Exclusive Interview with Xiao Feng: The Old System and Great Revolution in the Crypto World, and the New Coordinates with HashKey

Author | Cai Pengcheng, Editor | Liu Yangxue

HashKey bell-ringing scene, Xiao Feng is the fifth from the right

In 1998, 37-year-old Xiao Feng, then deputy director of the Shenzhen Securities Regulatory Office (now Shenzhen Regulatory Bureau), chose to resign and venture into the private sector. When he received his appointment as general manager of Bosera Fund, he held one of the first ten public fund licenses in China's capital market. That year, Bosera, along with nine other peers such as Southern, Guotai, and Huaxia, jointly opened the curtain on China's public fund industry.

Twenty-six years later, as this financial veteran stands in front of the Hong Kong Stock Exchange, he now holds a stack of compliance passes to the new world of crypto finance—from License No. 1 (Securities Trading), License No. 7 (Automated Trading Services) to VATP (Virtual Asset Trading Platform) license. The protagonist has shifted to HashKey, a financial group dedicated to global digital asset services that aims to fit crypto finance into a compliance framework.

In the history of Chinese finance, few have the unique background of Xiao Feng, who has both regulatory experience and has fully experienced the wild growth of traditional capital markets and crypto digital assets.

After submitting the prospectus, Dr. Xiao Feng, chairman and CEO of HashKey Group, known as the "Godfather of Blockchain" in China, accepted an exclusive interview with Barron's Chinese Network.

In Xiao Feng's view, "the era of wild growth in the jungle is over." With the acceleration of regulatory implementation in various countries, the offshore model will gradually decline, and compliance is the only pass.

Based on this ultimate judgment, HashKey firmly chose the "narrow door" of compliance as early as 2018, when there were no clear regulatory rules in Hong Kong. This meant it had to actively give up the "light asset, quick profit" traffic dividends of offshore exchanges and instead bear heavy regulatory costs and compliance obligations. The prospectus reveals that compliance costs are estimated to be around HKD 130 million in the first six months of 2025, averaging over HKD 20 million per month.

But that's not all. In Xiao Feng's strategy, compliance is merely the baseline for survival; his true ambition lies in reconstructing the business model—he is determined not to settle for being a simple matching exchange but aims to utilize distributed ledger technology to attempt to build a "crypto financial infrastructure" similar to a digital cash transaction clearing and settlement model.

Xiao Feng recalls that before founding HashKey, he conducted in-depth research on major stock exchanges worldwide, concluding that for almost every large exchange, trading matching business accounts for less than half of their revenue.

The prospectus outlines the full scope of this digital asset group's business: a composite system covering transaction facilitation, on-chain services, and asset management, with trading still at its core, occupying about 75% of the market share among the 11 licenses in Hong Kong. The other two lines—on-chain services manage HKD 29 billion in pledged assets; in asset management, the scale of management has reached HKD 7.8 billion since its establishment.

However, the revenue performance over the past three years shows that it has not completely escaped the violent cyclical nature of the crypto market, with a growth curve exhibiting certain high beta characteristics.

Chart: Barron's Chinese Network; Data Source: HashKey Prospectus

Another somewhat unusual sign is that the company's revenue has multiplied, yet it has not escaped losses. Apart from high compliance costs, the significant R&D investment is also a key reason. In 2024, HashKey's R&D expenditure reached HKD 556 million, accounting for as much as 77.1% of revenue. This ratio far exceeds that of internet platforms and is even higher than many hard tech listed companies.

The reason behind this move is that Xiao Feng does not view HashKey merely as a trading counter but is attempting to build a new financial infrastructure based on distributed ledger technology. A large amount of funding has thus been poured into the development of underlying blockchain facilities (such as the L2 network HashKey Chain) and related system capabilities.

Xiao Feng denies that the choice to go public stems from losses or cash flow issues. Regarding the latter, the prospectus states: As of October 31, 2025, the company holds approximately HKD 1.48 billion in cash and about HKD 567 million in digital assets. Even excluding digital assets and IPO fundraising, the existing cash is sufficient to support the company’s operations for 36.2 months at a monthly cash consumption rate of HKD 40 million.

"Next year's second half" is a key node that Xiao Feng repeatedly mentioned in the interview, seen as the biggest driving force behind HashKey's listing. This timing is derived from Coinbase and Nasdaq both claiming to launch tokenized stock trading services in the U.S. in the second half of next year.

Here, Xiao Feng demonstrates the macro vision of a "Godfather of Blockchain." In his view, the second half of 2026 is the "singularity" of the transition between old and new financial orders. The underlying logic is that when the tokenization of the funding side (stablecoins, deposits, CBDCs) converges with the tokenization of the asset side (stocks, funds, bonds) on-chain, a commercial closed loop of a "chain-based financial market system" will officially be established. HashKey is a key infrastructure builder in this closed loop.

Driving this process are fear and counterattack. He mentioned that Coinbase is trying to provide tokenized stock trading services to disrupt Wall Street's back office, a move that forces old giants like Nasdaq to also launch tokenized stock solutions for self-rescue. U.S. legislation has almost cleared the obstacles, and the timelines of the giants point to the second half of 2026.

The crypto world is changing rapidly, and Xiao Feng's judgment has not fluctuated with the cycles. In his view, one side is the revolutionaries (Coinbase), and the other is the reformists (Nasdaq). But regardless of which side you are on, you must admit that the new financial market infrastructure is an irreversible trend.

Below is the dialogue between Barron's Chinese Network and Dr. Xiao Feng, Chairman and CEO of HashKey Group.

Stablecoins Need to Break Free from Cognitive Bias

Barron's Chinese Network: Recent news about the mainland cracking down on "illegal stablecoins" has sparked much discussion. Will this affect Hong Kong's pace?

Xiao Feng: This is completely two different matters. Everyone must distinguish clearly: the mainland is cracking down on pyramid schemes and fraud using the concept of "stablecoins"; while Hong Kong is working on compliant stablecoins within a legal framework.

Previously, even I had friends asking me, "Mr. Xiao, I also want to invest in stablecoins." I asked him why, and he said, "Aren't stablecoins supposed to have fixed returns?" This is a cognitive bias. True stablecoins (like USDT) do not generate interest themselves, but in the mouths of pyramid scheme organizations, they become financial products with stable returns.

In fact, since the Hong Kong Monetary Authority began drafting the stablecoin bill two years ago, the entire tokenization market landscape has undergone tremendous changes. We can no longer view issues with the perspective of two years ago.

Barron's Chinese Network: What changes have occurred in the tokenization market landscape?

Xiao Feng: Now looking at the global "currency tokenization," three clear practices or models have emerged:

The first: compliant commercial institution stablecoins. This is defined by Hong Kong's stablecoin law and discussed in the U.S. stablecoin bill, where commercial institutions (like Circle, Tether) tokenize fiat currency. This is currently the most mainstream model. The second: central bank digital currencies. This is where central banks directly engage in currency tokenization. The People's Bank of China is already working on the digital yuan, and the European Central Bank is also in the works. Although the Federal Reserve's stance is currently unclear, this is undoubtedly an important pillar. The third: bank deposit tokenization. This is a new force that has emerged in recent months. For example, the Hong Kong Monetary Authority's sandbox program has already involved seven banks, including HSBC, Standard Chartered, and Bank of China Hong Kong. The core of this sandbox is to explore how to directly tokenize bank deposits.

Seven banks participating in the tokenized deposit sandbox; Source: Hong Kong Monetary Authority official website

Barron's Chinese Network: Why are banks positive about fund tokenization?

Xiao Feng: Banks are being pushed to the wall and must fight back.

Stablecoins issued by commercial institutions (like USDT) have taken away business from banks. Banks think: since the market needs currency tokenization, I have a larger capital scale, more customers, and richer application scenarios than you, and my deposit tokenization can also calculate interest for users, why shouldn't I do it myself?

So these three models—commercial institution stablecoins, CBDCs, and bank deposit tokenization—will coexist in the long term. As for which has more vitality? It remains to be seen; it’s not necessarily that stablecoins will win, nor that banks will win.

The advantages of banks are very obvious: they control large amounts of funds, have a large customer base, and many application scenarios, and bank deposit tokenization can calculate interest for users, which USDT cannot do. But banks also have disadvantages: they are usually a closed system, serving only their customer network. They do not have the freedom of movement like USDT, which does not rely on bank accounts and can flow freely on public chains.

So I believe they will each have their own scenarios and will tokenize currency within their own ecosystems.

If you look at the financial market as a whole, the asset side is also accelerating tokenization. Funds, bonds, and stocks are all attempting tokenization, and I believe insurance will join in the future. Thus, a closed loop of tokenization will form on both the funding and asset sides.

Barron's Chinese Network: Regarding RWA, there was a first default case in the U.S. in November. What do you think about the authenticity and prospects of RWA?

Xiao Feng: In fact, everyone is overthinking RWA; it is essentially asset tokenization. The so-called "everything can be tokenized" is an unstoppable trend. I believe its development can be clearly divided into three stages:

The first stage: currency tokenization. This history goes back to the birth of USDT in 2014, which tokenized the U.S. dollar. Later in 2016, USDC emerged. This is the 1.0 version of RWA.

The second stage: financial asset tokenization, which has exploded since last year. The most typical representatives are BlackRock and Franklin Templeton. They have begun promoting the tokenization of money market funds and government bonds in the U.S. This stage is developing rapidly, with relatively mature technology and legal pathways.

The third stage: physical asset tokenization. This refers to the narrow sense of RWA, such as real estate and artworks being put on-chain. Frankly speaking, so far, there have been no successful cases in this area. Why? Because there is a core technical challenge that has not been solved: the oracle problem. How do you ensure that the tokens on-chain are always one-to-one bound to the physical assets offline, never decoupling? The trust mechanism in this process still needs exploration.

I believe the key to solving physical asset tokenization may lie in DePIN (Decentralized Physical Infrastructure). DePIN connects physical devices directly to the blockchain network. Only when IoT devices can reliably transmit data from the physical world to the chain in real-time, solving the trust issue of "going on-chain," will there be a complete solution for physical asset tokenization.

Source: HashKey Prospectus

Listing, Compliance, and Profitability

Barron's Chinese Network: Why choose to go public at this time? Is it a matter of "riding the wave," or is it a "preparing for winter" under funding pressure?

Xiao Feng: To be precise, it is "storing food" to "ride the wave."

Why now? Because the on-chain financial market system I just mentioned is about to emerge. Nasdaq submitted a framework for tokenized stock trading to the SEC a few months ago. When the world's largest capital market begins to launch tokenized stock trading in the U.S., it means that the real "on-chain financial market" has been established.

This is why I am optimistic about the future. On one side is the tokenization of the funding side (currency, deposits); on the other side, the tokenization of the asset side (funds, bonds, stocks) is also accelerating. When both funding and assets have completed tokenization on-chain, at a certain point in time, they will converge, forming a closed-loop "on-chain financial market system." That is, using on-chain money to buy on-chain assets, with direct transactions on both sides.

If we rewind to July of this year, the situation was still unclear. But now, looking back, the situation has gradually taken shape. The asset side of stocks, bonds, and funds is moving, and the funding side is also moving. I predict that by the second half of next year, this closed loop will form. The market system of on-chain finance will truly run smoothly.

Since it is a financial market, there cannot be a lack of trading intermediaries and infrastructure. HashKey is doing just that.

This year, we deployed a compliance layer CaaS product (Crypto as Service) on HashKey Chain, including KYC, AML, privacy protection, and information disclosure. HashKey Chain is an Ethereum-based Layer 2, but unlike ordinary public chains, we have specifically created a "compliance layer." Because our banking partners have provided feedback that "account information on public chains is all public, which we cannot accept." Therefore, we must add privacy protection.

Another important point is that we have added a "transaction rollback" mechanism on-chain. In financial markets, it is inevitable for traders to make "fat-finger" errors, such as misplacing a decimal point or adding an extra zero; there must be a remedy to roll back transactions. Traditional public chains do not have this, but it is essential for financial markets.

In addition to funding preparation, going public is also a "self-revolution." Although HashKey is currently a licensed institution regulated by the Securities and Futures Commission, that is not enough. Becoming a public company means HashKey must accept oversight from the entire society. When J.P. Morgan or other large financial institutions choose partners, their requirements are extremely high. These institutions conduct due diligence on us, often taking three to six months. If we were a public company, the situation would be completely different.

Our prospectus has over 690 pages. After going public, we will also have to release quarterly financial reports and have strict information disclosure obligations. This extreme transparency is our "pass" to cooperate with heavyweight global financial institutions. For a new industry like Web3, transparency is the greatest trust.

Barron's Chinese Network: The market is very concerned about HashKey's profitability. The prospectus shows that the company's cash flow is relatively healthy but still in a loss state. When do you expect HashKey to reach a comprehensive breakeven point?

Xiao Feng: Our cash reserves are indeed abundant, with about HKD 2.05 billion in reserves (approximately HKD 1.48 billion in cash and nearly HKD 567 million in digital assets). But this is not just to maintain operations; it is also for strategic opportunities next year.

HashKey's cash flow consumption assumptions; Source: HashKey Prospectus

Regarding profitability, I do not agree with the statement that "compliance cannot make money." Compliance indeed cannot generate quick profits from exploiting customers, but as long as a certain scale is reached and compliance costs are spread out, it can still be a very good business. As for the specific breakeven point, we certainly have expectations internally, but as a prospective public company, it is not convenient to disclose predictions.

Doing offshore business is indeed enjoyable; the boss can make decisions alone. But at HashKey, I do not have the final say. If I want to do something, I must first consult the compliance officer and legal officer. If they say, "Mr. Xiao, this matter is explicitly prohibited by regulations," then I absolutely cannot proceed.

Even for a reasonable demand like "shared liquidity," we communicated with regulators for over half a year. This involves many details: for example, how to settle between Hong Kong and Dubai? How to transfer funds when banks are closed on weekends? These all need to be resolved one by one. Compliance is a slow and meticulous process.

Barron's Chinese Network: In the early days of HashKey's establishment, the crypto industry in Hong Kong was still in its wild growth phase. Why did you firmly choose the most expensive and slowest compliance path from the beginning? After all, self-limitation might cause HashKey to miss some bull market dividends.

Xiao Feng: I have never been confused about this. I have worked in the traditional financial system for over 20 years and have also been a regulator; I understand very well why the world needs financial regulation. Financial activities inherently carry enormous negative externalities. You cannot expect practitioners to rely on moral self-discipline to eliminate these risks; that is impossible. Without laws and regulations, the world would be a "jungle world," where the weak are preyed upon by the strong.

Why was "cutting leeks" popular in the early crypto circle? Because there was no regulation. But if you want to scale this market to USD 10 trillion, governments will absolutely not allow you to cut leeks at will. If the scale is small, you can be a casino, and everyone is willing to gamble; but if you want to become a mainstream financial market serving the public, there must be rules.

How did laws come about? They were established after countless investors were defrauded and harmed. There must be police, courts, and prisons to serve as deterrents. So, do not use technology as an excuse. "Decentralization" is just a technology; it is not a reason for you to defraud others at will. Even in a decentralized world, fraud is still a crime, and you will still go to jail.

Barron's Chinese Network: Although compliance may be the correct path, the costs are extremely high and may even drag down the business.

Xiao Feng: The timing is indeed crucial. If you had talked about compliance back in 2009 when Bitcoin first came out, it would have been too early to do anything. But by 2018, when we decided to apply for a license in Hong Kong, it was because I saw a major trend. At the same time, this is a matter of cognition and belief: do you believe that cryptocurrency is just a cyclical speculative tool, or do you believe it will truly change the global financial infrastructure? I have firmly believed from the beginning that distributed ledger technology will reconstruct financial infrastructure. So I came to Hong Kong at the end of 2018, even though there were no specific licensing guidelines at that time; I wanted to find a compliant place to do this.

When I first arrived in Hong Kong, it was quite interesting. At that time, the Hong Kong Securities and Futures Commission told me, "Hong Kong does not need to issue licenses now, and there is no legal basis to issue you a license."

Under Hong Kong's common law, for enterprises, it is "permitted unless prohibited," while for regulatory bodies, it is "not allowed unless authorized." At that time, the regulatory body even joked, "You can open your business by turning left when you go out; no one will manage you." I jokingly asked, "Does that mean no one is managing at all?" The other party replied, "No, someone manages; the police will manage."

Their logic is very clear: if you defraud consumers, defraud investors, or misappropriate customer assets, that constitutes a criminal offense, which is a matter for the police, not under the jurisdiction of the Securities and Futures Commission.

Barron's Chinese Network: Where are the main compliance costs invested?

Xiao Feng: The costs of compliance manifest in many aspects. First is customer acquisition costs. Offshore exchanges can register like internet companies with just an email; we cannot do that. The strict KYC process inevitably leads to slower customer growth, and revenue growth naturally slows as well.

Secondly, being licensed means "though small, it has all the organs," so you must equip all departments and systems required by regulatory requirements.

For example, security costs. Our custody system uses HSM (Hardware Security Module), and the price of servers is at the million-dollar level. To start a server, six people must be present—three to open the security room door and three to start the server.

There are also insurance costs. To meet regulatory requirements, we purchased USD 2 billion in customer asset insurance, which is a top-tier configuration globally.

However, the good news is that regulation is also helping us reduce costs. For example, this year, the Hong Kong Securities and Futures Commission allowed global exchanges within the same group to share liquidity, so there is no need for each exchange to build separate pools. Additionally, our custody system is allowed to provide services externally, serving not only exchange clients but also family offices or other institutions. As the scale expands, the unit compliance costs will definitely decrease.

"More than Just an Exchange"

Barron's Chinese Network: HashKey has a very diverse business line. Will the strategic focus adjust with the listing? At the same time, the crypto industry itself has strong cyclicality, while listed companies require stable quarterly reports. How will HashKey resolve the contradiction between "strong crypto cycles" and "stock market stability"?

Xiao Feng: Our business lines are very clear, just three: 1. Transaction facilitation (exchange + OTC); 2. On-chain services (node validation + technical services); 3. Asset management.

Source: HashKey Prospectus

Our business model is actually closer to Coinbase, rather than those that only do matching. If you have studied the largest exchange groups in the world—Nasdaq, NYSE, London Stock Exchange—you will find a pattern: they are not just exchanges.

In their revenue structure, trading commissions are only a part. The second and third largest sources of income are usually data services and technical services, and their proportions are not much different from commission income. For example, the London Stock Exchange has the FTSE Russell Index Company, which is used by USD 40 trillion in global funds; Nasdaq sells its matching system to over 80 exchanges worldwide.

HashKey is also a customer of Nasdaq; we purchased its market surveillance system. This system is very expensive and incurs annual service fees, but it must be purchased. Because the Hong Kong Securities and Futures Commission has also installed this system, it needs to monitor the market in real-time for any abnormal trading or manipulation. This has given us great inspiration: HashKey must also become a technology service provider in the future. We not only do trading but also output compliance technology and data services, which is the business model that can transcend cycles.

True long-term investors pay great attention to the diversification of revenue composition when looking at an exchange group. If you tell me that you rely solely on trading commissions for income, your valuation will definitely be discounted. Because the market will certainly have bull and bear cycles. When a bear market arrives, trading volume will be halved, and your revenue will follow suit. Therefore, there must be non-trading-related income to smooth out these fluctuations.

When I studied the history of exchanges, I found that Nasdaq sold its matching engine to over 80 exchanges and collected service fees every year. This money is guaranteed, regardless of market conditions. HashKey is building such a model: not only trading but also selling technology and data. This is the path we must take.

Barron's Chinese Network: The prospectus shows that HashKey's institutional clients contribute the vast majority of trading volume. How do you view the weak position of the retail end?

Xiao Feng: The retail market in Hong Kong is indeed not large, but HashKey is already the largest in retail share among licensed exchanges. Moreover, our user quality is extremely high.

A retail investor must go through such a cumbersome and strict KYC process; if it weren't for "true love," they would have left long ago. Although the number of remaining customers is only in the tens of thousands, their value is very high, with the value shared by a single user for the exchange being about ten times that of offshore exchanges.

In addition to retail and institutional clients, we also have a third unique type of client: licensed brokers.

This is a phenomenon unique to Hong Kong. You cannot see Coinbase providing such services for brokers in the U.S.; brokers find it difficult to access Coinbase as brokers. Why can't Coinbase do it? Because Coinbase holds not a securities license but various state-level "money transmission licenses" (MTL).

In Hong Kong, however, HashKey holds two sets of licenses: one set is the No. 1 and No. 7 licenses obtained under the Securities and Futures Ordinance, which establishes our legal status as a licensed trading system. With a securities license, we can connect with all brokers in Hong Kong (as long as they upgrade to the No. 1 license).

At the same time, we also hold the VATP (Virtual Asset Trading Platform) license under the Anti-Money Laundering Ordinance. The dual licenses allow us to operate like a securities exchange while also legally trading non-securities virtual assets (tokens). This is our barrier. This is a phenomenon unique to Hong Kong: currently, about 40 licensed brokers have upgraded their licenses to trade virtual assets on behalf of clients. Among them, 90% of brokers are connected to HashKey's trading system at the backend. Of course, in this model, I cannot see who the underlying clients are.

Therefore, with these dozens of brokers' "invisible clients," our client structure shows that institutions (including Omnibus) account for about 80%, while retail investors account for 20%. This also aligns with the data we disclosed in the prospectus.

Barron's Chinese Network: In future strategies, which side will you focus on more?

Xiao Feng: Both sides will develop. We will continue to expand retail while also vigorously developing the Omnibus broker institutional business. As for what the final ratio will be, we will not deliberately pursue a specific number. We will serve whatever structure the market develops into, following the natural course.

Barron's Chinese Network: What about the international strategy? The prospectus shows that the company has also begun operations in Bermuda and other places?

Xiao Feng: Our Global station has obtained a license from Bermuda. Although Bermuda is considered offshore, it has a complete regulatory framework, and Coinbase has also obtained a license there.

Of course, the Bermuda model and Hong Kong's "onshore model" are indeed different. Hong Kong has a local market, but Bermuda has only a few tens of thousands of residents, and there is no local market to speak of. So it is essentially 100% aimed at the international market. We began operating in Bermuda in April last year, but encountered a major problem: no banks were willing to provide deposit and withdrawal services. However, this year we solved this problem and confirmed two banks willing to support us.

With banking services resolved, we have three major advantages in Bermuda that other offshore exchanges do not have: 1. A compliant fiat deposit and withdrawal channel; 2. Ability to engage in Omnibus broker business (compliant brokers can only connect with compliant exchanges); 3. Ability to trade RWA tokenized assets (which require regulatory approval).

Significant contraction in the Bermuda sector in the first half of this year; Source: HashKey Prospectus

So next year, we will leverage these three advantages to develop the Bermuda "compliant offshore" business.

Barron's Chinese Network: How to maintain a competitive advantage in the B-end institutional market with traditional financial institutions entering tokenization?

Xiao Feng: Cooperation will definitely outweigh competition.

This is similar to our core business—we are trading intermediaries. No matter which institution issues tokenized products, as long as they are compliant, we welcome them and are willing to help them distribute and trade.

So far, the Hong Kong Securities and Futures Commission has approved us to take on the role of "distributor." Therefore, in the past year, when asset management companies in Hong Kong issued tokenized funds, we participated as a distributor. Now, we are actively preparing for the next step: further providing secondary market trading services for these products. Of course, the premise is that these products must be approved by the regulatory authorities; otherwise, we absolutely cannot touch them.

In this case, we are not issuing products for ourselves but providing infrastructure services for the entire market. Therefore, our relationship with traditional financial institutions will definitely be a cooperative one.

Barron's Chinese Network: Why don't you issue stablecoins yourself?

Xiao Feng: Right. Last year or even the year before, when no one had done tokenization in the market and everyone didn't understand how to do it, we indeed needed to create some "model houses" and templates to show others: "Look, this can be done." But that does not mean we will always do it ourselves.

The most typical example is stablecoins. You will find that HashKey has not applied for a stablecoin issuance license ourselves. We invested in a company to let them apply. Although we are the largest shareholder, it is a completely independent legal entity.

If I tightly hold a stablecoin license while also running an exchange and issuing stablecoins, what would other stablecoin issuers think? They would question, "Aren't you both the referee and the player? Will you give your own coin a backdoor? Will you treat me fairly?" This would create a conflict of interest.

So we internally weighed this repeatedly: First, completely not participating in the stablecoin track? That is inappropriate; this is infrastructure, and we cannot be absent. Second, personally getting involved? That is also inappropriate, as it would harm the neutrality of the exchange.

Barron's Chinese Network: How do you hope the market defines HashKey?

Xiao Feng: I want to emphasize this point. The outside world often misunderstands that HashKey is just an exchange. But in fact, we are a complete financial services group based on digital assets. As I have repeatedly mentioned, we have three major business pillars: transaction facilitation (exchange business); on-chain services (infrastructure); asset management.

The Old Order and Great Revolution in the Crypto World

Barron's Chinese Network: HashKey's ability to establish itself in Hong Kong and go public must rely on industry cycle judgments. Looking back over the past few years, the crypto industry has experienced wild growth and is facing tightening regulations. At this current juncture, what are your trend judgments about the crypto industry?

Xiao Feng: We have three major trend judgments about the future of the industry:

The first trend: shifting from "offshore" to "onshore." The so-called "offshore" means unregulated or even evading regulation; "onshore" means obtaining licenses and being regulated within a specific jurisdiction. In the future, the space for "onshore" compliant business will grow rapidly, while the space for "offshore" business will be severely compressed.

Why is there this trend? Because in the past year, more and more countries have begun to legislate and issue licenses. Once a country legislates, the logic is simple: if you want to continue serving your citizens offshore, sorry, you cannot. You either obtain a license and stay legally, or you do not apply for a license and must leave.

The new regulations that took effect in Hong Kong on June 1, 2023, titled "Guidelines for Operators of Virtual Asset Trading Platforms," are a typical example. Prior to this, HashKey voluntarily chose to accept regulation, while other offshore exchanges, although unlicensed, could operate freely in Hong Kong. But after June 1, this changed from "voluntary" to "mandatory."

Previously, all offshore exchange apps could be found in the Hong Kong app store. But after the new regulations came out on June 1, all those apps were removed. The Securities and Futures Commission's message is clear: if you want to continue serving Hong Kong customers, come and get a license. If you express your intention to apply, I will give you a 12-month transition period. If you decide not to apply, then sorry, I will give you a grace period (to clear out by the end of May or the end of August), after which you must completely exit the Hong Kong market.

This is not just Hong Kong; countries around the world will do the same. As countries legislate one after another, the space for offshore business will definitely be compressed. I cannot say that the offshore model will be completely eliminated in the future, but its space will certainly not be as large as it was before; the era of "wild growth" is over.

Why can't offshore operations work anymore? Because governments will take action. There are two underlying logics: the first is taxation. No government can watch such a large flow of funds without collecting taxes. The second is protecting investors. As a responsible government, how can you watch your citizens being "cut leeks" on unregulated platforms? Therefore, legislative action is inevitable.

The second trend: extending from "digital native" to "digital twin." "Offshore to onshore" is the operating model of exchanges, while this trend speaks to the financial assets themselves, that is, the tokenization of assets. Bitcoin and Ethereum are "digitally native" assets. However, the traditional financial market has an asset scale of over USD 270 trillion, and these massive assets will gradually undergo tokenization. This is what is meant by "digital twin."

In fact, asset tokenization is essentially a process of securitization. Since it is a security, 99.99% of it requires regulatory approval. Do you think the assets approved for issuance by the Securities and Futures Commission will allow you to trade on an unregulated offshore exchange? Absolutely not. So this presents a huge opportunity for compliant exchanges.

The third trend is from Off-chain to On-chain. In the future, all financial institutions and financial markets will ultimately converge into a unified "on-chain financial market system." When the tokenization of the funding side (capital) and the tokenization of the asset side (assets) both reach a certain scale, scale effects will emerge, forming a commercial closed loop. The time point for this closed loop to form is the second half of next year that I just mentioned.

Of course, this does not mean that the market will be completely built at that time. But the key is that if Nasdaq and Coinbase start truly tokenizing stocks in the U.S., then the funding and assets will be connected on-chain, and the closed loop will begin to operate. This also means that the prototype of the on-chain financial market will officially take shape in the second half of next year.

Once the U.S. sets this template, what happens next is very simple: countries around the world will learn, imitate, and follow. This is an inevitable process led by the U.S. with global responses.

Barron's Chinese Network: In the past two years, the global regulatory environment has changed significantly. You have also mentioned that tightening regulations are an inevitable trend in the global market. Looking ahead to the next 2 to 5 years, how do you predict the short- to medium-term global regulatory trend?

Xiao Feng: From a global perspective, there is no doubt that the U.S. is leading the world in legislation and institutional development.

The legislative process in the U.S. is very fast, and it is expected that by the end of this year or early next year, key bills will be enacted. Among them, the most noteworthy is the crypto market structure bill. The House of Representatives has already passed this bill, and it is currently under review in the Senate. Even if it does not pass by December this year, it is highly likely to pass in January next year.

Why am I so confident? Because during the House vote, we saw that this was a proposal with strong bipartisan support. The same goes for the stablecoin bill. This means that regulating the crypto industry and establishing market structure is no longer a partisan struggle between Republicans and Democrats, but a consensus among the elite class of American society. Everyone believes that the U.S. must master the dominant position in Web3 and must do so. Once the bill passes, I am optimistic that the industry will experience an explosion in the next two years.

First, the "legitimacy" and "compliance" issues of all traditional financial institutions entering the crypto industry will be completely resolved. Traditional institutions are most afraid of having a good story but flaws in compliance. If the laws are unclear, they will not dare to enter the market in large numbers. But if legislation is completed and obstacles are cleared, they will enter in large numbers.

Recently, there has been a clear signal: the U.S. Commodity Futures Trading Commission (CFTC) has approved a federal-level cryptocurrency spot trading license.

CFTC has approved a federal-level cryptocurrency spot trading license; Source: CFTC official website

This is very crucial. According to the new bill, most regulatory authority over crypto assets will be transferred to the CFTC. The fact that the CFTC is now willing to issue this license indicates that legislation is a done deal—regulation of crypto assets (excluding securities) will definitely fall under the CFTC's jurisdiction.

Previously, there was no federal-level spot license in the U.S. Coinbase had to apply for "money transmission licenses" state by state across the 50 states to ensure compliance. Coinbase has maintained a compliance team of hundreds of people just to deal with the different regulatory rules of these 50 states. This is not only a huge financial cost but also a massive human resource cost. Now, with the CFTC's federal license, institutions only need to obtain this one license to conduct spot trading across the U.S.

Barron's Chinese Network: What impact will this series of actions in the U.S. have on the world, especially on China?

Xiao Feng: When the U.S. moves, the world will move. Europe is following suit, and Hong Kong is also following suit. More importantly, this will definitely have an impact on mainland China.

This is a competition at the level of financial market infrastructure between the new and old transaction clearing and settlement systems. When major global economies embrace distributed ledgers, new financial infrastructure, and tokenized financial assets, no one can stand aside. In fact, the digital yuan that the mainland is promoting will also be a fiat currency tokenization based on blockchain and distributed ledgers.

I believe this is a trend we can clearly see in the next two years.

Barron's Chinese Network: Although traditional finance indeed has its inherent operational logic and many problems, and crypto finance (stablecoins, RWA) has many advantages, does this necessarily mean that "disruptive impact" will occur? After all, over a decade ago, when you mentioned "distributed commerce," changes did not happen immediately.

Xiao Feng: You can view the years from the birth of Bitcoin in 2009 to today as a massive social engineering experiment. Reconstructing the financial market system and transforming "off-chain" into "on-chain" is indeed not something that can be completed in three to five years.

But this experiment has given traditional finance the greatest insight: blockchain, as a new transaction clearing and settlement system, is feasible and highly efficient. Transferring money from New York to Hong Kong through traditional systems takes three days, while blockchain only takes two minutes. From a business perspective, when the efficiency of the new infrastructure is this high and the cost this low, it is inevitable that it will replace the old system.

Barron's Chinese Network: Who will initiate this revolution to replace the old order?

Xiao Feng: It will definitely be the "disruptors." Coinbase is such a disruptor. Coinbase's market value once surpassed that of the New York Stock Exchange (NYSE). This is akin to a new "disruptor" telling a century-old establishment: "I am younger than you, but my market value is higher than yours, and I am encroaching on your market." If traditional giants do not wake up or are unwilling to give up their vested interests, they can only watch themselves being eliminated. But they cannot sit idly by.

Two months ago, Nasdaq submitted a proposal for tokenized stock trading. This is 100% a response to the stimulus from Coinbase.

In the first half of this year, when Coinbase submitted a proposal to the SEC to conduct tokenized stock trading in the U.S., Wall Street's reaction was instant panic, feeling that "it's over." Why? Because compared to the two proposals, Coinbase's proposal is entirely based on a new transaction clearing and settlement system.

Wall Street's existing system relies on the DTCC (Depository Trust & Clearing Corporation) to operate through central registration, central custody, central counterparty trading, and central settlement. Coinbase's proposal is: "I don't need DTCC, nor do I need a central counterparty; I can handle everything on-chain." It is peer-to-peer trading, "trade and settle," and is settled on a transaction-by-transaction basis. This is akin to me giving you 100 dollars, and you giving me two packs of cigarettes, with money and goods clearing without needing a third party to keep accounts. This is a "digital cash" trading clearing and settlement model.

If Coinbase's proposal is adopted, all the middle and back-office departments that maintain Wall Street's operations will no longer be needed. This means that half of Wall Street's employees will face unemployment. The front office doing trading may be fine, but those in the back office doing clearing will definitely lose their jobs. The entire Wall Street was very panicked at that time.

I specifically called a friend on Wall Street who is responsible for middle and back-office operations at a large financial institution. I asked him, "I see Coinbase has submitted a proposal for tokenized stock trading; will this have a big impact on you?" He told me, "Mr. Xiao, the entire Wall Street has been discussing that proposal these past few days, and everyone feels it's over; our jobs are really at risk."

Faced with this survival crisis, Wall Street began to fight back. Everyone thought: we can't just sit and wait for death, right? Thus, Nasdaq proposed an alternative plan. That forty-some-page proposal can still be found on the SEC's official website. Nasdaq clearly proposed a path completely different from Coinbase's: reform.

Its core is: retain the DTCC (Depository Trust & Clearing Corporation), continue to do central settlement of tokens, and let DTC be responsible for the tokenization and settlement of assets. This means it retains the original structure of Wall Street; although it cannot be said to have 100% preserved everyone's jobs, it at least saved a large portion.

Now, we have these two proposals on the table: Coinbase's revolutionaries and Nasdaq's reformists.

But please note, even if Nasdaq retains the DTCC, it must adopt tokenization. Why? Because only through tokenization can 24/7 trading and settlement be achieved. If you cannot achieve 24/7 trading, you will definitely fail in future competition.

To achieve real-time settlement, tokenization is essential. Because only on the basis of a tokenized new financial infrastructure can all-weather trading be realized.

This is a very classic case: one side is the revolutionaries (Coinbase), and the other side is the reformists (Nasdaq). But regardless of which side you are on, you must admit that the new financial market infrastructure (blockchain/tokenization) is an irreversible trend.

Original link