Financial Secretary Paul Chan Mo-po was reportedly to believe that the time is ripe for Hong Kong to invest in the Web3 digital economy despite recent volatility, as competent market players who survived a “burst bubble” can focus on innovation and make significant strides. Hong Kong was optimistic even after recent fluctuations in virtual-asset markets and the collapse of some online trading platforms.

The potential of Web3 lies in its decentralization, which enables peer-to-peer transactions. It’s the decentralized internet — built on distributed technologies such as blockchain and decentralized autonomous organizations — that offers users greater control over data that once were stored in the servers owned by individuals or corporations. It’s considered to be the third major evolution of the internet, after the World Wide Web (Web1) and the user-generated web (Web2, or social media).

However, the virtual-asset market in Hong Kong has been unstable and volatile. FTX Trading collapsed in November, sending cryptocurrency values plummeting and causing cascading problems throughout the industry. As people cast doubts on the future of Web3, the Hong Kong Special Administrative Region government believes it is “the best time” to promote its development.

From the eye-catching outdoor advertising wrapping the city’s busiest subway stations to the building housing the Hong Kong Digital Asset Exchange (HKD.com) in the most prominent location in the central business district, Hong Kong is bent on getting in on the ground floor to harness the virtual transactions and claim the market of cryptocurrencies and digital assets. Earlier in February, HKD.com, Hong Kong’s first iconic crypto exchange, announced plans to kick-start the license acquisition and planned to open premium branches across Southeast Asia and the Middle East.

According to the HKSAR government, the next stage of development would be to focus on developing blockchain technology and set up a regulatory framework. This week, the Hong Kong Monetary Authority (HKMA) has completed public consultation on a stablecoin launch, and it intends to roll out a regulatory frame for the stablecoins this year. The first half of 2023 witnessed a surge in the number of fintech companies, with more than 800 companies offering fintech services ranging from virtual banking to crypto transactions. The success of offering HK$800 million ($102 million) worth of tokenized green bonds was reported as historic — the first to be launched by a government in the world.

Now that Hong Kong has fully reopened to the world and maintains its status as one of the world’s most important financial centers with the aim of strengthening its position, it seems to be the perfect time for Hong Kong to promote its role as a Web3/virtual-assets hub. The investment will definitely pay off, as long as the proper regulations and protections are put in place

By establishing a licensing system for virtual asset service providers, the city’s authorities will ensure appropriate supervision and minimize risk in the innovation and development of Web3.

The servers, systems and networks that run applications and store data will, in theory, be owned by the users themselves, who will have a say in what rules and regulations are in place, and how they can be used. The city’s pivot toward a friendlier regulatory regime for cryptocurrencies shows that it is ready to become an influential virtual asset center/crypto hub. Hong Kong is exceptionally applaudable in approaching virtual assets. It’s revealed that the city will allow exchanges and other intermediaries to sell assets directly to retail investors. This change comes four years after the city limited exchanges to serving only those with portfolios of HK$8 million or more, who are considered as professional investors, thus excluding retail investors.

The Financial Services and the Treasury Bureau, in its Policy Statement on the Development of Virtual Assets in Hong Kong, recognizes the potential of distributed ledger technology (DLT) and Web3 to become the future of finance and commerce, saying that with proper regulation, they are expected to enhance efficiency and transparency, which in turn will reduce or eliminate existing friction in clearing, settlement and payments. Hong Kong shows signs of a vibrant virtual-assets ecosystem, as demonstrated by non-fungible token (NFT) issuances in our market, the presence of metaverse developers, and the use of DLT in trade, finance, etc. Further opportunities can be realized as we continue to cast our sight on more use cases, such as trading art and collectibles, tokenization of vintage goods, or in the case of financial innovations, tokenization of a wide spectrum of products such as debt securities.

This approach is also consistent with the HKMA’s “Fintech 2025” strategy, which was unveiled in 2021 and aimed to encourage the financial sector to adopt fintech comprehensively by 2025, and in the words of HKMA chief Eddie Yue Wai-man, “promote the provision of fair and efficient financial services” for the benefit of Hong Kong residents and its economy.

In addition, “Fintech 2025” is aligned with the national 14th Five-Year Plan (2021-25) and the Long-Range Objectives through the Year 2035, which recognized Hong Kong’s economic potential at the national level.

However, the Web3 industry needs to be properly regulated, since the right regulations and effective governance protect investors, prevent fraudulent activities within the ecosystem, and provide clear guidance to allow companies to innovate in the crypto economy. I also emphasized the need for an internationally coordinated approach, given that governments, central banks and other financial regulators are limited to the specific territory of their jurisdiction, but the digital space is global; therefore, a coordinated approach is needed.

To sum up, Hong Kong, as we can see from the FSTB announcement made during the Hong Kong FinTech Week and also from Chan’s recent remarks, is willing to embrace the benefits offered by the Web3 industry, thus becoming a Web3 and digital-assets hub. Now that Hong Kong has fully reopened to the world and maintains its status as one of the world’s most important financial centers with the aim of strengthening its position, it seems to be the perfect time for Hong Kong to promote its role as a Web3/virtual-assets hub. The investment will definitely pay off, as long as the proper regulations and protections are put in place.

The author is a fintech adviser, a researcher, and a former business analyst for a Hong Kong publicly listed company.

The views do not necessarily reflect those of China Daily.