Why is Hong Kong's blockchain policy "inconsistent"?

Author: Meng Yan

When I visited Hong Kong in early August this year, it coincided with a peak in the local hype around stablecoins and RWA. I described the scene at the time in a previous article:

"With stablecoin legislation in the US and Hong Kong, and the resulting stock and crypto market movements, everyone in Hong Kong is now buzzing about stablecoins and RWA. Every dinner table conversation revolves around recent market trends and rumors. Titans of traditional finance are actively engaging with crypto opportunities. A large number of entrepreneurs from traditional internet and AI sectors are flocking to Hong Kong seeking ways to integrate with Web3. Many forward-thinking entrepreneurs from traditional industries are also starting to pay attention to crypto. Even discussing stablecoins and RWA in a hotel lobby attracts curious inquiries and exchanges from others. Such a vibrant atmosphere hasn't been experienced since 2018. Before coming to Hong Kong, I guessed the global crypto center was in New York. But coincidentally, a Wall Street banker I know just arrived from New York to Hong Kong and told me that Hong Kong's crypto fervor far surpasses New York's. So, if ranked by heat, Hong Kong is undoubtedly number one in the world right now."

Less than two months later, Hong Kong is sending mixed signals. On one hand, the Hong Kong government recently reiterated its commitment to advancing stablecoin and tokenized asset development in an important comprehensive report, indicating no substantial change in Hong Kong's crypto industry policy. On the other hand, various media reports and rumors corroborate that mainland regulatory authorities have made a significant policy shift regarding Mainland Chinese financial institutions participating in RWA business in Hong Kong. This has rippled into Hong Kong, casting doubt on the prospects of its crypto industry. It is said that Hong Kong's crypto fervor has plummeted so sharply that the text above now reads with a sense of vicissitude, reminiscent of lines like 'recalling the prosperous Kaiyuan era, even small towns housed ten thousand households.' I'm glad a planned analysis article was delayed due to my US trip; otherwise, reading it now might be somewhat awkward.

This isn't the first time. Speculating when Hong Kong's crypto policy will have its 'big moment' is a perennial hot topic in the Chinese crypto community. And lamenting the hesitations and reversals of regulatory policy, much like Li Guyi's "Unforgettable Tonight" for the CCTV Spring Festival Gala, serves as the closing theme for each round of discussion.

There's no need for doubt. Contradictory signals indicate the matter itself is complex. Policy reversals show the situation facing decision-makers is intricate. Therefore, at this moment, we must first judge what regulators will do, and second, decide what we ourselves should do.

Regarding the first question, my judgment is this: Regulators will allow Hong Kong to fully participate in the US-led blockchain digital economy using its local resources, but will strictly restrict deep involvement by mainland individuals and enterprises.

Let's state the facts and reason. The current situation is this: The application prospects of blockchain technology are clear, but its political and economic consequences remain uncertain.

With the US showing its hand, blockchain's application scenarios are now defined. If anyone ever sneers and questions, "What use is blockchain besides speculation?", you can throw this answer in their face: The largest-scale, most efficient resource allocation network in history will be built on blockchain. Within twenty years, people will be able to buy and sell any asset with digital currency anytime, anywhere. Capital, future cash flows, control rights, data rights, AI computing power, robot command rights, energy, and all digitizable items will flow globally in seconds. Any regulatory rules, capital controls, or market barriers not encoded into smart contracts will become as ineffective and precarious as the isolationist and maritime prohibition policies of the 19th century. In short, blockchain is the WTO of the digital economy.

Such an efficient resource allocation network can push market efficiency to its extreme. However, so-called market efficiency means 'to each according to his due.' In an ideal world, this is good news for most. But in the real world, deciding whose resources are allocated to whom for what purpose is far from a purely economic issue. Especially since this great digital economy navigation event is not occurring in the 'Great Moderation' historical phase when Thomas Friedman wrote "The World is Flat," but in a phase that the US political commentary magazine "The New Republic" finds eerily similar to the pre-WWI era. Therefore, it is destined not to be merely a simple, inclusive financial and technological advancement, but will inevitably be weighed repeatedly by everyone on the scales of victory and defeat.

The outcome of victory or defeat cannot be overemphasized. Unless this resource allocation network fails to materialize, the rise and fall, glory and disgrace of an individual, a company, or a nation for decades to come will largely depend on their position within this network. Just as an individual's power and wealth depend mainly on their position in the social network, not their personal intelligence or strength, an economy's rights and wealth in the digital economy will also depend mainly on its position in the blockchain economic network, not its own productivity. As a technology, blockchain aims to create a new digital economic order. Order is also a product, and the most important of all products. Therefore, my view differs from most: an economy's position in the future digital economic order is more important than the AI computing power it possesses.

However, predicting one's position in the blockchain order is extremely difficult. Except for the rule-makers, the market never offers promises to anyone. Joining this network could make you a winner or a loser.

This uncertainty can be particularly vexing for an economy's decision-makers. I've tried to formalize this dilemma into a set of nested "if-else" logic:

If I can dominate the blockchain economy as a rule-maker, then

Join and dominate.

Else, if I can achieve an acceptable outcome, then

Join and participate.

Else, if I can become a winner, or at least not a loser, without joining, then

Do not join, close the doors, prohibit maritime trade, splendid isolation.

Else, if I can start a separate venture as a rule-maker, then

Do not join, and start a separate venture.

Else — which means not joining guarantees loss, and starting a separate venture has no chance, then

Join, and engage in long-term maneuvering.

Against this logic, the Trump administration's aggressive blockchain policy becomes understandable. The US simply answered Yes at the first decision branch. Its main strategy is not merely participation, but domination and rule-setting.

Most other economies worldwide are likely still calculating gains and losses, or perhaps still watching and waiting. Maybe this won't happen? Maybe the next US administration can flip the table? Maybe wait a few more years?

This line of thinking is very dangerous because the US is sprinting at full speed.

Following the US stablecoin bill passage in July, the baton has now passed to the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). These two agencies are moving faster than the most optimistic previous expectations, planning to rapidly push for all US publicly listed company stocks and bonds to be put on-chain, and to introduce a new regulatory framework significantly relaxing digital asset trading before year-end. This means that by next year, hundreds of millions of "digital economy nomads" worldwide will be able to use stablecoins to purchase equity and debt of US companies, protected by the US regulatory system. Once the US preemptively becomes the sole "regular army" in this network, it will, like a bear breaking into an apiary, thrust its snout through every digital barrier, sucking the world's digital honey. Blockchain will pump money, data, computing resources, and power to the US government and corporations day and night. Having tasted the sweetness, the US will not look back.

There isn't much time left for hesitation.

Among all the "other" economies, China is the most special. In terms of strength, China is the only economy with a chance to compete with the US for dominance in the on-chain digital economy. Although the best timing for this has passed, it doesn't mean catching up later is impossible. China has successful experience in this regard. The current problem is that understanding of this new economic network under construction is still very limited, making it impossible to devise a set of effective strategies like when joining the WTO.

Hong Kong plays the role of such an experimental field. It must both participate in the game, explore paths, and cultivate talent, while also preventing the experiment from expanding prematurely and introducing risks and uncertainty into the mainland.

This logic aligns well with the current stance of Hong Kong regulators. If my guess is correct, this regulatory approach will remain stable for some time.

For Chinese blockchain practitioners overseas, this means there is space for participation, but there are boundaries for operation. Participating in the US-led blockchain economy in Hong Kong is not a problem, especially purely on-chain DeFi business, which will undoubtedly become a fiercely contested battleground. But at the same time, funds and assets from the mainland must be repeatedly verified for compliance. In particular, the previously hot trend of tokenizing mainland assets as RWA belongs to high-risk operations requiring extra caution.

For individuals, now is a time window for the entire industry to change chips, change rules, and change players. One must not hesitate or miss opportunities due to some unclear local regulatory policies. I believe Hong Kong's policies may fluctuate, but the space left is sufficient. Especially starting from DeFi, fully utilizing the US regulatory framework's tolerance window for DeFi, one can certainly achieve great things.