closed-loop system of checks and balances.
3. The Five Elements of Centralized Crypto Exchanges
In contrast, crypto exchanges often combine the functions of broker, central clearer, bank, and client manager. Users only need to open an account on the platform to trade. Integrated risks lead to a lack of checks and balances. The exchange handles KYC and AML (handled by banks in the stock market); it can see all orders and can engage in proprietary trading or market manipulation (prohibited in the stock market); it can misappropriate client funds; listing rules are opaque, without sponsors or lawyers gatekeeping. Although there are various improvement measures like third-party custody, without solving ledger transparency, structural risks remain high. Regulating centralized crypto exchanges requires further innovation tailored to reality.
4. Structural Differences Require Differentiated Rules
Although the businesses are similar, the regulatory focus for crypto markets and stock markets is vastly different. The former particularly needs to guard against the risks arising from a lack of checks and balances in its integrated structure.
From an investment perspective, tokens have stages like seed round, angel round, Series A, B, C, and IPO, the difference being that retail investors can participate early. Hong Kong’s current approach is to regulate tokens like stocks, and the tokens it filters are late-stage tokens, similar to IPO stocks, comparable to stocks listed directly on HKEX.
Mechanically applying the “same rules” principle is like “regulating cars with horse-and-carriage era rules” – forcing the car to travel at a horse’s speed might be safe, but misses the point.
III. A Unified Regulatory Framework Based on Transparency
Traditional finance and crypto finance differ significantly, but transparency, as a common underlying logic, can become a principle for future regulation. Regardless of structure, transparency can simplify supervision and regulation. Leveraging technological innovation and institutional design under the principle of transparency to enhance the auditability and openness of various trading activities is a low-cost method and the evolutionary direction of future financial regulation.
With transparency, even angel-round tokens can be regulated.
1. Transparency Applies to Both Traditional and Crypto Finance
The transparent concept of Web3 can be used to reform Web2. The publicization of exchange ledgers is not only a crypto requirement but also the evolutionary direction for all types of exchanges. Under policy guidance, transparent exchanges will replace opaque ones. If centralized exchanges achieve ledger transparency, the regulatory burden will be significantly reduced; although decentralized exchanges (DEX) need improvement in user experience, their on-chain transparency is highly valued. This shows the market welcomes transparent technical design.
Due to transparency, users can track transactions in real-time using on-chain tools, but DEX anonymous transaction transparency is still insufficient. Further improvements introducing a KYC whitelist mechanism could curb bot cheating. Similar Web2 projects mostly use whitelists but lack sufficient transparency, which is precisely the key to Web3 and Web2 integration.
Although privacy needs protection, transparency can track market manipulation and shady dealings. The Hong Kong stock market is already transparent down to the broker level; in the future, this could be extended to individual real-name accounts (with an option for anonymous display). HKEX’s business structure is simple, involving only the trading, making ledger transparency technically highly feasible.
2. Transparent Collaboration between Regulators and the Community
Regulatory operations must be public. The current regulatory consultation mechanism is outdated. Communication with the community and various sectors is needed to align with the development reality of the crypto ecosystem. The community, as a mechanism for consultation and checks and balances, can allow users to supervise regulators, exchanges, banks, and other institutions. Crypto community software products are maturing and could be extended to traditional finance in the future. The practice of crypto communities is essentially a new exploration of production relations; its adoption will reduce regulatory costs and improve policy accuracy.
3. AI Audit Tools Facilitate Ledger Transparency
Crypto transaction logs are naturally transparent, something traditional finance still cannot achieve. AI can be used to monitor ledgers in real-time, creating an immutable record of monitoring. As a plug-in tool, it requires almost no modification of existing systems. Although this technology originated in the crypto industry, it is more suitable for the transformation of traditional finance. Of course, data privacy and security risks need to be balanced.
Since traditional finance currently cannot achieve ledger transparency, this is a good transitional method.
IV. Building a Practical Regulatory System
1. Establish a Unified Cross-Departmental Coordinating Body
Cryptocurrencies possess multiple attributes like securities, currency, and commodities, making a multi-regulator model unsuitable. A unified cross-departmental coordinating body needs to be established, or a lead department designated. This avoids policy missteps leading to brain drain. Both Hong Kong and the US have seen talent and project loss due to poor regulation.
Even this is insufficient. Cryptocurrency is global and advanced, challenging the current international economic order. Cross-border regulatory cooperation is also essential. This issue is subject to the Grandstand effect – if you can’t beat it, you have to embrace it. The problem is that people from the horse-and-carriage era see the car but can’t even open the door.
2. Establish a “Government-Civilian Collaboration, Professionally-Led” Decision-Making Advisory Body
We need people who can build cars in the horse-and-carriage era. This requires establishing an integrated government-civilian advisory mechanism to ensure frontline experts have a voice. Regulation formulation must fully consider the opinions of the advisory body; it is suggested that the official voting power should not exceed 50%.
Selection criteria for civilian members:
1) Having developed globally renowned projects;
2) Theoretical contributions to the industry;
3) Having promoted significant industry development;
4) Personal participation in crypto practice and holding crypto assets worth more than $5 million (basic threshold).
This mechanism injects professionalism and avoids disconnection from reality.
3. Adhere to the Principle of “Market First, Moderate Regulation”
Hong Kong’s market mechanism is traditionally liberal. Faced with innovation, practice should come first. Don’t make decisions for users; exchanges should have the right to list tokens, while simultaneously drawing on the mature systems of stock sponsors, analysts, and brokerages.
Regulation should focus on real-time monitoring of systemic risks and major violations, not pre-emptive intervention. Embrace the concept that “the market is smarter than us” – Allow preliminary experiments.
V. Three Major Strategies to Promote Hong Kong as a Cryptocurrency Hub
This is a systematic project during a window of opportunity. Hong Kong can leverage its strengths in rule of law, the linked exchange rate system, and finance, focusing on three major directions: stablecoins, exchanges, and new asset classes.
1. HKMA Leads the Issuance of the US Dollar Stablecoin USHK
USDT’s fiat reserve is opaque, with a $100,000 redemption threshold and a 0.1% handling fee. The Hong Kong Monetary Authority (HKMA) could issue USHK via the linked exchange rate system: banks deposit USD, the HKMA issues an equivalent amount of stablecoins to the banks. No handling fee, no threshold, and HKMA credit backing – three advantages solving USDT’s pain points. Hong Kong’s three major banks have extensive KYC/AML/CFT experience and operational expertise as HK dollar note-issuing banks. If Mainland Chinese residents’ $50,000 foreign exchange quota is extended to USHK, it could become the preferred choice for overseas settlement, surpassing USDT, and achieving “Hong Kong Dollar” status (as a digital dollar proxy).
Why raise this issue? Because the current issuance method for HKD stablecoins overlooks the fact that HKD itself is effectively a US dollar stablecoin through the linked exchange rate. Although USD, HKD, and RMB are all currencies, their characteristics are vastly different. The issuance method for USD stablecoins is not suitable for HKD stablecoins. For a detailed discussion, please refer to the author’s article <Hong Kong Dollar Stabilized Coin Offering: Essential Differences between Chain Reconstruction and CBDC Based on the Linked Exchange Rate System>.
2. Attract Global Top-Tier Crypto Exuses to Establish Presence in Hong Kong through Policy
The biggest applications in the 15 years of cryptocurrency are stablecoins and exchanges. The two complement each other. Having several of the top ten exchanges establish a presence in Hong Kong would be a major breakthrough. Mastering these two areas will drive traffic and ecosystem aggregation, promoting the tokenization of financial assets.
Diverting existing market share holds great promise globally. Attracting top global exchanges requires providing a clear, safe, and stable policy environment, coupled with a pragmatic attitude of not pursuing historical old issue.
3. Tap into the Dormant Incremental Market
Tokenizing stocks/bonds through RWA (Real World Assets) actually offers limited incremental potential. Because the crypto market is only just over $4 trillion (with 70% of Bitcoin held long-term, roughly $1.4 trillion tradable), the entire cryptocurrency market is equivalent to Nvidia’s $4 trillion valuation. Conversely, traditional exchanges issuing crypto derivatives have low trading thresholds and are growing rapidly. The future trend is more likely that traditional exchanges will absorb cryptocurrency as a sector of traditional finance.
The real new increment is the antiques market. As a traditional strength area for China and Hong Kong, industry estimates suggest the value of antiques could reach hundreds of trillions. Antiques share characteristics most similar to Bitcoin – scarcity and no price ceiling. But the antiques market has never achieved scale. Reasons include:
1) Rampant speculation and counterfeiting, lack of credit throughout the ecosystem. Simultaneously, there are no accredited authentication institutions, and famous auction houses like Christie’s state on their invoices that they do not guarantee the authenticity of antiques, so-called “well order-provenance” ultimately guarantees the auction house’s brand, not the item itself.
2) Distorted pricing of antiques. Antique prices are less ‘real’ than cryptocurrency and stock prices because stocks and cryptocurrencies are parts of a whole that can be traded sufficiently/fractionally. Auction is a whole-item transaction, inevitably prone to “shill bidding,” not a product of sufficient market trading. Cryptocurrency issuance methods could overturn the traditional auction model for antiques, spawning fairer trading methods.
3) Requires joint government-civilian promotion. Authentication methods actually exist now, In particular, the age of various antiques can be determined more accurately. Civilian dating methods are diverse but lack official recognition. If officially recognized one day, existing so-called “well order-provenanced” antiques would face reassessment as “genuine,” and Mainland China’s cultural relic system would also face major adjustments.
Leveraging its strengths in rule of law and certification, Hong Kong can support antique authentication and certification institutions, aiming to establish global authority in antique authentication and insurance, striving to master global discourse power.
Industry insiders conservatively estimate the value of antiques currently in Hong Kong exceeds HKD 500 billion. Utilizing the trading properties of cryptocurrency could correctly price antiques, break free from unscientific auction mechanisms, allowing a full pricing process before auction, turning a niche market into a mass market. Those who overcome difficulties to create new markets will gain the advantage.
Unlocking the value of antiques is not only a new growth point for Hong Kong but also for the Chinese economy.
4. Special Policies to Attract Crypto Talent
Policy 1: Donate HKD 3 million equivalent in Bitcoin/Ethereum (verified holding of 1 Bitcoin for over 1 year), obtain a passport after residing for 3 months annually for 7 years, cumulative 21 months. Expected to attract 150,000 – 250,000 industry elites.
Policy 2: For crypto projects employing foreign talent, stake 1 Bitcoin per person to obtain a work visa; obtain passport after residing full 7 years and paying taxes according to law. Staked tokens are managed for profit by authorities entrusted.
The donation might seem small, but if considered part of Hong Kong’s strategic reserves, its benefits could far exceed the existing HKD 30 million investment migration policy.
The aforementioned three major strategies aim to compete for existing market share, expand incremental space, promote the integration of traditional and crypto finance through policy, and help Hong Kong establish a leading position in the global crypto field.
Such measures must be accompanied by corresponding legal revisions and risk control mechanisms to ensure their legality and robustness.
This article is an abridged and revised version of the author’s previous article <How to Solve the Problems Raised by Changpeng Zhao for Hong Kong>, with policy suggestions added at readers’ request.
