Hong Kong and Singapore compete for the new financial track in Web3.0: Who will become the center?

Hong Kong and Singapore vie for Web3.0 finance leadership: Who will win?

In the era of the digital economy, the international economic and financial landscape is undergoing new changes. As two Asian and international financial centers, Hong Kong and Singapore have successively launched the third generation of the Internet (Web3 or Web3.0) to compete for the new track of the financial sector.

“With the rise of blockchain technology, many people believe that the Internet has entered the era of Web3.” said Paul Chan Mo-po, Financial Secretary of the Hong Kong Special Administrative Region at the Hong Kong Web3 Carnival held in April this year.

In fact, Web3.0 is gradually becoming a blue ocean in the global financial field, and the competition between Hong Kong and Singapore is particularly fierce.

Two major international financial centers: competing for Web3.0 “territory”

In recent years, Hong Kong and Singapore have successively held multiple important events and issued multiple policies, actively promoting the field of Web3.0.

In 2022, Hong Kong Fintech Week added Web3 and Metaverse ideas as new elements, including the distribution of limited edition attendance certificate agreements (POAP) tokens to participants in the form of non-fungible tokens (NFTs). In April 2023, the Hong Kong Web3.0 Association was officially established, and it also ushered in the Hong Kong Web3 Carnival and the Digital Economy Summit. The four-day carnival is a grand event that brings together global Web3 technology leaders, experts and scholars, and industry elites, with more than 10,000 people registered to participate.

Hong Kong Chief Executive Carrie Lam attended the ceremony to establish the Hong Kong Web3.0 Association. Picture is from the Hong Kong SAR Government website.

Singapore has a relatively earlier exploration of Web3.0. In November 2021, the Singapore Fintech Festival (SFF) was held with the theme of Web3.0. The three-day SFF2021 brought together global experts to discuss how Web3.0 and key technological advances will drive the future of financial services.

“With the rapid development of technology, the Internet has evolved from a specific institution communication channel to Web1.0, creating a group of enterprises based on gathering and distributing information.” Paul Chan Mo-po said that in the past 20 years, the Internet has developed into Web2.0, which combines social interaction with the dissemination of information, and with the popularity of mobile terminal devices, it has created a new generation of giant enterprises. Web2.0 belongs to a centralized Internet, and users’ data and information are collected and controlled by large Internet platform companies. Under Web3.0, the immediacy, transparency, efficiency, decentralization, and platform-free attributes of blockchain technology break the original situation where data and information are controlled by specific Internet platforms. Data will be owned jointly by builders and users, making the Internet “decentralized”.

“Of course, Web3 is in its early stages, and currently common applications include cryptocurrencies, decentralized exchanges, digital identity verification, decentralized financial services (DeFi), blockchain games, and NFTs, but it can be imagined that there will be more new applications and opportunities in the future.” said Paul Chan Mo-po.

Although Web3 is still in its early stages, the competition between Singapore and Hong Kong in this field is becoming more and more intense.

“The competition between Singapore and Hong Kong in the Web3.0 field can be traced back to their emphasis on financial technology and innovation. Both are international financial centers with strong financial and technological infrastructure, which provide good conditions for promoting the development of Web3.0.” Yu Jianing, executive director of the Metaverse Industry Committee of the China Mobile Communications Federation and honorary chairman of the Hong Kong Blockchain Association, told The Blockingper.

Yu Jianing believes that Singapore has some advantages in developing Web3.0. The Singapore government has always actively promoted the development of digital assets and blockchain technology by formulating regulatory policies, strengthening cooperation between government and enterprises, and international cooperation. Singapore’s advantages lie in its high degree of internationalization, good legal environment, and relatively complete regulatory policies, which have attracted a large number of international financial and technological enterprises.

However, Hong Kong is also catching up. On the one hand, Hong Kong is a pioneer in regulatory compliance in the virtual asset field in the Asia-Pacific region and plays a huge and positive leadership role in the development of the Asia virtual asset market. On the other hand, as a financial hub between China and the international community, Hong Kong has unique geographical advantages and close ties with the mainland financial market. Mainland China is also actively promoting the development of blockchain technology and the digital economy, forming a good complementary ecosystem for the Web3.0 industry circle with Hong Kong. In the future, Hong Kong can use its geographical advantages to strengthen its connection with the mainland capital market, promote capital flow, achieve two-way flow of funds and projects, and promote the deep integration of blockchain technology in practical application scenarios.

It is worth noting that behind the “battle for Web3.0”, one can also see the challenges faced by these two major Asian financial centers.

Professor Hu Jie, from the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University, told The Paper that Singapore has an advantage in the Web3 field, but suffered losses from investing in the cryptocurrency market last year, leading to a tightening of policies. Hong Kong’s economy has been in decline in recent years, and its financial advantages are also diminishing, particularly with significant outflows of talent and capital. Therefore, the Hong Kong SAR government hopes to use the opportunity of Web3 new finance to regain its former glory.

“Both sides see the opportunity for financial change brought by Web3 with blockchain technology as its feature, and because the whole world is exploring the Web3 model, becoming one of the few experimental zones first may win the future opportunity.” Hu Jie said.

Competing in the international virtual asset center, facing regulatory challenges

In the Web3 era, virtual assets, as a rapidly developing new track, have become one of the focuses of competition between Hong Kong and Singapore.

At the end of October to early November 2022, Hong Kong and Singapore held their respective financial technology festivals almost simultaneously.

At the 2022 Hong Kong Fintech Week, the Hong Kong SAR government released the Policy Declaration on the Development of Virtual Assets in Hong Kong (the “Policy Declaration”). The Policy Declaration pointed out that due to the attraction of virtual assets to global investors and the increasing recognition in financial innovation, as well as the future opportunities brought by virtual assets entering the Web3.0 and metaverse fields, virtual assets have become indispensable in the market. “Hong Kong is an international financial center and holds an open and inclusive attitude towards innovative personnel around the world engaged in virtual asset business.” Chan Mo-po said that the Policy Declaration will showcase the SAR government’s vision to promote Hong Kong as an international virtual asset center.

At the 2022 Singapore Fintech Festival, Ravi Menon, the Managing Director of the Monetary Authority of Singapore (MAS), said that Singapore hopes to become a hub for digital assets. During the Fintech Festival, the first industry pilot for digital assets and decentralized finance in Singapore went online.

The Monetary Authority of Singapore. Image from the official website of the Monetary Authority of Singapore

However, in recent years, many virtual currency projects have collapsed or related trading platforms have applied for bankruptcy protection, and the development of Web3.0 also faces severe problems of how to regulate it.

In response to this, Hong Kong Financial Secretary Paul Chan Mo-po stated that the development of the virtual asset industry in Hong Kong should be promoted cautiously. “The premise of promoting the development of Web3 is that it must not harm the stability of the financial system and investor protection. Appropriate regulation is necessary so that a ‘sustainable development’ environment can be created, giving everyone a more ideal development space. Under this premise, Hong Kong actively embraces the development of Web3.”

In terms of the development of Web3, Hong Kong will establish a special task force for the development of virtual assets and will first introduce a licensing system for virtual asset service providers in June this year. At the same time, the Hong Kong Monetary Authority is also studying the regulation of stablecoins, etc., to ensure the sustainable and responsible development of the virtual asset industry.

Ravi Menon, chairman of the Monetary Authority of Singapore, emphasized that he “supports digital asset innovation and refuses cryptocurrency speculation.” As early as 2016, Singapore launched a regulatory sandbox for financial technology innovation, and incorporated the regulation of encrypted assets into the “Payment Services Act”. For service providers who want to provide related encryption services, the Monetary Authority of Singapore has a strict and lengthy licensing process. MAS has also issued a strong warning to retail investors of cryptocurrencies, and has been taking increasingly strong measures to restrict retail investors’ access to cryptocurrencies.

Regulatory sandbox framework diagram. Image from the official website of the Monetary Authority of Singapore

“Regarding the regulation of virtual assets, both Hong Kong and Singapore are aware of the importance of protecting the stability of the financial system and the interests of investors, and based on this actively embrace the development of Web3.0, but the two have differences in regulatory aspects.” Yu Jianing said that Hong Kong emphasizes cautious promotion when promoting the development of the virtual asset industry and incorporates the regulation of virtual assets into the regulatory framework. This orderly regulatory measure helps to ensure market transparency and compliance and increases investors’ confidence. Singapore’s advantage in the regulation of virtual assets lies in its early adoption of a series of proactive regulatory measures. Regulatory sandboxes and strict licensing procedures help screen out participants with good compliance and risk control capabilities.

“The legal systems of Hong Kong and Singapore are relatively sound and are both international financial centers with mature experience in financial regulation,” said Hu Jie. The development of Web3 can comprehensively draw on the regulatory logic of traditional finance, and creatively implement reasonable regulatory measures based on the characteristics of Web3-related new technologies. “Some people think that the financial logic of Web3 is completely different from traditional finance, but I do not think so. On the contrary, the problems encountered in Web3 financial practice have all been encountered in financial history, but the physical technology of Web3 is different, so the regulatory logic is the same and the regulatory technology can be adjusted.”

Yu Jianing believes that the development of Web3.0 needs to uphold the key principles of responsible innovation and regulation, seeking a balance between encouraging financial innovation, flexibility, transparency, and consumer protection with an appropriate regulatory framework. Regulatory agencies need to closely monitor technological developments and market changes, develop flexible and specific regulatory policies to protect investors’ rights, prevent financial risks, and maintain market order. Regulation should emphasize compliance, transparency, and risk management, and encourage cooperation and information sharing to establish a healthy and vibrant Web3.0 ecosystem.

Exploring the Digital Hong Kong Dollar and Digital Singapore Dollar respectively

Central bank digital currencies may be another important battlefield in the competition for Web3.0.

Regarding central bank digital currencies, on May 18th, the Hong Kong Monetary Authority announced the launch of the “Digital Hong Kong Dollar” pilot program. Sixteen selected companies from the financial, payment and technology industries, including Bank of China (Hong Kong), HSBC, AliBlockingy Financial Services (HK) Limited, etc., will conduct the first round of trials this year to study the potential use cases of “Digital Hong Kong Dollar” in six categories, including comprehensive payments, programmable payments, offline payments, tokenized deposits, third-generation internet (Web3) transaction settlement, and tokenized asset settlement. However, no decision has been made yet on whether to formally launch the “Digital Hong Kong Dollar”.

HKMA Chief Executive Eddie Yue delivers the opening remarks at the event, launching the “Digital Hong Kong Dollar” pilot program. Image source: HKMA official website

Last September 20th, the Hong Kong Monetary Authority issued a policy position paper entitled “Digital Harbor Dollar – Taking a New Step” to outline the HKMA’s policy stance and future development direction for retail central bank digital currency (i.e. “Digital Harbor Dollar” or e-HKD).

The Hong Kong Monetary Authority had studied central bank digital currencies in 2017 and jointly launched the Inthanon-LionRock project with the Bank of Thailand in 2019. The project focuses on developing a blockchain-based cross-border corridor network that connects the central bank digital currency blockchains of Hong Kong (LionRock) and Thailand (Inthanon) to facilitate the synchronized settlement (PvP) process of cross-border foreign exchange transactions in wholesale (non-retail) levels of HKD and THB.

Inthanon-LionRock central bank digital currency model. Image from the Hong Kong Monetary Authority website

The Monetary Authority of Singapore launched the Ubin project in 2016 to explore blockchain technology and central bank digital currencies, and continues to collaborate with the industry on potential applications for wholesale CBDC. On the other hand, the Monetary Authority of Singapore is also carefully studying the costs and benefits of retail CBDC (Digital Singapore Dollar) and has launched experiments to test potential applications, but has not made a decision on this yet.

Wanxiang Blockchain Chief Economist Zou Chuanwei analyzed to The Paper that the LionRock project of the Hong Kong Monetary Authority and the Ubin project of the Monetary Authority of Singapore are both wholesale central bank digital currencies, and their progress and achievements are quite similar, but the LionRock project of the Hong Kong Monetary Authority has a greater impact internationally. In 2019, the HKMA and the Bank of Thailand proposed the corridor network concept during the trial of wholesale central bank digital currencies for cross-border synchronized settlement (PvP). This concept was adopted by the Bank for International Settlements (BIS) and became the basis for a series of multilateral central bank digital currency bridge trials conducted by BIS worldwide, including the MAS project in collaboration with the Bank of France. This fully demonstrates the innovation strength of the Hong Kong Monetary Authority.

“In terms of retail central bank digital currencies, the Hong Kong Monetary Authority has made faster progress than the Monetary Authority of Singapore.” Zou Chuanwei said that the Monetary Authority of Singapore released a research report on retail central bank digital currencies in November 2021, but believes that the urgency of launching retail central bank digital currencies in Singapore is not high at present. The Hong Kong Monetary Authority, on the other hand, released a technical white paper on digital harbor dollars in October 2021, discussed digital harbor dollars from a policy and design perspective in April 2022, and launched a pilot program for digital harbor dollars in 2023. The linked exchange rate system of the Hong Kong dollar provides ample room for innovation in digital harbor dollars. For example, the Hong Kong Monetary Authority has considered three possible issuance mechanisms for digital harbor dollars: coin mode, note mode, and total balance mode. The research, development and testing of digital renminbi by the People’s Bank of China can also provide reference for digital harbor dollars.

In addition, Hu Jie said that the launch of the digital currency by the central bank has symbolic significance, which demonstrates the central bank’s recognition and embrace of blockchain technology, and has a positive effect on encouraging other applications of Web3. “The monetary volume of Singapore and Hong Kong, China is too small. The launch of the central bank’s digital currency or stablecoin by itself has too little impact on the market and is more symbolic.”

What is the role of central bank digital currencies in the Web3.0 era?

From the “Policy Statement on Virtual Asset Development in Hong Kong” released by the Hong Kong Special Administrative Region Government on October 31, 2022, it can be seen that the understanding of Web3.0 by Hong Kong, China mainly focuses on the application of distributed ledger technology in asset registration, trading, and clearing, including virtual assets, stablecoins, and green bond tokens. The central bank digital currency represented by the Digital Hong Kong Dollar can serve as the “backbone” and pillar that connects legal currency and virtual assets.

In this context, Zou Chuanwei believes that central bank digital currencies mainly have two functions in the Web3.0 era.

On the one hand, it guides innovation. Central bank digital currencies enjoy government credit endorsement, have the highest level of security, and are applicable to the widest range of application scenarios. Innovations around central bank digital currencies can spill over into other directions of distributed ledger technology, thus guiding the market’s innovation in the application layer through government-led basic innovation. The use cases of Digital Hong Kong Dollar in comprehensive payment, programmable payment, and offline payment are representative of this aspect.

On the other hand, it serves as a bridge between legal currency and digital assets. Central bank digital currencies belong to legal currency, but use the same or similar technology as digital assets, so they can serve as a bridge between the two. The use cases of Digital Hong Kong Dollar in third-generation Internet (Web3) transaction settlement and tokenized asset settlement are representative of this aspect, but it is necessary to study whether Digital Hong Kong Dollar can improve the problem of inflow and outflow of the digital asset market, whether it is compatible with the requirements of “know your customer” (KYC), anti-money laundering (AML), and anti-terrorism financing (CFT), and whether it can support delivery versus payment (DvP). In addition, the use case of Digital Hong Kong Dollar in tokenized deposits reflects an emerging consensus-commercial bank tokenized deposits are safer than stablecoins issued by technology companies.

“Hong Kong is also considering the feasibility of issuing stablecoins with central bank digital currencies as reserves, which is safer than stablecoins’ reserve assets being held by commercial banks,” said Zou Chuanwei.

Yu Jianing believes that in the era of Web3.0, central bank digital currencies can also play an important role in improving payment efficiency, promoting financial inclusion, and supporting financial innovation. At the same time, the management of central bank digital currencies is easier, which can effectively reduce the cost and risk of online business financial management, account verification, etc., and is more easily integrated with Internet business than traditional payment methods.

“Singapore and Hong Kong are both international financial centers, with mature financial markets and innovative ecosystems. Cross-border payments and settlement have always been important needs,” said Yu Jianing. By promoting the research and application of central bank digital currencies, the two places can not only consolidate their leading positions in the field of financial technology, attract more innovators and investors, but also improve the efficiency and convenience of cross-border payments, accelerate capital flow, and promote the development of international trade.

At the same time, the introduction of central bank digital currencies involves complex technical architecture and security protection. Yu Jianing emphasized that ensuring the stability of the central bank digital currency system, preventing data leakage and network attacks, is an important challenge that requires comprehensive consideration of technical and security risks. The success of central bank digital currencies also depends on the public’s acceptance and understanding of it. Promoting and popularizing central bank digital currencies requires educating users and investors and solving the problem of cognition and trust in new technologies.