Author
Ms XUE WANG
Organisation/Institution
City University of Hong Kong, School of Law
Country
HONG KONG (SAR OF CHINA)
Panel
Banking and Finance
Title
When Code Challenges Law: The Unfavorable Isolation and Potential Characterization of DeFi in Hong Kong
Abstract
As a core infrastructure of Web3, decentralized finance (DeFi), characterized by its permissionless nature and decentralized governance, fundamentally challenges traditional financial regulation, which is built upon defined legal entities and geographic jurisdiction. Hong Kong has embraced Web3 as a strategic priority to solidify its status as an international financial center. However, the Stablecoin Ordinance 2025 introduces a stringent licensed issuer regime that effectively excludes DeFi protocols, which lack legal personality, from the legitimate stablecoin ecosystem. This approach reflects not mere risk avoidance but a structural failure of the centralized regulatory paradigm when confronted with decentralized technology, arising from an inability to attribute responsibility. This paper employs a three-layer analytical framework (protocol, governance, and application) to systematically examine the tensions between DeFi and Hong Kong’s regulatory paradigm. At the protocol layer, developer anonymity renders “fit and proper” assessments impracticable. At the governance layer, the absence of legal personality for decentralized autonomous organizations (DAOs) creates an accountability vacuum. At the application layer, the autonomous execution of smart contracts structurally mismatches the existing classification system for financial institutions. Drawing critically on the U.S.’s substance-over-form enforcement approach and safe harbor model established by the GENIUS Act, the EU’s Markets in Crypto-Assets Regulation (MiCA), and EU member states’ exploratory experiences with DAO legal personality, this paper proposes that Hong Kong shift from passive isolation to active regulation through a three-tiered strategy. In the short term, regulatory anchors should be established by supervising front-end service providers and imposing a duty of reasonable care on developers. In the medium term, a limited liability DAO entity should be introduced, consistent with common law traditions, to resolve the issue of missing responsible parties. In the long term, Hong Kong should pursue a regulation-as-code model, embedding compliance requirements directly into protocol design. This paper makes two contributions. Theoretically, it reframes DeFi regulation as a structural conflict between centralized regulatory paradigms and decentralized technology, offering a new analytical framework for digital-era governance. Practically, it provides a multi-layered, legally sound, and operationally feasible roadmap for Hong Kong to transition from regulatory isolation to adaptive governance, thereby securing a competitive edge in global digital finance rulemaking.
Biography
Ms. Xue Wang is an independent researcher, as well as a 2026 fall freshman in comparative law of Doctor of Philosophy in Law Programme, University of Macau. She is currently based in Hong Kong. Wang obtained her Bachelor of Laws at Shanghai University of Political Science and Law in 2022 and Master of Laws at City University of Hong Kong in 2024. She obtained her National Legal Professional Qualification Certificate of PRC in 2022. Wang used to work as a trainee paralegal in Shanghai, China and currently works as a research assistant both at School of Law, City University of Hong Kong and Faculty of Law, University of Macau. Wang has published two articles “When OFAC Meets the AFSL: U.S. Sanctions in Chinese Courts” (October 2025, Washington International Law Journal) and “The Role of Courts in China’s Counter-Sanctions Mechanism” (January 2026, Transatlantic Law Journal), both are co-authored ones with Professor Alexandr Svetlicinii. Wang’s research focuses on international law, fin-tech law, comparative law and legal responses to sci-tech innovation as well as political conflicts across different jurisdictions.
