By Lily Z. King

Hong Kong’s ambition to become a global hub for digital assets has been unequivocal. The government’s diligent efforts to foster a conducive ecosystem for digital assets underpin its broader vision to remain financially competitive on the international stage. But the recent debacle of JPEX, a Hong Kong-based cryptocurrency exchange, has stirred the waters of Hong Kong’s rapidly growing cryptocurrency sector.

In mid-September, JPEX introduced sky-high withdrawal fees, effectively restricting users from accessing their funds, leaving thousands in a financial quandary. This incident, with a monetary fallout estimated to surpass HK$1 billion (US$127 million), has not only triggered a police investigation but also sharply tainted the public’s perception of cryptocurrency.

The JPEX scandal has undoubtedly cast a sombre shadow over Hong Kong’s cryptocurrency aspirations. This incident may incite a ripple of public scepticism towards any Web3 initiatives by the government.

I even heard an institutional investor saying: “Why does Hong Kong need Web3? We already have the horse racing industry for gamblers.”

The silver lining is that by addressing the regulatory challenge the JPEX scandal has exposed, Hong Kong could potentially enhance the safety net for retail investors. It also reaffirms the necessity of Hong Kong’s licensing regime for virtual asset trading platforms.

The current volatility, security risks and technological barriers in the cryptocurrency market make it difficult to anticipate a significant growth in retail investment any time soon. But we are seeing encouraging signs of the institutional adoption of digital assets and blockchain technology.

The institutional realm has discerned the potential of cryptocurrency not merely as a speculative avenue but as a transformative financial infrastructure for the future. In particular, the Hong Kong government is continuing to promote the tokenisation of real-world assets.

Choi Fung Yee, a member of the Securities and Futures Commission (SFC) and the executive director of the investment products division, spoke at the recent Bloomberg Buy-side Forum about the SFC’s efforts to provide more detailed guidance on the tokenisation of authorised investment products.

The Hong Kong Monetary Authority is expanding its pilot project for the first global tokenised green bond, and in a recent report, outlines the potential next steps to promote tokenisation in Hong Kong’s bond market.

Blockchain technology is also being adopted by more mainstream companies. One case in point is Grab, the Southeast Asian “super app” with a user base of 180 million, which recently launched a Web3 wallet for its Singaporean customers. This wallet, supported by the Polygon blockchain, stands as a testament to the real-world applications of digital currency, facilitating Singapore dollar stablecoin payments.

The road to the mass adoption of digital assets is admittedly steep. But the strides made by institutional forces in bridging the chasm between traditional finance and cryptocurrency finance are noteworthy.

Institutions have strict requirements for stability, security and customisability. As a result, cryptocurrency infrastructure companies are developing cutting-edge custody and wallet solutions – such as a multiparty computation wallet that allows multiple parties to jointly manage and control the funds within the wallet, and smart contract wallets – that reduce counterparty risk and increase transparency and user control.

During the last speculative bubble, the digital asset market was mostly driven by a get-rich-quick aspiration that attracted retail investors, of which JPEX was a part.

However, we are at a new pivotal moment, where the cryptocurrency industry must prove that it can have an impact on the real-world economy. The reason many institutions have quickly jumped on the artificial intelligence (AI) revolution bandwagon is that AI can tangibly improve their productivity.

While setbacks such as the JPEX scandal present challenges to Hong Kong’s cryptocurrency ambition, it also indicates a maturing industry moving beyond mere speculation. We are seeing significant progress in the areas of stablecoin, payments and real-world assets. The rapidly growing institutional adoption promises a more stable and transformative digital economy for Hong Kong and Asia as a whole.