“Does it concern you that your approach to the digital assets industry is driving the industry out of the United States?”, is what Congressman Tom Emmer asked Gary Gensler, the US SEC chair, last week.
I’m sure we’re all aware of the US government being under fire for its recent hostility towards crypto. And ironically at the same time, they’re not providing clarity around crypto laws either… We still don’t know whether ETH (which has been around for 7 years, by the way) is considered a security or not.
And the US crypto industry has started fighting back – starting with Coinbase suing the SEC this week for its lack of regulatory guidance provided to crypto companies operating in the area. Others are simply choosing to leave, with many of the biggest US crypto companies already starting to relocate to friendlier jurisdictions.
Whether the US will even have a digital asset industry in a couple of years is… undecided.
While those in the US are busy wrestling one another, the rest of the world’s been getting busy trying to develop clearer rules around crypto. Dubai’s VARA is continuing to serve as a transparent and trusted guiding authority for the emerging world of crypto. Even the EU is gearing up its MiCA framework, being many steps ahead of the US with a comprehensive framework for crypto regulation. And we can’t forget about Hong Kong – which has been continuously engaging the crypto community to better develop a robust regulatory framework for digital asset companies since January.
Hong Kong has definitely taken the crypto world by storm this month. It started off with its new VASP licensing regime, and has now even moved onto frying bigger fish: the Hong Kong court recently ruled crypto as property.
The city’s regulators even suited up for the Hong Kong Web3 Festival earlier in April, a flagship event that was filled with pro-crypto excitement and celebrations of decentralization, Web3 and the future of digital assets. In front of crypto and DeFi firms from all over the globe, they publicly announced their commitment to embracing crypto and digital assets. Now over 20 crypto companies have announced they’ll be establishing a presence in the city, and more than 80 companies have expressed interest in doing so.
And they’ve definitely been putting their money where their mouth is. Not only are they providing clearer regulatory guidelines for digital asset companies in the area, they’ve also been actively pushing to connect crypto firms with banking institutions, to help them maintain banking accounts. The city’s government approved banks like ZA bank and Bank of China are now helping crypto companies out with their banking needs. This is a huge step, in light of the recent TradFi crisis in the US which spelled trouble for many crypto firms.
This is stellar news for all of us in the crypto industry. And an even bigger one for Hong Kong making its comeback as the global crypto hub. The rules we’ve been looking for are finally being put in place.
Now, here’s an unpopular opinion. Or a ‘fresh take’ let’s say. While Hong Kong is making great strides to help the digital industry grow, we believe it’s falling short on a few fronts. They’re overly focused on providing regulatory frameworks around centralized exchanges, and centralized exchanges only.
Here’s why we think it could be better.
Regarding Hong Kong’s comeback as a global crypto hub, our CEO Alessio Quaglini recently sat down with the Wall Street Journal to comment on the limitations of the SFC’s new licensing framework – specifically, on how it departs from traditional finance principles.
He stated that the framework’s focus on regulating centralized exchanges – and requiring them to hold customer’s assets in wholly-owned subsidiaries – are failing to address one of the industry’s most important issues: lack of independent and segregated asset custody, which is mandatory for investor protection.
He continued the conversation with RTHK Radio 3’s Money Talk, where he elaborated on the need for segregation for custody activities in Hong Kong’s new framework. In the interview, he also detailed the role of crypto custodians, what exactly they do, and his broader view on regulatory developments in the city.
It’s great to see the world collaborating and working to address crypto regulation – providing clearer guidelines not just for companies operating in the industry, but also to better investor protection. Needless to say, these efforts were largely sparked by the biggest, and probably most tragic crypto incident in history: the downfall of FTX.
And we wanted to dig deeper into how it all happened exactly – the role that centralized exchanges have played in the crypto industry, and the implications of the FTX debacle. In our latest report, we uncover what went down in the 2022 market crash, how centralized exchanges need to move forward to better the industry, and the potential for decentralized exchanges to take over the spotlight as indicated by recent months.
But it doesn’t stop there. The banking crisis last month was living, breathing proof that not only does this issue of centralized entities operating in black boxes exist in the crypto world, it still very much exists in the traditional financial world.
It all boils down to understanding the role that human trust plays in our financial systems. Past records of centralized entities (in and out of crypto) operating on opaqueness rather than transparency has provided key lessons on how both the traditional and alternative decentralized financial system can move forward – with the element of trust in mind.
Our CEO Alessio recently gave a keynote speech at the HK Web3 Festival to discuss the role of centralized entities, and how the alternative decentralized, trustless system can only move forward with the element of trust baked into its operations.
Reflecting Hong Kong’s effort to build its Web3 ecosystem, we’ve been continuing to grow our ecosystem here at Hex Trust. We recently partnered with AlgoRai Finance, a decentralized structured products platform built on the Algorand blockchain, to provide institutional investors with access to AlgoRai’s investment and risk-based solutions.
We’ve also been actively connecting with other Web3 players from all corners of the industry. We were thrilled to co-host a VIP Drinks night together with Bullish to celebrate the HK Web3 Festival, with over 120 friends joining us from all over the world.
As we continue building our presence across the digital asset industry, one of our priorities has been to share our story across different Web3 communities. Here’s our Head of Platform & Infrastructure Aaron Baideme, sharing about Hex Trust’s background and his personal journey in the world of fintech on the What The FinTech podcast.
Aaron was also spotted at Web3 Reimagined earlier this month, a Web3 Festival side event that was hosted by our partners Bing Ventures and Followin. Here’s Aaron in action with fellow speakers from Alchemy Pay, GBV Capital, Animoca Brands and more to discuss the future of Web3 and digital assets.
It’s great to see how the world’s been gearing up to provide clear-cut rules around crypto and digital assets – especially in Hong Kong, the very place where Hex Trust was born and bred. We’re proud to see the city taking steps to embrace groundbreaking technology, especially in great contrast to the drastic overkill happening in the US.
But creating a holistic and comprehensive regulatory framework is a whole different game. Hong Kong's current framework could be better. We’ve said it many times, and we’ll say it again: independent and segregated asset custody is necessary for investor protection. The digital asset game isn’t and shouldn’t just be played by exchanges – there are many other service providers that provide key infrastructures to the industry that are also in need of rules to better guide their activities. A prime example being custodians.
This isn’t to assume that these regulatory frameworks won’t continue to evolve in the coming years. Dubai’s VARA has already come up with a pretty comprehensive framework, and we’re hoping the EU’s MiCA will be the same. There doesn’t seem to be a one-size-fits-all regulatory solution for now, but perhaps in the future, we’ll see a cherry picking situation where effective regulations from different jurisdictions are combined to wholly benefit the digital asset industry.
If anything, this is the very reason we voice out our concerns – hoping it’ll bring even more positive change to regulatory developments around the world. This is just the beginning of a new industry that’s ready to unveil its true potential.