Hong Kong's principle of "same business, same risks, same rules" re-examined

Authors: Zhu Weisha, Zhang Feng

1. Pain Points Emergence: Hong Kong's Lagging Under the Trend of Global Regulatory Integration

Recently, the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) issued a joint statement, clearly stating for the first time: "Current laws do not prohibit the listing of certain cryptocurrency spot products on U.S. registered exchanges." This statement not only marks a coordinated effort by U.S. regulatory agencies but also conveys a global signal that traditional finance and cryptocurrency finance are moving toward regulatory integration. In contrast, while Hong Kong is an international financial center, its response to cryptocurrency asset regulation has been relatively slow, and the framework development has not kept pace with innovation. If adjustments are not made in a timely manner, Hong Kong risks being marginalized in the new round of financial competition.

2. Principle Review: The Cognitive Misunderstanding of "Same Business, Same Risk, Same Rules"

Hong Kong regulators often cite the principle of "same business, same risk, same rules" when dealing with crypto assets. This principle appears logically consistent on the surface, but it reveals serious shortcomings in practice. While cryptocurrency trading and traditional stock trading both fall under the category of "trading" activities, their risks fundamentally stem 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 business is similar but the structure is completely different, and the sources of risk are entirely different.

The stock market and cryptocurrency exchanges do share similarities in the five basic elements of trade matching, brokerage, settlement, banking services, and user management, but there are fundamental differences in their structure and operational mechanisms. Traditional stock markets adopt a multi-tiered, multi-institutional checks and balances model, whereas typical centralized cryptocurrency exchanges (CEX) exhibit a highly integrated characteristic, almost encompassing all functions within one entity. This structural difference directly leads to stark contrasts between the two types of markets in terms of 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 the securities firm's dedicated account at the bank. The securities firm cannot directly use client assets, and the flow of funds must strictly follow the "return along the original path" and reconciliation mechanism. The securities firm is responsible for placing orders, while the exchange is only responsible for matching and does not participate in proprietary trading. The Central Clearing and Settlement System (CCASS) independently executes the clearing, and the bank holds the final authority over fund allocation. The Securities and Futures Commission (SFC) acts as the highest regulatory body, implementing compliance supervision throughout the process. This closed-loop check-and-balance system effectively isolates risks and ensures market stability.

3. Integrated Risks of Cryptocurrency Exchanges

In contrast to cryptocurrency exchanges, users typically only need to open a single account on the platform to complete all operations. The exchange simultaneously undertakes 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 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, as long as the ledger mechanism remains opaque and checks and balances are not established, it is difficult to eradicate structural risks.

4. "The same rules" do not equal "equal security".

The development stage of crypto assets is different from traditional securities. Token financing often covers various stages from seed rounds, angel rounds to IPO, allowing retail investors to participate at a very early stage. The current regulatory practice in Hong Kong tends to treat tokens as stocks in the IPO stage, which, while having certain rationality, overlooks the investment attributes and risk characteristics of tokens at an even earlier stage.

Rigidly enforcing the "same rules" is akin to "governing cars by the rules of horse-drawn carriages"; on the surface, it appears orderly, but in reality, it limits development and conceals true risks. Regulation of crypto assets should be based on the substance of the business and the structure of risks, implementing differentiated and refined rules.

3. Exploration of Exit Strategies: A New Regulatory Framework Centered on Transparency

Although traditional finance and cryptocurrency 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 cryptocurrency systems but should also become a basic requirement for all financial transaction activities. Leveraging technological innovations—such as on-chain ledgers, AI auditing tools, etc.—to enhance the verifiability and openness of data is an effective path to achieve low-cost and high-efficiency regulation.

1. Transparency: Bridging the regulatory bottom line between traditional and crypto.

The transparent concept of Web3 is enlightening for traditional trading venues. If exchanges can promote the realization of 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 easily resolved; decentralized exchanges (DEX) still have room for improvement in experience, but they 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 fraudulent transactions and bot manipulation. Similarly, traditional finance can also absorb 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 user account level transparency (supporting anonymous display) to further enhance market integrity.

2. Build transparent collaboration between regulation and the community

The existing regulatory consultation mechanisms are largely limited to traditional channels, which are difficult to match the development speed and cultural characteristics of the crypto industry. It is necessary to promote the establishment of a transparent interactive mechanism among "regulation-community-market", 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 check-and-balance mechanism, while also enhancing the responsiveness and accuracy of policies.

3. AI Audit: Technology to Achieve Ledger Transparency

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, immutable supervision records can be automatically generated and 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 transparent operation transformation of traditional institutions. Of course, it is also necessary to design a proper privacy protection mechanism to prevent data abuse.

IV. Build a practical and forward-looking regulatory system

1. Establish a unified regulatory coordination agency across departments

Cryptographic assets possess multiple attributes of securities, commodities, and currencies, and fragmented regulation can easily lead to overlaps or vacuums. Hong Kong should establish a high-level cross-departmental coordination body or clearly designate a leading supervisory department to coordinate policy formulation and law enforcement actions, in order to avoid the outflow of talent and projects due to regulatory hesitance.

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 government-civil collaboration"

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:

Previously led globally recognized crypto projects;

Outstanding contributions to industry theories or standards;

Promoted significant milestone events in the industry;

Continue to 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%, thereby ensuring that policies are both professional and practical.

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

Hong Kong is known for its market flexibility and loose regulations. In the face of crypto innovation, regulation should remain humble, allowing "trial and error" while focusing on systemic risk monitoring and major violations instead of unnecessary prior approvals. Exchanges should be allowed to set their own token listing rules, while also drawing on traditional finance mechanisms such as sponsors, analysts, and brokers to achieve market-based checks and balances.

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

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

1. Launch the US dollar 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 to issue USHK led by the Monetary Authority: commercial banks deposit U.S. dollars, and the Monetary Authority issues stablecoins at a 1:1 ratio with no barriers and zero fees, backed by government credit. If residents from the mainland are allowed to exchange USHK within the $50,000 foreign exchange quota, it is expected to become the preferred tool for cross-border settlements, shaping the new status of "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 set up regional headquarters or operational centers in the city, clearly define policy expectations, establish a transition period, refrain from pursuing compliance violations from the past, and create an open, safe, and stable regulatory environment.

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

In addition to the tokenization of traditional equity and debt, more attention should be paid to the incremental market. Among them, the antique market has enormous potential, with a total valuation reaching several hundred trillion, yet it cannot be scaled due to difficulties in identifying authenticity, price distortion, and circulation issues. Hong Kong can leverage its advantages in the rule of law and certification to support the establishment of authoritative antique appraisal and insurance institutions, promoting the tokenization of antique assets. By utilizing on-chain pricing and trading mechanisms, it can break through the limitations of traditional auction houses, allowing the market to transition from niche to mainstream.

4. Implement the talent introduction plan for cryptocurrency experts

Introduce targeted visa and residence policies:

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

Cryptocurrency companies can obtain work visas for foreign talents by pledging 1 Bitcoin or other means, and after 7 years of tax residency, they can acquire permanent status.

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

Hong Kong urgently needs to break away from the regulatory mindset of "horse-drawn carriages managing automobiles". Under the premise of upholding the rule of law and controlling risks, it should recognize the particularities of the cryptocurrency industry. Based on the principle of transparency, supported by professional communities, and driven by institutional innovation, it must re-examine and adjust the applicable boundaries of "same business, same risk, same rules" in order to seize the high ground in the new global landscape of cryptocurrency finance.