The Future of Crypto Assets under Hong Kong's New Stablecoin Regulations

When Hong Kong announced new regulations requiring stablecoin users to verify their identities, the reaction from the Crypto Assets community was one of uproar. Many expressed strong dissatisfaction and disappointment, even considering it a sign of the end of the decentralization philosophy.

As an old player in the Crypto Assets space who has experienced the early days of Bitcoin, the ICO craze, and the rise of DeFi, I deeply understand the origin of this sentiment. It is not just a dislike for complicated procedures, but also a steadfast adherence to the core principles of Crypto Assets.

However, let's set aside our emotions for the moment and carefully examine this new regulation to see if it is a poison that stifles innovation or a necessary pain for the development of the industry.

The Roots of Crypto Assets Users' Opposition to Identity Verification

Crypto Assets users' resistance to identity verification is deep-rooted.

First of all, in terms of ideology, the original intention of Bitcoin's creation was to establish a permissionless, censorship-resistant, peer-to-peer electronic cash system. The core lies in not having to trust any centralized institution. However, identity verification requires us to place our trust in governments and centralized organizations, which, in the eyes of ideologists, is a betrayal of the spirit of encryption.

Secondly, from the perspective of user experience, Web3 aims for a seamless, convenient, and global financial experience. A single wallet can provide unhindered access. However, identity verification introduces the cumbersome processes of traditional finance, greatly reducing the user experience.

Finally, from a security perspective, what cryptocurrency users are most concerned about is the leakage of privacy. Handing over personal information to centralized platforms is akin to giving others custody of the keys to digital assets. We have witnessed too many cases of platforms being hacked and data breaches.

Therefore, when Hong Kong introduced the verification requirements, users' first reaction was resistance and ridicule, which is understandable.

The Necessity of Regulation: Hong Kong's Vision

However, from a more macro perspective, the decision-makers at the Hong Kong Monetary Authority are not ignorant of decentralization. Their goal is not merely to serve existing Crypto Assets users, but to look towards a broader future.

Despite the obvious drawbacks, this policy also has its positive significance:

1. Preventing Systemic Risk: We all remember the lessons from the Terra/Luna collapse. A stablecoin that lacks regulation and has opaque reserves is a ticking time bomb. The proposal in Hong Kong primarily targets issuers, requiring 100% high-quality reserves, asset segregation, and regular audits. This means that compliant stablecoins issued in Hong Kong in the future will be safer and more reliable than most of the existing stablecoins.

2. Attracting Traditional Financial Capital: We have been looking forward to the entry of institutional investors, but large pension funds, insurance companies, and family offices are hesitant to step into an anonymous, chaotic, and unregulated market. Identity verification and compliance measures pave the way for these trillions of dollars in traditional financial funds to enter. Compliant and regulated stablecoins will serve as a bridge for them to enter the Crypto Assets world.

3. Improve the industry image: For a long time, Crypto Assets have been associated with negative terms such as money laundering and illegal financing. While identity verification sacrifices anonymity, it significantly increases the flow cost of illegal funds, helping Crypto Assets gain recognition from mainstream society and regulatory institutions. Hong Kong is conveying a message to the world: the Web3 here is compliant, secure, and trustworthy.

Hong Kong's strategy is clear: sacrifice part of the decentralization ideal in exchange for financial stability, institutional trust, and the status of a global Web3 hub.

Far-reaching Impact: A New Landscape in the Crypto World

Once this policy is implemented, it will have a profound impact on the entire encryption world:

• Formation of Two Parallel Worlds:

  • Compliance World: Represented by Hong Kong, consisting of licensed exchanges, compliant stablecoins, and verified users. Here, the scale of funds is large, trading is secure, but everywhere is subject to regulation.
  • Native World: Continue to develop freely on public chains like Ethereum. There is no need for permission here, high anonymity, and active innovation, but it also faces hacker attacks and protocol risks.

• Control of fiat currency entry and exit channels: In the future, the conversion channels between fiat currency and Crypto Assets will be strictly regulated. Users can freely operate in a decentralized world, but when they need to convert their earnings into fiat currency, they will likely have to go through identity verification checkpoints.

• The tiering of stablecoins: Stablecoins in the market will be classified into levels. Licensed and reserve-transparent "elite stablecoins" (such as compliant HKDG/USDG) will become the preferred choice for institutions and large-scale applications. In contrast, stablecoins with opaque reserves and unclear issuing entities will gradually see their space for survival shrink.

Conclusion: The Growing Pains of the Industry

Looking back at the whole process, my feelings are quite complicated.

It feels like a young wanderer pursuing freedom, who in middle age has to put on a suit for family and career and walk into an office building. We have lost that pure freedom, but in exchange, we have gained stability and a broader space for development.

Hong Kong's identity verification scheme represents a painful yet necessary growth for the entire Crypto Assets industry. It makes us old users feel uncomfortable, even betrayed, but at the same time, it clears obstacles for the mainstreaming and scaling of the industry.

We will face a clearer choice: to stay in that decentralized world full of idealism but fraught with risks? Or to accept identity verification and embrace a larger, more mainstream, but also more constrained new world?

Perhaps the answer is not either-or. The real future may likely be the coexistence of two worlds, where we learn to flexibly switch identities and assets between the two worlds based on different needs.

The scheme in Hong Kong may not be perfect, but it at least offers a possibility. For us users, understanding the logic behind it is more valuable than simply scoffing at it. After all, in the world of investment and survival, understanding the rules is always the first step to success.