The collapse of FTX in November 2022 sent shockwaves across the global crypto landscape. Once among the world’s largest cryptocurrency exchanges, FTX imploded due to liquidity issues and revelations of fund misappropriation to its sister trading firm, Alameda Research. The fallout led to over a million creditors, bankruptcy filings for both FTX and FTX.US, and the arrest of its founder, Sam Bankman-Fried. This event deepened an already harsh crypto winter, intensifying global regulatory scrutiny and diverting investor attention toward emerging technologies like generative AI.
Yet amid the chaos, a surprising shift emerged. While many Web3 projects faltered, traditional industry giants—including YouTube, Nike, and Mastercard—began accelerating their investments in blockchain innovation. Simultaneously, Hong Kong stepped forward as a proactive player, advancing regulatory frameworks, public policies, and private-sector initiatives to position itself as a leading Web3 hub.
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Just months after FTX’s collapse, Hong Kong faced another setback—the JPEX scandal. But were these events setbacks or catalysts? Can Web3 still thrive? The answers may lie in Hong Kong’s unique blend of local action and global vision.
Navigating the Fallout: Web3’s Global Winter
In the wake of FTX’s failure, skepticism about Web3 intensified. Sir Tim Berners-Lee, widely recognized as the inventor of the World Wide Web, warned that “Web3 is not the web” and advised ignoring it, citing blockchain’s inefficiencies—slowness, high cost, and lack of privacy—for personal data storage.
Despite this pessimism, Hong Kong remained committed to becoming an international virtual asset center. Financial Secretary Paul Chan emphasized the need for innovation balanced with “a forward-looking regulatory framework to manage risks and ensure orderly market development.”
However, Hong Kong could not remain insulated. Before relocating to the Bahamas, FTX had operated out of Hong Kong. Local firms, including those using Tether—whose parent company iFinex is registered in Hong Kong—were directly or indirectly affected.
By mid-November 2022, Genesis Block, a Hong Kong-based OTC crypto trading platform operating Bitcoin ATMs, halted services. In January 2023, Animoca Brands, a Hong Kong-based gaming and venture firm, slashed its Web3 fund target from $2 billion to $1 billion. Founder Yat Siu noted that the biggest damage from FTX wasn’t financial but reputational—especially in weakening institutional trust in the U.S. market.
Further setbacks followed: Amber Group downsized its Hong Kong compliance team, Babel Finance restructured after losing around $766 million from risky client fund usage (per Bloomberg), and investor confidence wavered.
Regulatory Clarity: SFC’s Strict but Constructive Approach
Hong Kong had already planned to license crypto exchanges starting June 2023. After FTX, the Securities and Futures Commission (SFC) doubled down on strict oversight. Then-deputy CEO Julia Leung (now CEO) stressed that FTX highlighted systemic risks and the urgent need for tighter controls.
In December 2022, Hong Kong passed the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022, mandating SFC licensing for all virtual asset exchanges operating locally.
By April 2023, the SFC signaled that even decentralized finance (DeFi) platforms could fall under regulation. If a DeFi protocol enables trading of assets classified as securities under Hong Kong law, it may require a Type 7 license (automated trading services).
On June 1, 2023, Hong Kong implemented a statutory framework for Virtual Asset Service Providers (VASPs). All centralized custodial exchanges serving Hong Kong investors must now obtain SFC approval. HashKey became the first licensed platform to offer retail crypto trading.
Two months later, the SFC issued warnings about unlicensed platforms falsely claiming VASP applications—foreshadowing the JPEX crisis.
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HKMA’s Proactive Push: Banking Support and Stablecoin Vision
While the SFC focused on regulation, the Hong Kong Monetary Authority (HKMA) took a surprisingly supportive role. Unlike U.S. regulators who restricted banking access for crypto firms, HKMA urged banks to serve licensed virtual asset companies.
In April 2023, HKMA released a circular emphasizing that banks should meet the “legitimate banking needs” of regulated crypto firms without blanket denials. Deputy Chief Executive Ronnie Wong stressed a “risk-based” approach to customer due diligence.
This stance enabled ZA Bank—the city’s largest virtual bank—to allow fiat-to-crypto conversions. Later in September, HSBC partnered with HKUST to pilot digital HKD (e-HKD) on campus, distributing 100 digital tokens to nearly 200 participants for use at five campus merchants.
HKMA also announced plans to introduce a regulatory regime for stablecoins by 2024—a critical step toward financial stability and broader Web3 adoption.
Measurable Progress: From ETFs to Real-World Applications
Despite turbulence, tangible milestones emerged:
- Crypto ETFs: In late 2022, HKEX launched Asia’s first spot Bitcoin and Ethereum futures ETFs.
- NFT Innovation: Forkast introduced an NFT index tracking performance across 21 blockchains.
- Global Expansion: Animoca Brands expanded Web3 initiatives into the Middle East and partnered with Japan’s Mitsui Group.
- Exchange Growth: OKX announced plans to expand in Hong Kong and Australia, applying for a VASP license. Gate.io and Bybit also expressed interest.
- Consumer Incentives: Bloom, a Web3 startup under Cyberport, teamed up with China Mobile Hong Kong to reward Visa cardholders with Bloom tokens convertible into Bitcoin, Ethereum, NFTs, or shopping vouchers.
- Retail Access: In August 2023, HashKey opened Bitcoin and Ethereum trading to retail investors (capped at 30% of portfolio).
- Institutional Entry: SEBA Bank (Switzerland) obtained SFC approval to serve professional investors; UBS Hong Kong began offering crypto ETFs.
- Trade Digitization: GSBN partnered with Ant Group’s ZAN to tokenize electronic bills of lading (eBL), potentially unlocking $25 trillion in global trade finance through asset tokenization.
First-Mover Edge vs. Geopolitical Risks
Hong Kong’s proactive stance has given it a first-mover advantage among global Web3 hubs—rivaling Dubai, Switzerland, and Singapore in tax efficiency and legal infrastructure. Local lawmakers have even publicly invited Coinbase to establish operations in Hong Kong.
Coinbase CEO Brian Armstrong praised Hong Kong’s clear regulatory guidance during the 2023 Hong Kong FinTech Week—highlighting growing international confidence.
Yet geopolitical tensions linger. A recent U.S. bipartisan bill proposes banning government officials from using Chinese-linked blockchain services—including Tether’s parent company iFinex (Hong Kong-registered). While unlikely to pass, such moves underscore potential headwinds for Hong Kong’s ambitions.
Frequently Asked Questions (FAQ)
Q: Is Hong Kong now open to retail crypto trading?
A: Yes. Licensed platforms like HashKey allow retail investors to trade Bitcoin and Ethereum, subject to a 30% portfolio cap.
Q: What is the VASP licensing framework in Hong Kong?
A: Introduced in June 2023, it requires all centralized crypto exchanges serving Hong Kong users to obtain SFC approval, ensuring compliance with AML and investor protection standards.
Q: How is Hong Kong supporting stablecoins?
A: The HKMA plans to implement a formal regulatory framework for stablecoins by 2024 to ensure monetary stability and foster innovation.
Q: Are DeFi platforms regulated in Hong Kong?
A: The SFC has indicated that DeFi platforms facilitating trading of security-like tokens may require licensing under existing securities laws.
Q: Can crypto firms access banking services in Hong Kong?
A: Yes—licensed firms can obtain bank accounts under HKMA’s “risk-based” policy, unlike in some other jurisdictions where banks refuse service.
Q: What real-world applications is Hong Kong exploring with Web3?
A: Projects include tokenized e-bills of lading for trade finance, consumer reward systems via credit cards, and digital HKD pilots in education settings.
Hong Kong’s journey through the FTX and JPEX crises reflects both resilience and strategic foresight. By combining strict regulation with institutional support, it has laid a foundation for sustainable Web3 growth—balancing innovation with integrity in an era of global uncertainty.
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