Re-examination of Hong Kong’s “Same Business, Same Risk, Same Rules” Principle

Authors: Zhu Weisha, Zhang Feng

I. Pain Points Emerge: Hong Kong Lagging Behind in the Global Regulatory Convergence

Recently, the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) issued a joint statement, clarifying for the first time that "current law does not prohibit U.S.-registered exchanges from listing certain crypto-asset spot products." This statement not only signals coordination and unification among U.S. regulators but also sends a global signal that traditional finance and crypto-finance are moving toward regulatory convergence. In contrast, despite being an international financial center, Hong Kong's response to crypto-asset regulation remains slow, and its framework development has not kept pace with the pace of innovation. If it fails to adjust promptly, Hong Kong risks being marginalized in the new round of financial competition. Hong Kong regulators often cite the principle of "same business, same risks, same rules" when dealing with crypto-assets. While this principle appears logically consistent, it has serious shortcomings in practice. While cryptocurrency trading and traditional stock trading both fall under the "trading" category, their inherent risks 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 also may stifle innovation and distort the market. 1. Similar businesses but distinct structures, resulting in completely different sources of risk. While the stock market and crypto exchanges do share similarities in five fundamental elements: matchmaking, brokerage, settlement, banking services, and user management, their structures and operating mechanisms are fundamentally different. Traditional stock markets employ a multi-tiered, multi-institutional model of checks and balances, while typical centralized crypto exchanges (CEXs) are highly integrated, encompassing nearly all functions. This structural difference directly leads to distinct differences in credit risk, operational risk, liquidity risk, and moral hazard between the two markets. 2. Analysis of the Checks and Balances in the Hong Kong Stock Market In the Hong Kong stock market, user funds are deposited in banks and then transferred to securities firms' dedicated bank accounts. Securities firms cannot directly access client assets, and fund flows must strictly adhere to a "return-of-origin" and reconciliation mechanism. Securities firms are responsible for placing orders, while exchanges are solely responsible for matching and do not engage in proprietary trading. The Central Clearing and Settlement Service (CCASS) independently performs clearing, and banks have ultimate authority over fund allocation. As the highest regulatory body, the China Securities Regulatory Commission (CSRC) oversees compliance throughout the entire process. This closed-loop system of checks and balances effectively isolates risks and ensures market stability. 3. The Integrated Risks of Crypto Exchanges In contrast, on crypto exchanges, users typically only need to open a single account on the platform to complete all operations. Exchanges simultaneously undertake brokerage, clearing, custody, and even market-making functions, lacking effective internal and external checks and balances. Specifically: - Exchanges are solely responsible for KYC and anti-money laundering (traditionally, banks perform this); - Exchanges have full visibility into all pending orders and can engage in proprietary trading and market manipulation (which is strictly prohibited in the stock market); - Customer assets are commingled with their operating assets, creating a significant risk of misappropriation; - The listing mechanism lacks transparency, with no third-party oversight such as sponsors or lawyers. Although the industry has introduced various risk control measures, such as third-party custody and insurance, structural risks will be difficult to eradicate as long as the ledger mechanism remains opaque and checks and balances are not established. 4. "Same rules" does not mean "equal security" Crypto assets are also at a different stage of development than traditional securities. Token financing often covers stages from seed and angel rounds to IPOs, allowing retail investors to participate very early on. Current regulatory practices in Hong Kong tend to treat tokens similarly to IPO-stage stocks. While this is reasonable, it overlooks the investment attributes and risk profile of earlier-stage tokens. Rigidly enforcing "same rules" is like "regulating cars with carriages." While it creates order on the surface, it actually restricts development and obscures real risks. Cryptoasset regulation should be grounded in the substance of the business and its risk structure, implementing differentiated and refined rules. Exploring a New Regulatory Framework Focused on Transparency: While traditional finance and cryptofinance differ significantly, transparency can serve as a common foundational principle, underpinning the regulatory framework in this era of convergence. Transparency applies not only to cryptocurrencies but should be a fundamental requirement for all financial transactions. Leveraging technological innovations—such as on-chain ledgers and AI-powered auditing tools—to enhance data verifiability and transparency is an effective path to achieving low-cost, high-efficiency regulation. 1. Transparency: Bridging the regulatory divide between traditional and cryptocurrencies. The Web3 concept of transparency offers valuable insights for traditional trading venues. Enabling exchanges to make their ledgers public will significantly reduce regulatory complexity and costs. If centralized crypto exchanges can achieve on-chain, verifiable asset transparency, their trust bottleneck will be overcome. While decentralized exchanges (DEXs) still have some user experience limitations, they enjoy widespread trust due to their native on-chain transparency. This demonstrates the market's genuine appreciation for the openness enabled by technology. It's important to note that transparency doesn't equate to complete anonymity. DEXs can mitigate the shortcomings of anonymous trading by introducing KYC whitelisting mechanisms, curbing fraudulent trading and bot manipulation. Similarly, traditional finance can leverage the advantages of on-chain transparency to enhance the credibility of the existing system. For example, the Hong Kong Stock Exchange currently implements broker-level transparency and may explore user account-level transparency (supporting anonymous display) in the future to further enhance market integrity. 2. Build transparent collaboration between regulators and the community. Existing regulatory consultation mechanisms are mostly limited to traditional channels and are no longer able to keep up with the rapid development and cultural characteristics of the crypto industry. We should promote the establishment of a transparent interaction mechanism among regulators, the community, and the market, leveraging established community platforms (such as Discord and Telegram) for public comment, policy hearings, and compliance oversight. Community power can effectively supplement official oversight as a checks and balances mechanism, while also improving policy responsiveness and accuracy. 3. AI Auditing: A Technological Aid for Ledger Transparency. Cryptocurrency ledgers are inherently auditable, while traditional financial accounts still rely on post-event reporting and spot checks. Real-time ledger monitoring using AI tools can automatically generate immutable supervisory records that can be integrated into existing systems as plug-ins without disrupting normal operations. Although these tools originated in the crypto industry, they are equally valuable for traditional institutions in their transition to transparent operations. Of course, proper privacy protection mechanisms must also be designed to prevent data misuse.

Fourth, Build a Practical and Forward-Looking Regulatory System

1. Establish a Unified Cross-Departmental Regulatory Coordination Body

Cryptoassets possess multiple attributes, including securities, commodities, and currencies. Fragmented regulation can easily lead to overlap or gaps. Hong Kong should establish a high-level cross-departmental coordination body, or designate a lead regulatory authority, to coordinate policymaking and enforcement actions, thereby avoiding the outflow of talent and projects caused by regulatory hesitation.

Furthermore, given the global and advanced nature of crypto finance, Hong Kong should actively participate in, and even lead, cross-border regulatory dialogue and cooperation, striving for a voice in international rule-making. 2. Establish a decision-making mechanism featuring "professional leadership and collaborative government-civilian collaboration." Regulators must truly understand the industry. It is recommended that an advisory committee be established, comprised of senior practitioners, technical experts, and academics. Members must meet at least one of the following criteria: - Have led a globally renowned crypto project; - Have made outstanding contributions to industry theory or standards; - Have driven major industry milestones; - Have sustained involvement in crypto practices and hold at least $5 million in crypto assets. This committee should have a substantial voice in policymaking, and it is recommended that official representatives hold no more than 50% of the votes to ensure both professionalism and practical implementation of policies. 3. Implement the "Market First, Appropriate Regulation" philosophy. Hong Kong is renowned for its flexible market and relaxed regulations. When it comes to crypto innovation, regulators should remain modest, allowing for "pilots" and focusing on monitoring systemic risks and investigating major violations, rather than requiring pre-approval for every detail. Exchanges should be allowed to independently formulate listing rules, while also leveraging the traditional financial system of sponsors, analysts, and brokers to achieve market-based checks and balances. V. Policy Recommendations: Three Strategies to Promote Hong Kong as a Crypto Finance Hub To seize this historic opportunity, Hong Kong should focus on three key areas: stablecoins, exchanges, and asset innovation, and implement systematic policies: 1. Launch USHK, a US dollar stablecoin backed by the Hong Kong Monetary Authority. Current mainstream stablecoins, such as USDT, suffer from issues such as opaque reserves, high fees, and exchange barriers. Hong Kong could leverage the linked exchange rate system, with the HKMA leading the issuance of USHK: Commercial banks deposit US dollars, and the HKMA will issue the stablecoin at a 1:1 ratio, with no barriers, zero fees, and government backing. If mainland residents are allowed to exchange USHK within a US$50,000 foreign exchange quota, it could become the preferred tool for cross-border settlement, establishing a new status for the "Hong Kong dollar." 2. Build a Top-Level Crypto Exchange Cluster The core applications of the crypto ecosystem are exchanges and stablecoins, which complement each other. Hong Kong should actively attract the top ten global exchanges to establish regional headquarters or operations centers in Hong Kong, clarify policy expectations, establish a transition period, and waive prior compliance issues, thereby fostering an open, secure, and stable regulatory environment. 3. Explore Real-World Assets (RWAs) and New Asset Classes Beyond tokenizing traditional equity and debt, we should also focus on incremental markets. The antiques market holds enormous potential, with a total valuation reaching hundreds of trillions of yuan. However, scalability is hindered by difficulties in verifying authenticity, distorted prices, and difficulties in circulation. Leveraging its rule of law and certification advantages, Hong Kong can support the establishment of authoritative antiquities appraisal and insurance institutions, promote the tokenization of antique assets, and transcend the limitations of traditional auctions through on-chain pricing and trading mechanisms, enabling this niche market to enter the mainstream. 4. Implement a crypto talent recruitment program. Targeted visa and residence policies will be introduced: - Donate HK$3 million or more in Bitcoin/Ethereum (held for at least one year) and meet residency requirements to obtain a passport. - Crypto companies hiring foreign talent can obtain a work visa by pledging one Bitcoin, for example, and obtain citizenship after completing seven years of tax residency. Such policies not only attract talent but also help accumulate strategic crypto asset reserves. Hong Kong urgently needs to break away from its "horse-drawn carriage governing a car" regulatory mindset. While upholding the rule of law and controllable risks, it must also squarely recognize the unique characteristics of the crypto 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 risks, same rules" to seize a leading position in the new global crypto-financial landscape.