With US regulators Startups and founders in this space continue to intensify their scrutiny of cryptocurrencies and look abroad for more favorable climate conditions to support their growth.
One such target is Hong Kong, which is looking to restore its status as a financial hub and is banking on favorable crypto regulations to attract a new crop of entrepreneurs, technologists and investors. So far his strategy seems to be working.
In mid-April, the annual web3 festival in Hong Kong attracted over 50,000 visitors. Compared to last year, when the event seemed like a gathering of crypto refugees fleeing mainland China’s restrictive policies, there were significantly more non-Chinese participants. At this year’s edition, buttoned-up city officials listened intently to the shabbily dressed founders battling jet lag. Although she didn’t attend the event in person, Cathie Wood, the billionaire founder of Ark Invest, spoke via video. And Vitalik Buterin, the nomadic founder of Ethereum, showed up at the last minute.
It sparked a feeling of déjà vu: In the industry’s early days, Hong Kong was a major hub for crypto firms run by foreign entrepreneurs, including FTX, Crypto.com and BitMex. Like other jurisdictions around the world, the city cracked down on crypto activity to protect investors’ interests as market volatility spiraled out of control.
The excitement surrounding Hong Kong’s Web3 scene began to bubble up again last June when the government legalized cryptocurrency trading for retail investors. Since then, the city has implemented a number of measures to regulate crypto-related activities, including a sandbox for stablecoin issuance as well as a licensing system for crypto exchange operators. Following in the footsteps of the US, Hong Kong just listed a number of cryptocurrency exchange-traded funds this week.
These moves stand in stark contrast to the US government’s tough stance towards crypto companies. Attendees at the web3 festival who traveled from the United States, Europe, the Middle East, India and other regions expressed optimism about the momentum in Hong Kong. First Digital’s FDUSD, for example, issued under Hong Kong’s digital asset rules and backed by U.S. Treasury bills, has quickly become the world’s fourth-largest stablecoin by market capitalization.
At the same time, people are aware of Hong Kong’s limitations as an emerging crypto hub. For one thing, it’s a relatively small market of seven million people, and the huge mainland Chinese market will be off-limits, at least for now. Additionally, the rules prioritize investor protection, which can lead to higher compliance costs and deter those who prefer a more permissive environment.
Nonetheless, Hong Kong remains one of the few jurisdictions, alongside countries such as the United Arab Emirates, Japan and Singapore, that have demonstrated a clear commitment to cryptocurrency. As Jack Jia, head of crypto at global payments company Unlimit, noted: “The fact that Hong Kong is proposing crypto regulation at all, just from a reputation and optics standpoint, will attract everyone.”
Open-minded officials
Hong Kong actually doesn’t have the most lenient crypto regulations. In fact, the strict scrutiny of exchange operators has led its crypto flagship HashKey to apply for a license in Bermuda. The world’s largest crypto exchanges, namely Binance, Coinbase and Kraken, are conspicuously absent from the list of 22 applicants for the city’s license to exchange virtual assets.
As it turns out, Hong Kong’s biggest appeal lies in its push to provide regulatory clarity for crypto activities.
“The SEC is notorious. “Everything is a security, but we don’t tell you clearly which license you need to apply for, and then we might still reject your application,” said Jia, describing the U.S. Securities and Exchange Commission’s stance on regulating crypto firms. “There is no set SEC process. But regulators in Hong Kong have put in place a process to hear your views.”
In fact, several crypto executives told TechCrunch that they held closed-door meetings with Hong Kong government officials. San Francisco-based Chainlink is working to feed real-world data into smart contracts, which are lines of code that execute predefined rules. It is currently negotiating to deploy its technology to Hong Kong’s major financial infrastructure, its co-founder said Sergey Nazarov.
“People don’t fully realize that capital markets and cryptocurrencies are very compatible. When I came to Hong Kong, I found that this compatibility is initially accelerated here because the government and regulators are more open to this compatibility,” said Nazarov, who invited Hong Kong’s Finance Undersecretary Joseph Chan to speak at a fireside chat with him at SmartCon, Chainlink’s annual conference, in Barcelona last year.
This year, Chainlink is bringing SmartCon to Hong Kong at the invitation of the local government, making Hong Kong the first Asian city to host the conference, according to Nazarov.
“The Hong Kong regulator issues stablecoin regulations and regulations [digital] Financial assets. This means that Hong Kong can be a place where assets and payments can function reliably and in a regulated manner in one system,” Nazarov added. “That’s important because if things aren’t regulated, not everyone will leave hundreds or hundreds of trillions of dollars and banks.”
Steve Yun, president of Dubai-based TON Foundation, Telegram’s official blockchain partner, shared the bullish sentiment, saying Hong Kong may have the biggest competitive advantage over other emerging crypto hubs as the city is “trying to have a very comprehensive framework to accomplish”. Making builders and entrepreneurs feel more comfortable and attracting talent.”
Hong Kong’s financial regulations are complicated, but Charles d’Haussy, CEO of the Switzerland-based DYdX Foundation, is no stranger to it, having previously led fintech for InvestHK, the foreign direct investment arm of the Hong Kong government.
“The Hong Kong government was initially very open to cryptocurrencies,” recalls d’Haussy. Then came a period of hostility as regulators tried to combat rampant crypto fraud. But “I think they understood about a year ago that there was a new market there and that there should be regulations in place to ensure that this opportunity was not missed.”
“There you saw the HKMA [Hong Kong Monetary Authority] I’m doing more and more CBDCs [central bank digital currencies]and the Hong Kong SFC [Securities and Futures Commission] It issues licenses for crypto exchanges and ETFs,” d’Haussy added.
Access to China
When Hong Kong opened up to cryptocurrencies last year, there was much speculation that mainland China might follow suit. That hope remains distant as China continues to ban its population from trading cryptocurrencies. Nonetheless, businesses are now recognizing Hong Kong’s potential as a gateway to another of its neighbor’s valuable resources.
While Hong Kong is a magnet for financial talent, its neighbor to the south, Shenzhen, is home to some of the world’s largest technology companies such as Huawei, DJI and Tencent. Not surprisingly, crypto firms are benefiting from the combination of Hong Kong’s friendly regulations and its proximity to developer resources in Shenzhen and other Chinese cities.
One such actor taking advantage of Hong Kong’s geographical location is the TON Foundation. As part of its efforts to become a super app, Telegram is partnering with TON, which allows developers to build blockchain-based lite apps that run on the messenger. During web3 week, the foundation held a boot camp in Hong Kong in hopes of attracting Chinese developers, particularly those familiar with WeChat’s mini-app empire.
“Now we are targeting regions where there are a large number of developers and entrepreneurs, especially those who grew up with some kind of mini app over a super app and those who have been involved in the growth of such an ecosystem” said Yun.
For example, A16z-backed company Aptos held a three-day hackathon in Shenzhen back in February that attracted hundreds of applicants. Aptos, led by a team that previously worked on Meta’s Diem blockchain, has also partnered with Alibaba’s cloud computing division to attract Chinese developers.
Some foreign founders have gone a step further and established a physical presence in the city. ZkMe, founded by a German entrepreneur to enable private ID verification, has chosen to locate its headquarters in Hong Kong.
“We came here to build a sustainable business and leverage the technology expertise here, and of course working with the Greater Bay Area is also very beneficial,” said Alex Scheer, founder and CEO of zkMe, about the initiative aimed at achieving this Integrate Hong Kong with nine neighboring Chinese cities, for example through tax advantages for Hong Kong companies setting up in Shenzhen. Of zkMe’s 16-person team, 14 are based in the Shenzhen office.
Some founders are more optimistic that Hong Kong will pave the way for China to use cryptocurrencies in the future. Anurag Arjun, founder of Dubai-based Avail, a modular blockchain company, believes governments that realize the full benefits of crypto technologies will eventually take a more accommodating stance.
“[The crypto industry has] has developed very advanced technology in recent years. “Some examples are things like zero-knowledge proof technology,” he said, suggesting that the underlying technology behind the cryptocurrency was not designed to support fraudulent NFTs or speculative trading, but rather the industry’s foundational technology improve.
“Given the strategic nature of Hong Kong, we believe it is an important location – a gateway to China in the future,” Arjun said. “As China opens up in the future – and once we talk to more government officials and commit to the technology and not just the monetary elements – what we are doing in Hong Kong will be a useful lesson for expansion into China as well.”