10 Observations on Hong Kong's Blockchain Regulatory Environment: Pessimistic in the Short to Medium Term, Optimistic in the Long Term

Author: Yue Xiaoyu

Blockchain in Hong Kong was once booming, but recently it seems to have quieted down.

So what is the current state of Hong Kong's crypto scene?

Recently, I've been living in Hong Kong and frequently communicating with many local friends and projects, gradually gaining clarity on Hong Kong’s Web3 regulatory environment and policy direction.

Here are 10 key takeaways:

1. First, the conclusion: short- to medium-term pessimism for Hong Kong's Web3 industry development, long-term optimism.

2. Short- to medium-term pessimism stems from regulatory policies that keep swinging back and forth—like two sides of the brain fighting each other.

It's not just central government versus the Hong Kong government; even within the Hong Kong government, administrative departments and regulators are at odds.

The central government prioritizes financial stability, while the Hong Kong government wants to develop new industries; administrative bodies push for innovation, while regulators favor caution.

The fundamental conflict lies in the fact that blockchain's decentralization and global liquidity are inherently incompatible with strong foreign exchange controls and capital outflow restrictions.

3. Long-term optimism exists because the overarching trend is irreversible. Stablecoins truly hold value—especially for cross-border trade and payments—and represent a transformative shift.

Meanwhile, the United States is accelerating legislation for the cryptocurrency industry, seizing both legislative authority and leadership. Eventually, other regions will be forced to “open their borders.”

However, the decision point hasn't arrived yet, so there's still room for hesitation and observation—but the longer this delay continues, the more passive the position becomes.

Of course, it's undeniable that Hong Kong has taken a critical first step by opening a small window. The next phase involves gradually expanding it.

More importantly, Hong Kong remains China’s external gateway or financial backdoor. It may now be narrowed or more tightly controlled, but this gateway must exist.

4. Phase one licenses for HKD-backed stablecoins will only go to local conglomerates, with no more than five issued.

J.D. and Ant Group withdrew from stablecoin license applications primarily because the mainland government fears these tech giants are too large and pose uncontrollable risks.

Of course, for tech giants like J.D. and Ant, if Hong Kong doesn’t grant them licenses, they can simply apply elsewhere.

For a city of seven million people, Hong Kong’s market size isn’t that large, and stablecoin operations remain essential business for these tech giants.

5. HKD-backed stablecoins will struggle to launch—not just due to licensing issues, but mainly because strict risk controls severely limit their scope of operation.

For example, a major constraint in Hong Kong’s current stablecoin policy is that end users must undergo KYC.

This means HKD-backed stablecoins won’t have a secondary market and can only circulate among whitelisted addresses.

This is intended to further contain risk, but it sacrifices usability, ultimately turning them into a Hong Kong version of “digital RMB.”

6. While HKD-backed stablecoins face limitations, RWA (Real World Assets) holds tremendous potential!

Hong Kong’s regulatory logic is: tiered oversight based on underlying assets.

Stablecoins are backed by fiat currency, thus facing the highest regulatory scrutiny;

RWAs backed by financial assets may be classified as securities;

RWAs backed by physical assets face the lowest regulatory requirements.

7. Currently, many projects focus on RWAs backed by physical assets, while few pursue those backed by financial assets.

Yet RWAs backed by financial assets are far superior to those backed by physical assets, because physical assets must first be financialized before tokenization—a long, costly, and low-yield process.

Currently, RWAs involving physical assets lack transparency; the physical asset component is largely a black box. Most projects either merely ride the hype or are suspected of money laundering.

8. Previously, I assumed high-quality assets in traditional finance were scarce and highly sought after.

But after speaking with RWA startup teams, I realized that quality assets in traditional finance still face significant funding shortages—in fact, quality assets exceed available capital.

The value of tokenization lies in lowering the barrier to accessing capital.

9. RWA evolution follows this path: fiat on-chain → bonds on-chain → stocks on-chain → financial derivatives on-chain → physical assets on-chain.

Fiat on-chain faces excessively high regulatory hurdles and isn’t accessible to small businesses;

Physical assets on-chain aren’t inherently valuable—tokenizing poor assets doesn’t make them good;

But standard financial products in the middle—bonds, stocks, etc.—offer vast opportunities by genuinely solving the mismatch between asset holders needing funds and investors seeking quality assets.

10. Never speculate about regulators’ intentions—you’ll lose badly.

Flip the perspective: the absence of clear, finalized regulations actually protects and creates a moat for existing crypto practitioners.

Once regulations are fully implemented and big corporations rush in, what opportunities will remain for us?

Therefore, this is an excellent window period.

Opportunities belong to the prepared. Hesitators are exiting; the committed are building aggressively. The road to success has never been crowded.

Prepare your technology and products now, so when the regulatory starting gun fires, you can sprint ahead immediately.

The prerequisite is that industry participants must genuinely believe in this space and build projects that truly address market needs and solve real problems.