Hong Kong encryption regulators roundtable: Pursuing perfection too much may lead to mistakes, closed environments limit liquidity.

Editor | Wu Talks Blockchain

This article is based on two discussions from the Finternet 2025 Asia Digital Finance Summit. The first part discusses “The Evolution of Digital Asset Regulation from Hong Kong to the Middle East,” hosted by Rocky Tung, Director and Head of Policy Research of the Hong Kong Financial Development Council. The guests include Elizabeth Wong, Director of Intermediaries at the Hong Kong Securities and Futures Commission and Head of the Fintech Group, and Wai Lum Kwok, Senior Executive Director of the Financial Services Regulatory Authority at the Abu Dhabi Global Market. The second part discusses “Breakthroughs, Innovations, and Safeguards in Hong Kong,” hosted by Gary Tiu, Executive Director and Head of Regulatory Affairs at OSL Group. The guests include Eric Yip, Executive Director of the Intermediaries Division at the Hong Kong Securities and Futures Commission.

The Finternet 2025 Asia Digital Finance Summit will be held in Hong Kong on November 4, with the core concept of “Connecting Chains, Building the Future”. It is jointly supported by more than 10 organizations including OSL Group, Hong Kong Investment Promotion Agency, Hong Kong Financial Development Council, and Hong Kong Cyberport.

Previously, the Hong Kong Securities and Futures Commission (SFC) issued a circular on November 3, allowing local licensed virtual asset trading platforms to share order books with overseas subsidiaries or affiliated platforms under the same group for the first time. This means that orders from Hong Kong and overseas can be matched in the same liquidity pool for trading. It implies that Hong Kong investors will be able to directly match transactions with overseas markets in the future, enjoying deeper liquidity and a trading environment closer to international prices.

The audio transcription is completed by GPT and may contain errors. The guest's views do not represent Wu's views. Readers should strictly adhere to the laws and regulations of their location. Please watch the full content on YT:

Part One: The Evolution of Digital Asset Regulation from Hong Kong to the Middle East

The changing approach to digital asset regulation in Hong Kong.

Rocky: The Financial Services Development Council began to focus on cryptocurrencies in 2021, while the Hong Kong Securities and Futures Commission (SFC) started as early as 2018. As an international financial center, Hong Kong cannot ignore this emerging field of cryptocurrency. In 2021, we decided to no longer limit cryptocurrency access to professional investors.

Against this background, Hong Kong's regulatory approach in the digital asset space is constantly changing, and the SFC's regulatory coverage is also expanding. Elizabeth, how do you view the changes in the SFC's regulation of digital assets?

Elizabeth: The SFC has been regulating digital assets since 2018, with the goal of creating a secure digital asset ecosystem. We adopted a cautious and conservative strategy, initially regulating by creating a closed ecosystem. As the market has developed, we have found that this closed environment restricts Hong Kong's connection to global liquidity.

In order to enhance liquidity, we have decided to allow local investors to access the global market. To this end, we recently issued two notices allowing licensed virtual asset trading platforms to share the global order book with overseas affiliates, promoting the connection between Hong Kong and the global market.

The release of this notice took a considerable amount of time, mainly to ensure our close collaboration with the industry, understand the potential risks, and provide a clear regulatory framework for the industry. We hope to promote compliance with regulatory requirements and enhance trust in the industry in this way.

The industry is gradually recognizing the importance of regulation, and they support and look forward to obtaining licenses, which helps promote the sustainable development of the industry.

Changes in the regulatory framework of Abu Dhabi

Rocky: About two years ago, when I visited ADGM (Abu Dhabi Global Market, a free zone for international financial services), Abu Dhabi did not pay special attention to digital assets, but now Abu Dhabi is performing excellently in this field and has provided forward-looking planning. Can you confirm if the situation at that time was accurate? If so, what contributed to the change?

Wai Lum: When you visited in 2021, cryptocurrency was indeed not a focus, although it is very important to us. In 2018, we launched a framework when the world was discussing the risks of anti-money laundering and combating the financing of terrorism. We decided to go beyond these issues and collaborate with multiple institutions, referencing the frameworks of Japan's FSA and New York's Department of Financial Services. Ultimately, we decided to extend the regulatory framework of traditional finance to the cryptocurrency space, viewing it as a new asset class.

The decision behind this is the hope to integrate traditional finance with new finance. Although this means that technology companies must meet higher thresholds, we are seeing an increasing trend of cross-field integration. Today, many securities, cryptocurrency brokers, and traders only need one license to cover multiple areas.

The market is also changing. Since 2018, the main market participants have been companies providing price discovery and trading services for individual investors. After the collapse of FTX, more institutional investors are focusing on custody solutions, and as custody technology matures, businesses such as staking and lending are gradually attracting more participants. Currently, ADGM has formed a preliminary ecosystem covering brokers, exchanges, stablecoin issuers, lending platforms, and more. We also see traditional financial institutions (TradFi) and decentralized financial institutions (DeFi) deploying their respective strategies. This is a field full of potential, and as regulators, our close interaction with the industry is crucial.

Regulatory challenges of cross-border transactions and capital flows

Rocky: I think there are many similarities between ADGM and the regulators in Hong Kong. We have an international background behind us, while also having our own characteristics. We also hope to establish connections with different markets and parties. We want to advance steadily, rather than aggressively inviting everyone to participate, only for everyone to quickly withdraw when problems arise. We do not want to see such a situation occur. Based on this, I would like to ask both of you the same question: What similarities do you see in the market? And what differences are there? How can participants in one market leverage and enter another market?

Wai Lum: I see many similarities, and over time, regulatory frameworks will increasingly converge. We primarily view cryptocurrencies through the lens of traditional finance (TradFi), focusing on investor protection and the safety of the financial system. From this perspective, the regulatory frameworks of markets such as Hong Kong, Singapore, and the UAE are becoming more similar, with many elements being shared, such as asset isolation protection and market abuse regulations. Therefore, the convergence of regulatory frameworks aids in the expansion of businesses. Companies in both Hong Kong and the UAE are now seeking to expand, making the convergence of frameworks crucial for enterprises. Although each market has different priorities and starting points, the differences will gradually diminish over time.

Hong Kong's regulatory priorities start from scratch and respond flexibly to changes, whereas many mature international financial centers need to adjust their existing frameworks. Therefore, the starting points differ in each region, and disparities still exist.

Elizabeth: I agree. The International Organization for Standardization also requires regulators in different countries to adopt a unified regulatory approach. The current principle is “same activities, same risks, same regulation.” This is also our approach in Hong Kong and Whilam in the UAE. We are all promoting the construction of the digital asset ecosystem under the traditional financial framework. I also agree with Whilam's view that many companies consider the regulatory environment when choosing a headquarters to enhance trust among investors and customers, thereby supporting their expansion into other global markets.

Regarding tokenized assets, global regulators have taken a similar stance. We consider these assets to be securities, and if they are securities, they are regulated according to securities regulations. This approach has gained widespread support globally, especially for FinTech companies, which are more adept at this kind of operation. Therefore, whether in the cryptocurrency market or traditional financial sectors, large companies are focusing on the digital asset ecosystem.

The progress of Hong Kong regulation in promoting the digital asset ecosystem.

Rocky: We need to establish an effective ecosystem that connects traditional finance with the digital asset space, while also integrating with other markets. Hong Kong faces complex challenges in this regard, especially concerning the issuance of OSL's first license. Why is the approval process taking so long? How can we ensure the healthy development of the ecosystem while adhering to regulations in the future?

Elizabeth: We acknowledge that the approval process for virtual asset trading platform licenses in Hong Kong is lengthy. Part of the reason is that when we began collaborating with OSL, regulators were first gaining an in-depth understanding of the digital asset market. We worked closely with OSL and spent a lot of time understanding its business and the characteristics of digital assets. Many companies still have the notion of “we come from the cryptocurrency world and are not fully part of traditional finance,” which also takes time for them to adapt to the regulatory requirements within the traditional financial framework.

Currently, we are collaborating with the government to release two consultation documents aimed at improving the digital asset ecosystem in Hong Kong. We are considering providing licenses for virtual asset brokers and custodians to ensure that every link is regulated. We believe that through compliant regulation, Hong Kong can establish a sustainable market.

We have also received suggestions that regulation should be extended to virtual asset advisory services and fund management services. We are working with the government to explore whether to include these in the regulatory scope. Once a complete ecosystem is established, more overseas companies will enter Hong Kong, bringing global liquidity and further promoting the development of the Hong Kong market.

How does ADGM ensure transaction security, clarity, and traceability?

Rocky: How does ADGM ensure seamless integration of cross-border transactions and capital flows? How can efficiency be improved to ensure that these transactions are secure, clear, and traceable?

Wai Lum: Being a pioneer is very challenging, but we believe that the transformation in this field is inevitable. We have always been ahead, engaging with the industry in advance because we have no ready-made reference points. We apply the framework of traditional finance to the new financial domain to address issues such as interoperability and efficiency.

I believe that the way to ensure future adaptability is to maintain close interaction with the industry. We often learn together with the industry, and industry participants become the link between us and other jurisdictions. When we develop frameworks, industry participants come to us with products and business models, and we collaborate with them to understand the needs and tailor the frameworks. Through this process, we have gradually developed frameworks for stablecoins, tokenized assets, lending platforms, and more.

Most of these companies support compliance and are willing to work with us to adhere to the rules. They also inform us of the issues encountered by other jurisdictions during the enforcement process, helping us to be more cautious when formulating the framework. We need to ensure future adaptability and maintain a sense of responsibility in line with international standards and industry developments. Straying from the mainstream may lead to difficulties for companies when expanding overseas. Therefore, as regulators, it is crucial to maintain close contact with the industry and participate in global regulatory dialogues. We regularly attend discussions with organizations such as the Financial Stability Board (FSB) and the Stablecoin Association to help us stay in sync with industry dynamics.

The practical application and market feedback of tokenized assets

Rocky: Communication with industry participants is crucial. We cannot become the “outlier” in regulation and should maintain dialogue with other regulatory bodies to ensure sustainable regulatory development in each jurisdiction. Tokenization has recently become a hot topic; are there any successful cases in Hong Kong that can be shared?

Elizabeth: To be honest, progress has been slow. We released notifications related to tokenization in 2023, but we are still discussing whether we can find practical use cases by 2025. Our work involves releasing regulatory guidance to clearly inform the industry how we regulate tokenized securities according to securities law. We are also participating in the “Project Cluster” of the Hong Kong Monetary Authority (HKMA) to provide regulatory guidance to the industry, helping them understand how to construct tokenized securities, design structures, and apply for licenses.

Our tokenization experience is similar to that of the digital asset market. We have sought industry feedback on trading platform policies but did not receive sufficient responses. Therefore, we hope the market can participate more in this process and drive it forward together.

We are considering how to accelerate the process and promote independent innovation in the market. We plan to launch an acceleration program in the coming months to drive more practical application cases, whether in the field of tokenized assets or other digital assets.

How to Properly Address Cross-Border Interoperability and Regulatory Challenges

Rocky: Cross-border interoperability is a huge challenge for both practitioners and regulators. How do you ensure that this challenge is properly addressed to ensure seamless connections for cross-border transactions?

Wai Lum: Interoperability can be divided into intergovernmental, inter-industry, and interoperability between technology and regulation. Each level of interoperability is different.

Regarding intergovernmental interoperability, the most effective approach is to maintain continuous communication. Digital assets are essentially cross-border, with more and more companies operating in multiple jurisdictions. We must ensure interoperability through dialogue, especially when explaining our position to other regulatory bodies. Different jurisdictions and regulators have different priorities and considerations, and we filter industry players who are willing to grow with us, ensuring they share our vision and wish to move forward together.

Currently, the industry model is clearly differentiated, with some companies using specific Blockchains and others choosing their own Layer 1 solutions. As regulators, we focus not only on intergovernmental interoperability but also on interoperability between regulation and the industry, as well as between regulation and technology. To this end, we consider regulatory technology (RegTech) and sub-regulatory technology (SubTech) as part of our strategy. The digital native characteristics of cryptocurrencies enable us to connect, monitor, and track online through digitization. For example, within the fiat-backed token and stablecoin framework, we can track on-chain circulation in real time and connect to reserve accounts via API, ensuring data matching accuracy. This is the interoperability between regulation and the industry.

In addition, we have encoded the rules and regulatory requirements into a machine-readable format, and we hope that smart contracts can interact with our rules in the future, reading and understanding rule changes in real-time and making corresponding adjustments.

Elizabeth: In February this year, we released the “Digital Asset Planning Roadmap,” which includes issues such as virtual asset derivative trading and virtual asset lending. We are also considering how to strengthen our dialogue with the industry, understand market trends, and formulate more reasonable regulatory policies. Additionally, we are exploring how to enhance monitoring of the industry, especially when integrating more regulatory systems and participants, to ensure we can control market activities.

These measures are what the market can expect, although they cannot be fully realized in the short term, we are working hard to promote them.

Part Two: Breakthroughs, Innovations, and Safeguarding in Hong Kong

How can Hong Kong's cryptocurrency policy avoid disconnecting from the market?

Gary: As a policymaker at the Securities Regulatory Commission, how do you ensure the long-term applicability of policies and avoid disconnecting from market changes?

Eric: In fact, the pursuit of perfection does not always lead to the best results. Just like I told my colleagues, it’s not always necessary to actively seek a raise; you may actually end up getting one. This principle also applies to regulation; overly pursuing perfection may lead to mistakes.

In practice, we establish a regulatory framework through tools such as regulations, rules, and guidelines. Hong Kong's regulatory system is already quite mature, having been gradually established since 2018. Compared to the United States, although the cryptocurrency market is developing rapidly, regulation still requires time. The main goal of legislation in the cryptocurrency field is to combat unlicensed activities rather than to overly rely on static legal texts.

We also ensure regulatory flexibility through public consultations, notifications, and dialogues with the market. The market generally prefers principled regulation, but once implemented, it often calls for clear and specific rules. My view is that prescriptive regulation is suitable in the initial stages, and as the market matures, it should gradually shift towards more flexible principled regulation, which helps to adapt to changes and maintain flexibility. Hong Kong is moving towards a higher quality market, and we should develop in this direction.

How does the banking industry choose between principles and rules?

Gary: As a former banking practitioner and now a regulator, have you seen any differences in thinking between the banking industry and the regulatory industry in the formulation of policies in the digital asset space? For example, how do you choose between principles and rules?

Eric: I am not just a banker; in fact, I started out studying piano. Later, I managed the stock market at a stock exchange, then worked in private equity, and eventually moved into banking, before finally transitioning to become a regulator. My career has gone through many difficult transformations.

But now, as a regulator, this is the easiest phase of my career. However, I always stick to the consistent philosophy that whatever you do, it must be planned, constructive, and aimed at growth. You cannot skip these steps. For example, you can't just think about playing the “Moonlight Sonata” tomorrow; not even Mozart could do that. You must first have a plan and learn in order to reach that level.

Similarly, this is also true in the field of digital assets. Many of our achievements are thanks to our colleagues in the market and the securities regulatory commission, as we began this journey in 2018. Although we are not the most aggressive regulators in the cryptocurrency industry, we have maintained our persistence. We successfully avoided some major disasters in the cryptocurrency industry, such as the bankruptcy of FTX.

Accelerating innovation and the implementation of “fast failure” in Hong Kong

Gary: I also really like your self-assessment approach. We conduct a comprehensive review every three months, with the last one being three weeks ago, and we are still recovering from the trauma. However, the two plans you mentioned for accelerating innovation and licensing particularly caught my attention. Everyone hopes that Hong Kong can innovate faster, maintain flexibility, and accelerate the commercialization process. The “iterative thinking” in the crypto industry is also highly regarded, and we hope to innovate through continuous trial and error.

My question is, in Hong Kong, we have already seen similar “fast failures”, especially in licensing. If a project does not meet the requirements, we do not give it a chance to enter the market, which is an early form of “fast failure”. Another way is to allow projects to enter the market, but if they fail to comply, they will naturally exit. So, do you think we should see more of the second type of “fast failure” in Hong Kong? That is, allowing projects to enter the market more quickly, and if they cannot succeed, they will naturally exit?

Eric: This should be part of the acceleration plan, and we hope to take a “small steps, fast pace” approach. For me personally, I am not the executive director of digital assets; I am the executive director of an intermediary organization, so my scope of work is broader. Although I spend a significant amount of time in the digital asset field, I also need to pay attention to the other 95% of the market, which equally requires my attention.

The regulation of digital assets indeed requires us to strike a balance between risk and reward. In business, if you have more capital, you can try more innovations. But if funds are limited, greater caution is needed.

Gary: Does trial and error become more challenging in the formulation of digital asset policies?

Eric: In fact, this is not difficult for me. Because I believe that the key to trial and error is not to pursue perfection; practicality is more important than perfection. My team has been working very hard, and we are continuously improving and making progress step by step.

Hong Kong is committed to finding a balance between adherence and flexibility.

Gary: So, what do you hope the crypto market in Hong Kong can achieve? What kind of products do you want to see? If we measure it by months, when should we expect to see these innovations?

Eric: Doing homework is key! I have always been persistent, although I am a contradictory person, having my own principles while being flexible within a certain range. Look at our goals, we already have a clear product plan. We hope to see development in areas such as derivatives, modular financing, and staking loans. In fact, just yesterday I had a conversation with my colleagues about the capital rules for virtual asset derivatives trading, and the work is progressing very intensively. So what you need to pay attention to is that I have clearly stated these goals.

Gary: So, what about the timeline? How long until we see these innovative products launched to the market?

Eric: It depends on the pace of market development. While I have a strong desire to drive these changes, it is also important to realistically recognize that the Hong Kong market needs time to adapt to these changes. Our current regulatory framework is principle-based, so the maturity and professionalism of market participants are crucial. We can push for policies, but the market also needs to develop in sync with us. In some ways, we do feel that we are moving faster than the market. Therefore, our work needs to closely align with the market to help it grow further.