Bitrace’s Insights and Outlook at Hong Kong Fintech Week 2024
During the Hong Kong FinTech Week 2024, Bitrace CEO Isabel Shi participated in a blockchain and digital assets forum roundtable alongside Animoca Brands President Evan Auyang, Terminal 3 Co-founder & CEO Gary Liu, and Thomas Zhu from China Asset Management (Hong Kong). They held an engaging discussion on topics such as Hong Kong’s Web3 environment and the convergence of TradFi and DeFi. Additionally, at a fireside chat hosted by Cyberport, Isabel discussed virtual asset security and VAOTC regulation with Slowmist Partner & CPO Keywolf.
Here are the main points Isabel shared during the two events:
Blockchain & Digital Assets Forum: Convergence or Coexistence? Exploring the Relationship between Native Web3 and TradFi in Hong Kong
1.Traditional finance and decentralized finance, by definition, seem mutually exclusive, but we are seeing more and more collaboration between the two. The government has set up a special task force to enhance the Web3 ecosystem development. Earlier in the year, we saw the first batch of crypto ETFs listed. However, risks in compliance, fraud, security, and money laundering still raise concerns. What key steps could bridge the gap between the trad-fi and de-fi?
From my point of view, two factors are really important: clear regulations and trusted custodians.
Clear regulations: Regulators need to set up clear rules for both DeFi and TradFi, especially around things like anti-money laundering (AML), know-your-customer (KYC), data privacy, and taxes. This will help reduce legal uncertainty and manage risks for both sides.
And since crypto is global, with lots of cross-border movement, we’re going to face challenges at an international level too. A global regulatory framework might be where we’re headed in the future.
Trusted custodians: Another key piece is having trusted platforms that handle the compliance side of things — KYC, KYT, AML — and help users easily move between decentralized and traditional assets. We also need reliable custodians to store these assets securely, weve already had very mature custodian solutions for Trafi and some innovative solutions for Defi assets. However, I think we should have some more comprehensive solutions that could integrate both, thats a key step to bridge the gap.
2. Hong Kong’s crypto ecosystem is unique. In the U.S., we have giant crypto trading platforms, while HK regulators currently only license three different VATPs. What are the main blockers for HK’s crypto ecosystem? What are the best way to overcome the challenges mentioned above?
First, although Hong Kong has introduced a regulatory framework for VASPs, many aspects are still unclear, for instance, AML rules, the custodial standard. The current framework is influenced heavily by the traditional one, which is not very applicable to the web3 industry.
There’s also the challenge of fragmented regulation — different bodies oversee different parts of the ecosystem. For example, the Hong Kong Monetary Authority (HKMA) handles stablecoins, the SFC oversees VATPs, and Customs gets involved in OTC activities. This lack of clear boundaries and coordination between regulators can slow down the development of the crypto ecosystem.
Second, as crypto can easily move across borders, even though Hong Kong has a large OTC market, many local users prefer using OTC platforms for fiat on/off ramps, and they often turn to overseas exchanges for crypto-to-crypto trading. The large international exchanges dominate the market, pulling users and liquidity away from local players, which puts a lot of pressure on Hong Kong’s licensed exchanges to compete.
To overcome these challenges, I’d suggest two things:
- Clarify and coordinate regulations: We need clearer guidelines and better collaboration between regulatory bodies to strike the right balance between regulation and innovation. Given that Web3 is global, Hong Kong can’t rely solely on local rules — we need more cross-border regulatory cooperation and information sharing.
- Support local VASPs: Providing more policy and development support for local crypto firms would help them attract users, foster innovation, and build a competitive edge against the larger international platforms.
3.Hong Kong strives to become the web3 and crypto hub in the APAC region. What is HK’s competitive edge in the Web3 and Crypto space?
First, Hong Kong offers a flexible market environment, a strong legal framework, and a leading position in Asia’s financial markets. This foundation has already attracted major players in the crypto space — many big exchanges and stablecoin issuers originally set up their headquarters here. Even though the number of licensed exchanges in Hong Kong is small, the large scale of OTC crypto activity shows that Hong Kong has a natural advantage in Web3.
Second, since late 2023, Hong Kong has made a significant push to develop its Web3 infrastructure. Compared to other global financial centers, Hong Kong is leading in both commitment and resources dedicated to this space. I believe that in the long run, these efforts will help Hong Kong build a lasting competitive edge.
4.What additional regulatory initiatives could help HK to achieve its goal?
To help Hong Kong achieve its goal of becoming a Web3 and crypto hub, there are a couple of key regulatory initiatives that could make a big difference.
First, Regtech needs to take the lead. Web3, and especially crypto, is highly decentralized, anonymous, and operates across borders, so traditional financial regulations don’t fully apply here. One of the biggest challenges is tracking and preventing crypto-related crime — if you can’t detect it early, it’s very difficult to trace or recover funds. The U.S. has been investing heavily in regtech for years, and I think Hong Kong, as a Web3 pioneer in Asia, needs to do the same. By leveraging regtech, Hong Kong can find the right balance between innovation and compliance, and strengthen its influence in the APAC region and beyond through its regulatory standards, especially in areas like anti-money laundering.
Second, talent policies are crucial. Attracting and nurturing talent is key to driving growth in the Web3 space. As we’ve seen, talent in the crypto industry is highly mobile, especially as global regulatory landscapes shift. Hong Kong needs strong policies to attract international talent while also investing in local education and training. Developing a strong local talent pool will not only boost the Web3 ecosystem but also help Hong Kong stay connected to global markets.
Cyberport: 2024 Virtual Asset Security Insights & Compliance Opportunities and Challenges Under the New Policy Address
5.Notable Security Incidents in the Virtual Assets and Cryptocurrency Sector in 2024
Japanese exchange DMM suffered a loss of 4,502.9 BTC, amounting to over $300 million, marking it as the third-largest loss in the history of Japanese exchanges. The stolen funds were moved through a variety of methods, including dispersal, cross-chain transfers, and exchanges, contaminating many OTC merchants’ addresses along the way. The incident led to the freezing of business addresses belonging to notable institutions in Southeast Asia by Tether. Following the DMM incident, crypto service providers in Asia, especially OTC platforms, have become more vigilant about KYT (Know Your Transaction) processes.
6.With Hong Kong set to expand its licensed virtual asset exchanges, could you introduce common cryptocurrency fraud tactics to help the public avoid pitfalls?
Recently, Bitrace released the Web3 Anti-Fraud Handbook, which compiles the most common tactics we’ve encountered in real-world crypto fraud cases over the years. These include schemes like fake wallets that steal coins when downloaded from third-party sites, “pig-butchering” scams targeting non-blockchain-savvy users, and QR code transfer frauds where the amount transferred differs from what appears on the phishing site’s interface. Many traditional scams have been adapted to the Web3 space.
For those interested, the handbook is available for download on the Bitrace website.
7.The 2024 Policy Address mentions the completion of a second round of consultations on regulating virtual asset OTC transactions and the submission of a proposed licensing regime for virtual asset custodians. Could you interpret this?
We have long monitored the VAOTC market, especially in Asia, and have continuously gathered and analyzed VAOTC-related addresses. According to our data, the total transaction volume in Hong Kong’s VAOTC market reached approximately USD 500 billion over the past three years.
Among these transactions, aside from regular investor deposits and withdrawals, there are also numerous high-risk transactions, such as funds originating from sanctioned regions, risk-related funds tied to Southeast Asian black-market business addresses, and laundered funds associated with other criminal activities. These high-risk funds, passing through VAOTC addresses, can contaminate the addresses of ordinary investors and legitimate financial institutions, leading to significant legal risks. For instance, investors receiving funds from thefts or fraud may face investigations.
With a licensing regime, the Hong Kong government could mandate VAOTCs to operate compliantly, enabling the identification and isolation of these high-risk funds, thus preventing regular investors and financial institutions from exposure. If effectively enforced, Hong Kong could soon establish a trusted and compliant VAOTC market.
8.What preparations should OTC and custodial service providers make? Any suggestions?
It is essential to establish standardized Crypto AML and KYT mechanisms. Before accepting user funds, it is crucial to conduct a funds audit on the user’s transfer address to assess risk levels and, if necessary, implement control measures for high-risk addresses.
Adopting mature RegTech solutions can be more efficient than building systems in-house. However, risk management personnel must continuously enhance their understanding of the crypto market, including the basic principles of blockchain, the latest crypto crime techniques, and innovations in Web3 applications. This knowledge is vital for effective risk management and compliance.
9.What products can support regulatory and financial institutions?
We offer two standardized products:
- Detrust — An on-chain risk fund monitoring and management platform. It provides real-time monitoring and assessment of crypto addresses and transactions, helping clients quickly identify, manage, and investigate risk funds. It is suitable for various VASPs and traditional enterprises engaged in crypto activities.
- Bitrace Pro — A collaborative cryptocurrency tracking and analysis platform. It utilizes powerful features such as visual analysis, entity identification, and address clustering to help clients rapidly reconstruct risk events, alongside over 20 advanced risk analysis models for comprehensive and intelligent assessments. This platform is designed for compliance departments in law enforcement agencies or large VASPs.
Additionally, we can provide customized solutions, including stablecoin monitoring platforms, OTC monitoring platforms, and comprehensive compliance platforms.
10.As a leading company established in Cyberport, what advice would you give to companies preparing to enter Hong Kong?
Firstly, entrepreneurship is definitely not an easy journey; it requires long-term resilience and the ability to handle pressure.
Secondly, joining supportive organizations like Cyberport is crucial. As Hong Kong’s hub for innovation and technology, Cyberport not only offers valuable resources and networks for startups but also facilitates deep engagement with like-minded entrepreneurs, which is essential for business development and establishing lasting partnerships.
Contact us:
Website: www.bitrace.io
Email: bd@bitrace.io
Twitter: @Bitrace_team
LinkedIn：@bitrace tech
