Revisiting the principle of "same business, same risks, same rules" in Hong Kong

Authors: Zhu Weisha, Zhang Feng

1. Pain Points Emerge: Hong Kong's Lag Under the Global Regulatory Integration Trend

Recently, the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) issued a joint statement, for the first time clearly stating: "Current laws do not prohibit U.S. registered exchanges from listing certain cryptocurrency spot products." This statement not only marks a coordination and unification of 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 cryptocurrency asset regulation has still been slow, and the framework development has not kept pace with the innovation rhythm. If adjustments are not made in a timely manner, Hong Kong may be marginalized in the new round of financial competition.

II. Principle Review: Recognition Misunderstandings of "Same Business, Same Risk, Same Rules"

Hong Kong regulators often cite the principle of "same business, same risks, same rules" when dealing with crypto assets. This principle appears to have logical consistency on the surface, but it reveals serious deficiencies in practice. While cryptocurrency trading and traditional stock trading both fall under the category of "trading" businesses, their risks fundamentally arise from structural differences rather than similarities in business types. Mechanically applying the same set of rules not only fails to manage real risks but may also stifle innovation and distort the market.

1. The businesses are similar but structurally different, with completely different sources of risk.

The stock market and cryptocurrency exchanges do share similarities in the five fundamental elements of transaction matching, brokerage, settlement, banking services, and user management, but there are fundamental differences in their structure and operation mechanisms. Traditional stock markets adopt a multi-tiered, multi-institutional checks and balances model, while typical centralized cryptocurrency exchanges (CEX) exhibit a highly integrated characteristic, almost encompassing all functions in one. This structural difference directly leads to stark contrasts in the two types of markets regarding credit risk, operational risk, liquidity risk, and moral hazard.

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

In the Hong Kong stock system, user funds are deposited into banks and then transferred to a designated account at a securities company. The securities company cannot directly utilize client assets, and the flow of funds must strictly adhere to the "original route return" and reconciliation mechanisms. The securities company is responsible for placing orders, while the exchange only facilitates matching and does not participate 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), as the highest regulatory authority, implements comprehensive compliance supervision. This closed-loop balance system effectively isolates risks and ensures market stability.

3. Integrated Risks of Cryptocurrency Exchanges

In contrast, for cryptocurrency exchanges, users typically only need to open a single account on the platform to complete all operations. The exchange simultaneously assumes 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 open orders and can engage in proprietary trading or market manipulation (which is explicitly prohibited in the stock market);

• Customer assets are mixed with their operating assets, and the risk of misappropriation is significant;

• The listing mechanism lacks transparency, with no third-party supervision such as sponsors or lawyers.

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

4. "The same rules" does not equal "equivalent security"

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 IPO, and retail investors can participate very early on. Current regulatory practices in Hong Kong tend to treat tokens as stocks at the IPO stage, which, while having certain rationality, overlooks the investment attributes and risk characteristics of earlier stage tokens.

Rigidly enforcing the "same rules" is akin to regulating automobiles with the standards for horse-drawn carriages; on the surface, it appears orderly, but in reality, it restricts development and conceals real risks. Regulation of crypto assets should be based on the substance of the business and the risk structure, implementing differentiated and refined rules.

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

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

1. Transparency: Bridging the regulatory underpinnings of traditional and crypto.

The transparent philosophy of Web3 is enlightening for traditional trading venues. If exchanges can achieve public ledgers, it will 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), although still lacking in experience, are widely trusted due to their on-chain native transparency. This shows that the market genuinely recognizes the openness brought by technology.

It should be noted that transparency does not equal complete anonymity. DEX can compensate for the shortcomings of anonymous transactions by introducing a KYC whitelist mechanism to curb false transactions and bot manipulation. Similarly, traditional finance can also leverage the advantages of on-chain transparency to enhance the credibility of the existing system. For example, the Hong Kong Stock Exchange has currently achieved transparency at the brokerage level, and in the future, it may explore transparency at the user account level (supporting anonymous display), further enhancing market integrity.

2. Building transparent collaboration between regulation and the community

The existing regulatory consultation mechanisms are mostly limited to traditional channels, making it difficult to match the development speed and cultural characteristics of the cryptocurrency industry. It is necessary to promote the establishment of a transparent interactive mechanism among "regulators, communities, and markets," utilizing mature community platforms (such as Discord, Telegram, etc.) to conduct public reviews, policy hearings, and compliance supervision. The power of the community can effectively supplement official regulation as a counterbalance mechanism while enhancing the responsiveness and accuracy of policies.

3. AI Audit: Technological Support for Achieving Transparent Ledgers

The ledger in the crypto field has inherent auditability, while traditional financial accounts still rely on post-reporting and sampling checks. By using AI tools for real-time ledger monitoring, it can automatically generate immutable supervision records, which can be embedded in existing systems in a "plug-in" form without affecting normal operations. Although these tools originated in the crypto industry, they also hold significant value for the transformation of traditional institutions towards transparent operations. Of course, it is also necessary to properly design privacy protection mechanisms to prevent data misuse.

4. Build a practical and forward-looking regulatory system

1. Establish a unified cross-departmental regulatory coordination agency

Cryptographic assets possess multiple attributes such as securities, commodities, and currencies, and fragmented regulation can easily lead to overlaps or vacuums. Hong Kong should establish a high-level interdepartmental coordination body or clearly designate a leading supervisory department to coordinate policy formulation and enforcement actions, avoiding talent and project outflows due to regulatory hesitation.

Furthermore, the essence of crypto finance is global and advanced. 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. Establish a decision-making mechanism of "professional leadership and collaboration between government and citizens"

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

• Led globally recognized crypto projects;

• Made outstanding contributions to industry theories or standards;

• Pushed for significant milestones in the industry;

• Continuously participate in cryptocurrency practices and hold no less than 5 million USD in cryptocurrency assets.

The committee should have substantial say in policy-making, with a recommendation that the voting proportion of official representatives does not exceed 50%, thus ensuring that policies are both professional and practical.

3. Implement the concept of "market priority and moderate regulation"

Hong Kong is known for its flexible market and loose regulations. In the face of crypto innovation, regulation should remain modest, allowing for a "trial first" approach, focusing on systemic risk monitoring and addressing major violations, rather than excessive pre-approval for trivial matters. Exchanges should be allowed to formulate their own listing rules, while also drawing on systems such as sponsors, analysts, and brokerages from traditional finance to achieve market-based checks and balances.

V. Policy Recommendations: Three Major Strategies to Promote Hong Kong as a Cryptocurrency Financial Center

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

1. Launch of the USD stablecoin USHK endorsed by the Monetary Authority.

Current mainstream stablecoins like USDT have issues such as lack of transparency in reserves, high transaction fees, and exchange barriers. Hong Kong can leverage its linked exchange rate system, with the Monetary Authority leading the issuance of USHK: commercial banks deposit US dollars, and the Monetary Authority issues stablecoins at a 1:1 ratio, with no barriers, 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 Dollar."

2. Build a top-tier cryptocurrency 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 operations centers in the region, clarify policy expectations, set a transition period, not hold past compliance issues against them, and create an open, safe, and stable regulatory environment.

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

In addition to the tokenization of traditional equity and debt, greater attention should be paid to the incremental market. Among them, 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 advantages in the rule of law and certification to support the establishment of authoritative antique appraisal and insurance institutions, promote the tokenization of antique assets, and break through the limitations of traditional auctions through on-chain pricing and trading mechanisms, allowing it to leap from a niche market to the mainstream.

4. Implement the cryptocurrency talent recruitment program

Introduce targeted visa and residence policies:

• Donate 3 million HKD worth of Bitcoin/Ethereum (held for more than 1 year) and meet residency requirements to obtain a passport;

• Cryptocurrency companies can obtain work visas for foreign talent by pledging 1 Bitcoin, and after 7 years of tax residency, they can obtain identity.

Such policies not only attract talent but also accumulate strategic reserves of cryptocurrency assets.

Hong Kong urgently needs to break away from the regulatory mindset of "horse-drawn carriages managing automobiles". While adhering to the rule of law and ensuring controllable risks, it should recognize the uniqueness of the cryptocurrency industry. Based on the principle of transparency, supported by professional communities, and driven by institutional innovation, it should reassess and adjust the applicable boundaries of "same business, same risk, same rules" in order to seize opportunities in the new global landscape of cryptocurrency finance.