Editor's note: On September 20, the two-day 9th Blockchain Global Summit came to a successful conclusion. Wanxiang Blockchain Chairman Xiao Feng delivered a closing speech at the event titled "Web3.0 and the Hong Kong Special Administrative Region Virtual Asset Policy Declaration". The following is compiled based on the shorthand notes of the event, with some deletions and modifications that do not affect the original meaning.
Many people have been interested in the virtual asset declaration of the Hong Kong Special Administrative Region Government over this period of time. I will share with you my views on the virtual asset declaration announced by the Hong Kong Special Administrative Region Government from the perspective of the market and practitioners, and see why this declaration was issued and what its purpose is.
Why does the SAR government have a series of policy declarations on virtual assets? To explain the ins and outs of it, we must start with the digital economy. The basis of this series of declarations is that Hong Kong wants to build a complete set of adaptive services to support the digital economy in Hong Kong. What are the characteristics of the digital economy?
First, the digital economy is not constrained by geographical space.
Because it is not constrained by geographic space, Hong Kong has the opportunity to play its unique advantages of "one country, two systems", common law and free port in the digital economy. Some people say, "Hong Kong missed the Internet, so it must not miss the blockchain." In fact, there is no stage for Hong Kong to miss the Internet, because the Internet is related to geographic space, judicial regions, and the location of users. However, Web3.0 or blockchain is not closely related to geography, so Hong Kong does not have an Internet era, but Hong Kong can have a Web3.0 era or a blockchain era. And in this period, Hong Kong has a unique advantage, that is, the advantage of a free port.
What is the advantage of a free port? It means that funds can flow in and out freely. The deposit and withdrawal of legal currency is both an obstacle and a necessary prerequisite for large-scale application.
On the other hand, in Hong Kong, whether it is Web3.0, blockchain, or virtual assets, they can make good use of their institutional, mechanism, and legal advantages while avoiding geographical and spatial restrictions.
Second, the digital economy is not bound by physical rules.
For example, if you build a building or a city in the metaverse, you are not restricted by the rules of mechanics. Do you need to calculate its structural weight? No.
Third, the digital economy is not constrained by commercial organizations.
Digital technology has given individuals tremendous capabilities, so that they no longer need to rely on a certain business organization to do many things. For example, you can work for yourself, but you don’t need to rely on an organization.
In addition to this feature, the value law of the digital economy is completely different. The value law of the digital economy is high fixed cost, low marginal cost, or even zero marginal cost. Developing a software requires very high fixed costs and huge investment. For example, to develop GPT4, Open AI spent more than one billion or even tens of billions of dollars to develop it. In the future, to upgrade to GPT5 and GPT6, it will require tens of billions or even tens of billions of dollars of investment. This is a high fixed cost thing. But after GPT4 was developed, the marginal cost of 100 million users and 1 billion users is almost negligible. This is a value law that industrial products and industrial economy do not have.
Under this law of value, the path to maximizing the value of a digital product and service is to open source, free, and without permission, because only in this way can you maximize promotion and let others use your things. For a cost and service with zero marginal cost, the cost of serving 100 million people and serving 1 billion people will not increase. In such a situation, ownership is not so important, and the right to use, that is, to let more people use it, is more important, so the digital economy can be said to be an economy of the right to use to some extent.
In an economy of usage rights, how can we capture the value of an open source, open, permissionless, or even free product and service? The value capture tool for usage rights is Token. In computer language, Token means permission to use, or token. The permission to log in to a system has evolved into standardized usage rights in the blockchain era. Take the fax machine effect as an example. Let's assume that a fax machine network is composed of 1 million fax machines. Does any user who wants to join the fax machine network need permission from others? Basically, no, but you need to buy a fax machine first. If you don't buy a fax machine, you can't join the fax machine network. If you buy a fax machine, you buy a permission to join the fax machine network. Just like you need to buy a Bitcoin first to join the Bitcoin network, and you need an Ethereum to use the Ethereum network. Fax machines, Bitcoins, and Ethereum are all the same here, they are all permission to use. It is the token and permission that must be obtained when using this network and enjoying the value of this network. The difference between fax machines and Bitcoins and Ethereums is that one is digital and the other has a physical structure.
The fax machine network does not belong to the people who buy fax machines and access the fax machine network. This is like Ethereum. Holding ETH does not mean you own the rights and interests of the Ethereum network. You just have the right to use it or the permission to use it. Therefore, the fax machine effect of the right to use has given rise to a new capital system - the stakeholder capital system. Everyone is a user, and no one owns the network.
At the same time, the fax network has a third characteristic: any new user will bring value and benefits to other users who are already using the fax network. Because the more people join the fax network, the more possibilities other fax users have to send faxes, and the value is obviously increasing. This is the greatest beauty of the fax effect or the right to use effect. The more people use it, the better it is for everyone. If it is an ownership structure, if you own a share of the company's stock, the stock is yours, and no one else can claim to own it. The right to use can be granted indefinitely, and the more it is granted, the greater the value, but ownership is not like this.
Based on these three characteristics, we can regard the practice of blockchain in the past decade as a stage of infrastructure construction. At the same time, we can also regard it as a period of ten years for us to build a set of financial infrastructure for the digital economy with the above characteristics. According to the three characteristics of the digital economy summarized above, traditional financial infrastructure cannot serve it well. The practice of the first ten years is to build a new financial infrastructure that can serve digital natives and digital twins well.
This financial infrastructure is first based on a distributed network, which is Web3.0. At the same time, a new accounting method is built on this distributed network, which is a distributed ledger, that is, blockchain. Based on such a distributed ledger, we have built a set of distributed finance, which is DeFi. All large-scale applications based on blockchain or Web3.0 in the future will use this set of financial infrastructure, because traditional financial infrastructure cannot serve this new economic model.
The new financial infrastructure has the following major building blocks.
First, a new accounting method.
The most important feature of the new accounting method is that it is an open, transparent, and global public ledger. Before this, all accounting methods were private ledgers, and people kept accounts for themselves. My account cannot be known or checked by others. But everything on the blockchain is open and transparent to the entire network. What is built on the public ledger is a global ledger system. Once logged into the global ledger system, anyone in the world can check and see it, touch it, and trade it. This is a feature that traditional financial markets do not have. The assets in traditional financial markets are all registered in private ledgers. If it is not open to you, you cannot check it, buy it, invest in it, or trade it.
Second, the new account system.
Traditional finance is built on the basis of the bank account system, and all funds must be stored in the bank account system. After the emergence of the Internet platform, a new generation of Internet accounts emerged, such as Alipay Wallet and WeChat Pay Wallet. These two wallets are not accounts established by banks, nor are they accounts managed by banks, but accounts managed by Internet platforms, but they also contain legal tender. The revolutionary change comes from the blockchain. The digital wallets of the blockchain have various forms of presentation, but in order to align with the above, we call it a blockchain account. The blockchain account is completely separated from the traditional financial system, and even more separated from the bank account system and the Internet account system. The blockchain account system no longer runs legal tender, but USDT and USDC. In the future, it can also run the digital currency CBDC issued by the central bank. But in any case, if this currency cannot be digitized and cannot run on smart contracts, it cannot be compatible with the blockchain account.
Third, new settlement method.
Another change is that the settlement method of this new financial infrastructure has undergone a huge change. Transaction confirmation and clearing and settlement are completed simultaneously. Transactions are conducted point-to-point, and payments are also conducted point-to-point. This new settlement method has now been accepted by the traditional banking industry, at least from the United States, Singapore to Hong Kong, China. The RWA recently issued by traditional banks is the tokenization of real assets. Why do we need to issue real-world assets in the form of tokens? It has a great advantage - the efficiency of clearing and settlement is greatly improved, and the transaction fees and transaction links are greatly reduced. In addition, the form of currency running in this financial system has also changed greatly. It can be a digital currency.
I divide digital currencies into three categories. The first category is legal digital currency, that is, CBDC issued by the central bank. The central bank issues base currency, which needs to be created by market institutions to create monetary leverage or money multipliers in order to better serve the real economy. Therefore, stablecoins, that is, digital currencies issued by institutions, came out. In the traditional financial market, banks are the main builders of money creation, monetary leverage, and money multipliers. The stablecoin issued by institutions is called M2, which is the same as M2 in the real financial market. It is a currency created by leveraged market institutions such as banks. This is not a currency issued by the central bank, but a currency created by banks.
In Hong Kong, if you take a banknote with a "Pay on Presentment" on it, it is an IOU and belongs to M2. In the new financial infrastructure, there is also a native digital currency, Bitcoin. The form of Bitcoin is still evolving, and it has not yet evolved into a complete form, and its functions are also being improved.
Another new asset class is the emergence of tokens. We divide homogeneous tokens into two categories: functional tokens and security tokens. STO and RWA were discussed a lot in the meetings over the past two days. In fact, in my personal opinion, 70% to 80% of digital assets in the future are functional tokens, not security tokens under the concept of STO. There are seven or eight pieces of legislation related to blockchain, Web3.0, and digital assets in the US Congress. Everyone has different opinions and views, and there are a lot of debates. There are laws in the Senate and the House of Representatives, laws dominated by the Democratic Party and laws dominated by the Republican Party, and the views are different. But everyone has reached a consensus and intends to pass legislation to give the main regulatory power to the US Commodity Futures Trading Commission (CFTC) instead of the US Securities and Exchange Commission (SEC). On this point, the Senate, the House of Representatives, the Democratic Party, and the Republican Party have no dispute. This means that they have reached a consensus on at least one point, that is, 70% to 80% of tokens are virtual commodities, which are regulated by the Commodity Futures Trading Commission (CFTC). This also shows that most of the digital assets are still functional tokens, and how to design their compliance boundaries is very important.
This new financial infrastructure has a new token tool called NFT, the so-called non-fungible token. NFT is a digital token that is used to prove all digital, virtual, invisible and intangible things, such as identity proof, qualification proof, work proof, etc. There are a few more questions to be clarified:
First is STO.
In the eyes of the regulatory authorities in Hong Kong, STOs are divided into two categories. The first category is security tokens or equity tokens. Tokenizing a company's equity is no longer an IPO, but an STO. The second category is RWA, which may be an issued collective investment plan because RWA has interest payments, and interest payments are securities. Both categories fall within the scope of STO in Hong Kong.
STO must be issued on the blockchain, and it is best to issue it on a global public ledger, because in this way, whether it is a security token or an RWA, it becomes an asset issued, registered, and circulated on a global public ledger, thereby obtaining global liquidity support rather than liquidity support in a certain region. Looking back at the depth and breadth of the financial market at this time, you will find that the liquidity of these tokens is no longer supported by the depth and breadth of the financial market in a certain region.
The second is stablecoin.
I think stablecoins are very important to any market. Because stablecoins are not only trading tools for exchanges, but also bridges between the "real world and the virtual world", "real economy and digital economy", and "private ledgers and public ledgers". The so-called private ledgers are the ledgers of each financial institution, and the so-called public ledgers are blockchains. So stablecoins are also a bridge between bank accounts and blockchain accounts, that is, stablecoins are a bridge that turns legal tender in bank accounts into digital currency. At the same time, it is also a bridge between "CeFi and Defi", "legal currency and digital currency", and "unprogrammable currency and programmable currency". So its importance cannot be overemphasized. Every region has a stablecoin anchored to its own currency, such as Hong Kong's stablecoin based on the Hong Kong dollar. If it didn't exist, it would be unimaginable.
RWA is a direction that we have observed that regulators in various countries are pushing for. Through Tokenzation, real assets, bank assets, and assets with cash flow can be supported by the global liquidity market. To obtain global liquidity support, it must be based on the issuance of global public ledgers, and it is unlikely to do this on private chains or private ledgers.
More than 80% of the market share of RWA is not for the audience of centralized exchanges, but for the inter-institutional and inter-bank markets, which are issued by traditional financial institutions and traded between institutions in a tokenized market. It is like almost all stock exchanges in the world have tried to establish a centralized, standardized, and centralized bond market, but no stock exchange has ever succeeded. Because RWA or similar fixed-income products in the bond market are not suitable for standard centralized transactions, it should be a point-to-point transaction. Even if the same bond is bought and sold, the credit, payment terms, and purchase quantity of the counterparty are different, and the final quote is different. There is no way to put it in a system and use machines to match transactions, so it is not suitable for trading in exchanges.
After explaining this clearly, we know the shock or scientific nature of the virtual asset policy declaration made by the Hong Kong SAR government, that is, why it does this. The policy goal of the Hong Kong International Virtual Asset Center is not just to build a trading market for speculating in virtual assets, but its goal is much greater than this. They hope to find a way for blockchain, Web3.0, and virtual assets to serve the real economy, support technological innovation, and further upgrade the financial center through Tokenzation. This cannot be just a secondary market, that is, it cannot be just a virtual asset exchange.
Hong Kong's international virtual asset center is constructed with a four-layer structure. Only when these four layers are included can it be a complete financial system.
The first layer needs to have an active secondary market and active transactions. On top of active transactions, there needs to be a primary market that can issue new digital assets or virtual assets to support the real economy and technological innovation, thereby building a new and more advanced version of the financial market. Without such a market, the value of Hong Kong's virtual asset declaration will be greatly reduced. With an effective trading market and issuance market, the third-layer structure of the international virtual asset center is centralized industry services. Because service issuance and service transactions require the participation of many institutions and practitioners, a new virtual asset industry will be formed. Where does this industry fall? The first is to solve employment, and the second is to provide tax revenue. But this industry is far more than that, because with the previous three-layer architecture, the industrial ecology of Web3.0 will also land in such a city. We have observed that many Web3.0 startup projects have sought to land in Hong Kong Cyberport or Hong Kong Science Park, because there is the core foundation of the ecology - the primary market and the secondary market. Blockchain or Web3.0 entrepreneurs may be game experts, but not necessarily blockchain experts, so third-party technical support is needed on the chain. A good economic model needs to be designed to support business logic and Web3.0 logic. Professional knowledge and professional talents are also needed to support it. A modern industry is formed in this way. This is its four-layer structure.
On this basis, we have seen that the 2.0 version of Hong Kong International Financial Center is about to emerge. One of the core pillars of the 1.0 version of Hong Kong International Financial Center is Hong Kong's stock market. Hong Kong International Financial Center was once supported by two centers, one for financing international trade and international shipping, but this pillar has obviously been hit by the epidemic and other reasons in the past few years. After the decline in trade, shipping will also decline. The decline in trade and shipping has led to the gradual weakening of Hong Kong as one of the supports of the international financial center, that is, the number of services provided by a large number of banks for trade financing and shipping financing will decline, and its importance will also decline accordingly.
The foundation of the Hong Kong stock market is shareholder capitalism, but we use the corporate system to fix the rights and interests of all shareholders on the basis of the shareholder capitalism system. Therefore, shareholder capitalism or the stock market is an ownership market, which converts ownership into shares and standards and lists them on the stock exchange. This is the 1.0 version of Hong Kong's international financial center, which will exist forever, and the corporate system will also exist forever.
However, the change brought about by the emerging digital economy is that the foundation of the system has changed, from Shareholder to Stakeholder, from shareholder capitalism to stakeholder capitalism. Under the system of stakeholder capitalism, it is not necessary to use the corporate system to fix and determine the rights and interests of all persons. Since they are stakeholders, the organizational structure of non-profit organizations and open source organizations can be used. In non-profit organizations and open source organizations, the institutional structure of the right of use is actually a system, which shares and standardizes the right of use, that is, functional tokens. Therefore, the 2.0 version of the Hong Kong International Financial Center established the virtual asset market of Tokenzation.
Therefore, the Hong Kong SAR government's policy statement on virtual assets is related to Hong Kong's status as an international financial center, the upgrading of Hong Kong's service functions to the mainland, and even more so to Hong Kong's economic transformation and urban upgrading. It is not just a matter of the financial market, nor is it just the establishment of an exchange and the issuance of an exchange license. This is only one of its values. Five years later, we may even find that this is not the most important value.
