Authors: Zhu Weisha, Zhang Feng

I. Pain Points Emerge: Hong Kong's Lagging Under the Trend of Global Regulatory Integration

Recently, the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) issued a joint statement, clearly stating for the first time: "Current laws do not prohibit U.S. registered exchanges from listing certain crypto asset spot products." This statement not only marks a sign of coordination and unity among U.S. regulatory agencies but also conveys a global signal that traditional finance and crypto finance are moving towards regulatory integration. In contrast, although Hong Kong is an international financial center, its response to crypto asset regulation remains slow, and its framework development has not kept pace with innovation. If timely adjustments are not made, Hong Kong risks being marginalized in the new round of financial competition.

II. Principle Examination: Misconceptions of "Same Business, Same Risk, Same Rules"

Hong Kong regulatory agencies often cite the principle of "same business, same risk, same rules" when dealing with crypto assets. This principle appears logically consistent on the surface but reveals serious shortcomings in practice. While cryptocurrency trading and traditional stock trading both fall under the category of "trading" businesses, their risk fundamentally stems from structural differences rather than similarities in business types. Mechanically applying the same set of rules not only fails to control real risks but may also stifle innovation and distort the market.

1. Similar Business but Different Structures, Completely Different Sources of Risk

The stock market and crypto exchanges do share formal similarities in the five basic elements of transaction facilitation, brokerage, settlement, banking services, and user management, but their structures and operational mechanisms are fundamentally different. Traditional stock markets adopt a multi-tiered, multi-institutional checks and balances model, while typical centralized exchanges (CEX) exhibit highly integrated characteristics, almost encompassing all functions. This structural difference directly leads to stark contrasts in credit risk, operational risk, liquidity risk, and moral hazard between the two types of markets.

2. Analysis of the Checks and Balances Mechanism in the Hong Kong Stock Market

In the Hong Kong stock system, user funds are deposited into banks and then transferred to the securities company's dedicated account at the bank. Securities companies cannot directly use client assets, and fund flows must strictly adhere to the "return along the original path" and reconciliation mechanisms. Securities companies are responsible for order placement, while exchanges only facilitate transactions without engaging in proprietary trading. The Central Clearing and Settlement System (CCASS) independently executes clearing, and banks hold the ultimate authority over fund allocation. The Securities and Futures Commission (SFC) serves as the highest regulatory authority, implementing comprehensive compliance supervision. This closed-loop checks and balances system effectively isolates risks and ensures market stability.

3. Integrated Risks of Crypto Exchanges

In contrast, users of crypto exchanges typically only need to open a single account on the platform to complete all operations. Exchanges simultaneously undertake brokerage, settlement, custody, and even market-making functions, lacking effective internal and external checks and balances. Specifically:

• KYC and anti-money laundering are handled by the exchange itself (traditionally executed by banks);
• Exchanges can see all orders and can engage in proprietary trading or market manipulation (which is explicitly prohibited in stock markets);
• Client assets are mixed with operational assets, significantly increasing the risk of misappropriation;
• The listing mechanism lacks transparency, with no sponsors or lawyers as third-party oversight.

Although the industry has introduced various risk control measures such as third-party custody and insurance, as long as the accounting mechanism remains opaque and checks and balances are not established, it is difficult to eliminate structural risks.

4. "Same Rules" Does Not Equal "Equal Safety"

The developmental stage of crypto assets is also different from that of traditional securities. Token financing often encompasses various stages from seed rounds, angel rounds to IPOs, and retail investors can participate very early on. Current regulatory practices in Hong Kong tend to treat tokens as if they are stocks at the IPO stage, which, while having some rationality, overlooks the investment attributes and risk characteristics of earlier-stage tokens.

Rigidly enforcing "same rules" is akin to "regulating cars by horse-drawn carriage rules"; it may appear orderly on the surface but actually restricts development and obscures real risks. Crypto asset regulation should be based on the substance of the business and risk structure, implementing differentiated and refined rules.

III. Exploring Solutions: A New Regulatory Framework Centered on Transparency

Although traditional finance and crypto finance exhibit significant differences, "transparency" can serve as a common foundational principle to support the regulatory framework of the integration era. Transparency should not only apply to crypto systems but also become a fundamental requirement for all financial transactions. Leveraging technological innovations—such as on-chain ledgers and AI auditing tools—to enhance the verifiability and openness of data is an effective path to achieving low-cost, high-efficiency regulation.

1. Transparency: Bridging the Regulatory Underpinnings of Traditional and Crypto

The transparency concept of Web3 is enlightening for traditional trading venues. If exchanges can be encouraged to achieve public ledgers, it would greatly reduce regulatory complexity and costs. If centralized crypto exchanges can achieve on-chain verifiable asset transparency, their trust bottleneck will be resolved; decentralized exchanges (DEX) may still have shortcomings in user experience but are widely trusted due to their inherent on-chain transparency. This shows that the market genuinely recognizes the openness brought by technology.

It should be noted that transparency does not equate to complete anonymity. DEX can address the shortcomings of anonymous trading by introducing KYC whitelist mechanisms to curb false trading and bot manipulation. Similarly, traditional finance can absorb the advantages of on-chain transparency to enhance the credibility of the existing system. For example, the Hong Kong Stock Exchange has already achieved transparency at the brokerage level and may explore user account-level transparency in the future (supporting anonymous display) to further enhance market integrity.

2. Building Transparent Collaboration Between Regulation and Community

Existing regulatory consultation mechanisms are often limited to traditional channels, making it difficult to match the development speed and cultural characteristics of the crypto industry. A "regulation-community-market" three-party transparent interaction mechanism should be established, utilizing mature community platforms (such as Discord, Telegram, etc.) to conduct public reviews, policy hearings, and compliance supervision. Community power can effectively supplement official regulation as a checks and balances mechanism while enhancing policy responsiveness and accuracy.

3. AI Auditing: Technological Support for Achieving Ledger Transparency

The transactional ledgers in the crypto field possess inherent auditability, while traditional financial accounts still rely on post-reporting and sampling checks. Utilizing AI tools for real-time ledger monitoring can automatically generate tamper-proof supervisory records, embedded as "plugins" into existing systems without affecting normal operations. Although these tools originated in the crypto industry, they also hold significant value for traditional institutions transitioning to transparent operations. Of course, privacy protection mechanisms must be properly designed to prevent data misuse.

IV. Building a Practical and Forward-looking Regulatory System

1. Establishing a Unified Cross-departmental Regulatory Coordination Agency

Crypto assets possess multiple attributes, including securities, commodities, and currencies, and fragmented regulation can lead to overlaps or vacuums. Hong Kong should establish a high-level cross-departmental coordination agency or clearly designate a leading regulatory department to coordinate policy formulation and enforcement actions, avoiding talent and project outflows due to regulatory hesitation.

Furthermore, given the global and advanced nature of crypto finance, Hong Kong should actively participate in and even lead cross-border regulatory dialogue and cooperation, striving for a voice in the formulation of international rules.

2. Establishing a "Professionally Led, Government-Community Collaborative" Decision-making Mechanism

Regulators must truly understand the industry. It is recommended to establish a consulting committee composed of senior practitioners, technical experts, and scholars, with members meeting at least one of the following criteria:

• Have led globally recognized crypto projects;
• Made outstanding contributions to industry theory or standards;
• Have promoted significant milestone events in the industry;
• Have continuously participated in crypto practice and hold no less than $5 million in crypto assets.

This committee should have substantial decision-making power in policy formulation, with the official representatives' voting proportion not exceeding 50%, ensuring that policies are both professional and practical.

3. Implementing the "Market First, Moderate Regulation" Philosophy

Hong Kong is known for its market flexibility and loose regulations. In the face of crypto innovation, regulation should remain humble, allowing for "trial and error," focusing on systemic risk monitoring and major violations rather than pre-approval of trivial matters. Exchanges should be allowed to independently formulate listing rules while drawing on traditional financial systems such as sponsors, analysts, and brokers to achieve market-based checks and balances.

V. Policy Recommendations: Three Major Strategies to Propel Hong Kong as a Crypto Financial Center

To seize historical opportunities, Hong Kong should focus on three major directions: stablecoins, exchanges, and asset innovation, launching systematic policies:

1. Launching the USD Stablecoin USHK Backed by the Monetary Authority

Current mainstream stablecoins like USDT suffer from issues such as opaque reserves, high transaction fees, and exchange thresholds. Hong Kong can leverage its linked exchange rate system, with the Monetary Authority leading the issuance of USHK: commercial banks deposit USD, and the Monetary Authority issues stablecoins at a 1:1 ratio, with no thresholds, zero fees, and government credit backing. If mainland residents are allowed to exchange USHK within the $50,000 foreign exchange quota, it is expected to become the preferred tool for cross-border settlement, shaping a new status for "Hong Kong dollars."

2. Creating a Top-tier Crypto Exchange Cluster

The core applications of the crypto ecosystem are exchanges and stablecoins, which complement each other. Hong Kong should actively attract the world's top ten exchanges to establish regional headquarters or operational centers, clarifying policy expectations, setting transition periods, and not pursuing compliance for past actions, thereby creating an open, safe, and stable regulatory environment.

3. Exploring Real World Assets (RWA) and New Asset Classes

In addition to the tokenization of traditional equity and debt, more attention should be paid to incremental markets. The antique market has enormous potential, with a total valuation reaching hundreds of trillions, yet it cannot be scaled due to difficulties in authenticity verification, price distortion, and circulation challenges. Hong Kong can leverage its rule of law and certification advantages to support the establishment of authoritative antique appraisal and insurance institutions, promoting the tokenization of antique assets, and breaking through traditional auction limitations through on-chain pricing and trading mechanisms, allowing it to leap from a niche market to the mainstream.

4. Implementing a Crypto Talent Introduction Program

Introducing targeted visa and residency policies:

• Donating the equivalent of HKD 3 million in Bitcoin/Ethereum (held for over one year) and meeting residency requirements can grant a passport;
• Crypto companies employing foreign talent can obtain work visas by pledging 1 Bitcoin or similar means, gaining residency after seven years of tax contributions.

Such policies not only attract talent but also accumulate strategic crypto asset reserves.

Hong Kong urgently needs to break free from the "regulating cars by horse-drawn carriage rules" mindset, while adhering to the rule of law and risk control, to face the uniqueness of the crypto industry. By basing its approach on transparency principles, supporting professional communities, and driving institutional innovation, it can reassess and adjust the applicable boundaries of "same business, same risk, same rules," thereby seizing a high ground in the new global crypto financial landscape.

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