Written by: Biteye
On June 30, the Hong Kong Special Administrative Region government announced that Dr. Jack Kong has been reappointed by Financial Secretary Paul Chan as a member of the "Task Force on Promoting the Development of Web3."
The task force is dedicated to providing policy recommendations for the development of Hong Kong's Web3 ecosystem and promoting the sustainable development of Web3. The group is chaired by the Financial Secretary and brings together various representatives from the government and the market. The appointed and reappointed non-official members are all leaders and professionals in their respective industries.
Biteye invited Dr. Jack Kong to the X Space live broadcast room to discuss the current correlation between cryptocurrencies and stocks, stablecoin policies and practices, as well as opportunities for entrepreneurs and investors in the new cycle.
Guest: Dr. Jack Kong
Founder of Nano Labs [Nasdaq: NA], Director of Hong Kong Cyberport, Member of the Hong Kong Task Force on the Development of the Third Generation Internet, and Member of the Hong Kong Anti-Money Laundering and Counter-Terrorist Financing Review Tribunal.
TL;DR
The dynamics of this cycle have completely changed; due to scarcity and strict regulation, stocks related to cryptocurrencies have attracted more capital inflow than the crypto market, enjoying higher premiums.
Most people are better suited to hold Bitcoin rather than altcoins.
The future presents opportunities in both decentralized DeFi and compliant sectors. For grassroots individuals, more opportunities lie in the decentralized track.
The future global competition in stablecoins will mainly be between USD stablecoins and offshore RMB stablecoins.
Hong Kong is the most suitable place for Chinese entrepreneurs, allowing for greater advantages and easier success.
I. Looking Globally at "Cryptocurrency-Stock Correlation"
1.1 You are one of the few investors who have experienced the entire process of "Canaan Creative's IPO → Mining Stocks Surge → Cryptocurrency-Stock Correlation." In hindsight, how do you think the traditional financial market's acceptance of crypto assets has evolved step by step?
The traditional capital market, especially in mainland China, did not recognize the concept of cryptocurrencies in the past.
We initiated our IPO in mainland China in 2016, operating through a merger with an A-share company. However, we needed to prove many fundamental concepts, such as why Bitcoin is capped at 21 million, and demonstrate the technical principles and data that are now widely known. Even after proving everything, the mainland capital market still did not welcome such companies.
In 2018, we shifted to Hong Kong, where we were required to provide a large number of legal opinions, including product legal opinions from dozens of countries where we sold our products. Even after meeting all regulatory requirements and providing all answers and lawyer signatures, the waiting time was still indefinite.
Ultimately, we sent our Hong Kong prospectus to the U.S. regulatory authorities just before the U.S. government shutdown in 2019. After review, the U.S. regulators found no issues but raised a key question: Does the listed company hold digital currencies? If so, further research is needed; if not, although our equipment is used for mining, they believed there were no obstacles. Therefore, we quickly submitted our listing application in the U.S. After less than three months of review, we successfully listed on Nasdaq in November 2019, becoming the first publicly listed company in the industry globally. From 2016 to 2019, we worked continuously for four years to achieve this, setting two records on Nasdaq: the highest number of attendees on-site and the highest number of online viewers.
This experience highlights the differences between the capital markets in mainland China, Hong Kong, and the U.S. Now, all new investments, including mining stocks, cryptocurrency stocks, and U.S. stocks on-chain, are happening in U.S. financial institutions or markets. "The U.S. regulatory system ensures that financial innovation can occur in the U.S., while regulations in other places tend to be more conservative."
We experienced the last wave of the capital market cycle, primarily in mining stocks. Apart from companies like Canaan, which saw its market cap rise to over $6 billion, mining companies like Marathon Digital also attracted capital. In this round, we see more mining companies being viewed as traditional industries, while companies holding cryptocurrencies, including Microstrategy and others holding Bitcoin, Ethereum, Solana, BNB, and stablecoins, are also in demand.
The narrative and hotspots in the capital market have always been changing. Regulations have evolved from prohibiting listed companies from holding cryptocurrencies to gradually incorporating cryptocurrencies into the accounting statements of listed companies, with accounting standards being modified accordingly. Now, many cryptocurrencies can be acquired by U.S. publicly listed companies, and regulators have not raised significant objections. "Overall, we have experienced a process from being very conservative to gradually accepting, and now to fully opening up and supporting the industry."
1.2 From Canaan Creative as the "first blockchain stock" to the frequent interactions between listed companies and mainstream cryptocurrencies, do you believe that 'cryptocurrency-stock correlation' will become the next long-term trend? What opportunities do investors have in this new structure?
In 2018, mainstream institutions like BlackRock communicated with us because we were planning to go public, coinciding with Bitcoin's rise from over $10,000 to $20,000. Many institutions showed great enthusiasm for the industry for the first time in 2018. I had to meet with 10 to 20 institutions a day, including mainstream institutions managing over $100 billion in assets. Although they were already experiencing FOMO at that time, when Bitcoin dropped from $20,000 to a low of $3,000, they could not understand the industry anymore.
Many institutions went from extreme FOMO in 2018 to not understanding the industry in 2019. From 2020 to 2021, as the price of cryptocurrencies rose to $60,000, they regained confidence in the market. Investors in U.S. stocks, including Cathie Wood, also began to publicly express optimism about the market. Institutions have experienced this cycle for the first time in 2018, the second time at $60,000, and now possibly the third time.
In the cycle of participating in the track, I believe that cryptocurrency-stock correlation is definitely the mainstream narrative of this cycle. The reason is that many U.S. stock investment institutions and investors, even global investors, cannot buy ETFs, and many cryptocurrencies do not have ETFs. "Therefore, the cryptocurrency-stock approach addresses the regulatory and investment needs of different investors who cannot buy ETFs or various cryptocurrencies. When you meet the diverse needs of many investors and investment institutions, liquidity and premiums will emerge."
Thus, in the context of global mainstream capital markets having restrictions on investments in ETFs and cryptocurrencies, the opportunities in cryptocurrency-stocks remain sustainable. For more ordinary investors, I believe that purchasing Bitcoin is sufficient. "Based on my entrepreneurial experience over the past decade, the only asset that may be worth holding long-term is Bitcoin." We have many publicly listed companies, with stock prices ranging from $5 billion to $10 billion at their peak, and only a few hundred million at their lowest. I personally continued to increase my holdings in Canaan and these listed companies at high prices, yet my account may now only be worth 1/10 or even 1/100 of what it was at that time. Many online KOLs criticized me for "cutting leeks," but in reality, I am the one who has lost the most on this. Because we have always been optimistic about the track, we often did not sell our holdings at high prices and even bought more shares of these listed companies at high prices. I have also increased my holdings in Canaan and other stocks at high prices. Ultimately, you will find that no matter how skilled an investor is, it is determined by the market. For example, when Bitcoin falls, your stock price may fall even more, and when Bitcoin rises, your stock price may rise even more. The fluctuations of Bitcoin are not dictated by individual will, so I believe that for more conservative considerations, most people may only be suitable for holding Bitcoin. The volatility of cryptocurrency-stocks is greater; they may rise tenfold in a day or dozens of times in a month, but they can also drop 90%-99% when they fall, making them more suitable for professional secondary market investors.
1.3 Dr. Kong, as the first listed company to choose BNB as a reserve, what is the core logic behind this decision? Are there plans for further diversification of reserves?
Before reserving BNB, Nano Labs also held Bitcoin, but the Bitcoin track has already become strong enough with Microstrategy. I believe Bitcoin is the best asset, without a doubt. I just suggested that individuals hold Bitcoin, but when running a business, you will find it challenging to compete with existing giants. Where is your differentiation opportunity?
"We studied all mainstream cryptocurrencies and believe that apart from Bitcoin, BNB is the highest quality, relatively stable, and has growth potential." Because of the entire BNB ecosystem, we believe that if CZ, the first sister, and many other ecosystem partners continue to build the BNB ecosystem, it may have more opportunities than other cryptocurrencies besides Bitcoin. We are willing to build this ecosystem together with a group of people long-term, as we see it as a very promising ecosystem.
We observed that Bitcoin rose because people viewed it as digital gold, Ethereum rose due to the entire DeFi Summer, and Solana's meme narrative satisfied the demand for quick profits. We believe that the entire track, including trends from DeFi to memes, as well as RWA stablecoins and tokenization of U.S. stocks on-chain, is developing. We think ecosystems similar to BNB have the opportunity to capture new narrative hotspots, so we are willing to build this ecosystem.
In this process, we noticed that after the listed company announced its plans, CZ expressed support, and more key participants in the BNB ecosystem may be willing to support such an ecosystem. In the future, if the company reserves more BNB, it will promote the price increase of BNB, which will indirectly drive the emergence of more opportunities within the BNB ecosystem, further promoting the price increase of BNB. In summary, the company's holdings, stock price, BNB price, and the development of the entire ecosystem form a virtuous cycle.
II. Based in Hong Kong, Participating in the Stablecoin Wave
2.1 In addition to the BNB reserve plan, Nano Labs is preparing to apply for stablecoin licenses for HKD and offshore RMB. Recently, we have also seen domestic giants like JD and Alibaba gearing up to enter the market. What is your view on Hong Kong's positioning in the global stablecoin landscape? How will its role as a "bridge" be specifically reflected?
When we talk about stablecoins, we must introduce several mainstream opportunities for their development. Many people mistakenly believe that USD stablecoins represent U.S. hegemony; whether it was Trump in this term or Biden in the previous one, they were previously unaware of stablecoins until Biden was elected president or Trump began to strongly support stablecoins and Bitcoin during his term. During Trump's first term, he had little understanding of digital currencies. "When a country's president has little understanding, how can stablecoins be for U.S. hegemony?"
The first real opportunity for stablecoins arose from China's regulations. At that time, there was a document from a Chinese ministry stating that Bitcoin is a virtual commodity, and the public can buy and sell it freely, while financial institutions are prohibited from participating. This meant that people could initially use RMB to directly purchase Bitcoin, but the paths to directly buy Bitcoin through channels like Alipay were cut off. At that time, Chinese exchanges held a major share of the global trading volume, and we could not directly use RMB or RMB stablecoins; the only stablecoin accepted was the USD stablecoin. This created the first application scenario for USD stablecoins as a substitute for fiat currency in trading on exchanges.
At the same time, during that phase, due to the global regulatory environment's lack of understanding of the matter, only a few exchanges had fiat deposit channels, while more exchanges operated on cryptocurrency trading pairs. Stablecoins gained greater trading volume and growth from the flourishing of various cryptocurrency trading pairs and exchanges, which was the early native market trading scenario for stablecoins.
Another scenario emerged after the explosion of Ethereum, where we saw the emergence of various iterative ecosystems. The DeFi ecosystem requires stablecoins even more. This wave further promoted the growth of stablecoins, as various financial interactions and other applications within these ecosystems needed to use stablecoins, leading Ethereum and DeFi to drive the entire market.
Cross-border payments, black, gray, and unbanked payment demands are important scenarios for stablecoins. Whether for payments related to gambling, drugs, or the recent Yiwu small commodity market, many merchants accept stablecoins. At that time, after accepting USD for conversion to RMB, they were often blocked by local police, making stablecoins a simpler alternative. Therefore, in various cross-border exchanges, stablecoins indeed serve as better payment tools and vehicles.
These three scenarios have contributed to the development of stablecoins, which has reached two to three hundred billion USD in the past. In this process, we found that to develop stablecoins, regardless of the scenario, three characteristics must be met.
The first is to enhance payment efficiency. For example, cross-border transfers may take one, two, or three days, while stablecoins can arrive within seconds, thus genuinely improving efficiency.
The second point is the need to reduce costs. Traditional bank transaction costs far exceed the transaction costs of stablecoins.
The third point is to have a wealth effect. This means that after using stablecoins, why would one still want to hold them? Especially for those in the native market, why do they need to retain stablecoins? The reason is that they can purchase various memes and cryptocurrencies for trading, quantitative trading, and TVL. Although these returns may seem to incur some losses, the overall wealth effect is greater than using fiat currency for other investment methods. Therefore, I believe that past stablecoins have indeed aligned with these three core points, allowing them to grow.
Currently, the legislation for stablecoins in Hong Kong was originally planned to be launched last year, but the entire process, whether in terms of regulation or legislation, requires a lot of time. Although this round seems to be on par with the U.S. in terms of timing, Hong Kong has a complete opportunity to get ahead of the U.S.
The second question is whether it meets the three conditions mentioned earlier. If the existing scenario can be satisfied by USD stablecoins, then HKD stablecoins need to find more other scenarios. At the same time, HKD stablecoins also need to fulfill the three core points I just mentioned to truly develop.
Offshore RMB stablecoins have undergone significant changes in the past month, including many regulatory agencies in mainland China that previously had little interest in these innovations. However, now, in addition to the internet giants like JD and Ant Group that we see, many state-owned financial giants will also enter the application for stablecoin licenses, joining the wave. This indicates that China is further accelerating its posture in the competitive landscape of RMB stablecoins.
In the long run, the USD stablecoins and the entire payment system in the global financial system are priced in USD. The second is RMB stablecoins, which are currently offshore RMB stablecoins because "domestic payments are particularly developed, and there is no need for RMB stablecoins."
"We believe that with China's global development in industrial manufacturing, offshore RMB stablecoins will encounter tremendous opportunities."
I believe that before the high development of offshore RMB stablecoins, there may be opportunities for USD stablecoins and HKD stablecoins. As offshore RMB stablecoins continue to grow, the global stablecoin landscape may increasingly be a competitive landscape between USD stablecoins and offshore RMB stablecoins, while HKD stablecoins will serve more as a supplement, including future Euro stablecoins, Middle Eastern dirham stablecoins, or other stablecoins, which are regional supplements outside of these two stablecoins.
2.2 As a director of Hong Kong Cyberport, how do you evaluate Cyberport's role in promoting Hong Kong's Web3 ecosystem, and what is the most critical support in attracting businesses?
Hong Kong Cyberport is a company wholly owned by the Hong Kong government, so it not only has corporate functions but also needs to support the Hong Kong government in fostering startups in the fintech sector.
In the past six months, we received nearly 20,000 applications for startup projects. Therefore, we can see that Hong Kong Cyberport has been supporting the entire financial and tech startup ecosystem in Hong Kong. As for Web3, no government in the world has truly provided financial subsidies to Web3 entrepreneurs. After the policy declaration in Hong Kong on October 30, 2020, in the budget proposal in February 2023, Financial Secretary Paul Chan directly allocated 50 million HKD to Cyberport for the development of Web3.
Today, the organizers also benefited from this policy, including Cobo and other public chains that have enjoyed the policy dividends from Cyberport. This is not just about money; it represents the government's friendliness towards this industry. Recently, Cyberport provided subsidies to quality projects to support typical Web3 initiatives.
Cyberport has done a lot of work in the entire Web3 field and has provided support to many projects. In addition to the Web3 field, Cyberport has made significant investments in AI over the past two years. We have invested billions in building Hong Kong's AI infrastructure to provide more support for AI startups coming to Hong Kong and local companies or institutions that have demands for AI computing power and AI ecosystems.
III. Reflecting on the Past, Sharing Experiences
3.1 You have experienced the ups and downs of multiple crypto cycles. Now in Hong Kong, Web3 entrepreneurs face different paths such as token issuance and IPOs. How do you view these two models? What advice would you give to entrepreneurs?
I believe that throughout the entire crypto cycle, many people have gone through multiple iterations. During the iterative process, inertia in thinking may lead to many situations that were already at A8, A9, or even A10 in the previous cycle, returning to poverty in this cycle.
The first cycle was characterized by Bitcoin leading the entire Web3 enlightenment era. In that industry, the things that could be accomplished were limited to about 5-10, such as mining machine chips, mining, mining farms, and cloud computing power—these 5-10 industries were already the limit. However, we found that the earliest mentioned cryptocurrencies like Bitcoin and Litecoin seemed to have their second place changing every year or every couple of years. Before Litecoin, there were other coins, and after Litecoin, there was Ethereum. Therefore, you will find that while Bitcoin's position as gold has not changed, the position of silver has always been changing; this is a characteristic of that cycle.
The second cycle was the DeFi Summer, where we saw the birth of various financial applications based on smart contracts, along with the boom of NFTs and opportunities for DAO governance. In that wave, Bitcoin might double, while other coins could rise 3 times, 5 times, or even Bitcoin rising two to three times while other mainstream altcoins might rise 5-10 times; this was its characteristic.
In this current cycle, many investors, when exchanging currencies, believe that the exchange rates of Bitcoin and Ethereum have decoupled from the previous cycle and should switch to Ethereum, resulting in another prolonged decoupling. Other altcoins are similar; Bitcoin has risen 5 or 6 times in the past two years, while other altcoins may have dropped 99% from their highs.
Therefore, many investment methods in this cycle have led to significant problems, including for ourselves. For example, at that time, the value of the Ethereum ecosystem was 300 billion USD, and when we saw the Bitcoin ecosystem and the inscription ecosystem gradually rising, we believed that a 1 trillion USD Bitcoin ecosystem should be able to grow out of several hundred billion USD. Thus, we worked hard to go long on the inscription ecosystem and the entire Bitcoin ecosystem, even buying many coins regardless of whether they were at low or high prices, and we have not sold them to this day. However, we found that this ecosystem is currently approaching a state of zero. We also used inertia in thinking, believing that the Ethereum and Bitcoin ecosystems would develop in this way.
From the facts, we realized that our judgment was completely wrong. The host just mentioned token issuance and IPOs, which is also the case. In the past, we saw a very ordinary project that, due to investors backing it, could become a project worth hundreds of millions, tens of billions, or even over a hundred billion USD after being listed on Binance, Upbit, or Coinbase.
This is a phenomenon we observed in the previous cycle. "Due to the overall inflow of funds in the previous cycle being greater than the growth rate of cryptocurrency projects, most projects could enjoy the benefits of incremental capital."
In this cycle, we have observed that in the past six months to a year, most token issuance projects may face a decline in value, and even without considering funding rates, all projects listed on Binance could be shorted, as from the perspective of token prices, they all have profit margins, and there are almost no tokens that rise after being listed, which is completely different from the previous cycle. "Recently, it is precisely that new token listings are not hot, while cryptocurrency stocks are very popular, because the stock market, whether shell companies or top assets, only has a few thousand companies, and they are under the scrutiny of auditing firms, lawyers, and regulatory agencies, making the cost of fraud very high, while the overall inflow of incremental funds is larger compared to the cryptocurrency market."
Therefore, we see more projects similar to top cryptocurrency stocks, such as Circle. If Circle issues tokens, it is unlikely to rise significantly, as its market cap peaks close to the issuance of stablecoins after the IPO. Because in this cycle, dozens of new tokens appear every day, the stock market is generally a scarce target, so combining top Web3 projects can create better liquidity and attention. "Overall, for top projects, the previous cycle was more suitable for token issuance, while this cycle may be more suitable for cryptocurrency-stock correlation."
3.2 How do you view the current global compliance process for Web3? What are the most certain trends for Hong Kong's Web3 compliance direction in the next two years? What areas still have uncertainties?
I believe that the track is undoubtedly transitioning from a native and grassroots phase to a compliance phase. The entire blockchain underlying infrastructure is decentralized, and DeFi will always exist. "We believe that the future will definitely have opportunities for both decentralized DeFi and compliance. For grassroots individuals, more opportunities lie in the decentralized track."
For large institutions, their opportunities lie in the compliance track. From the perspective of stablecoin applications in Hong Kong, previously, when the Hong Kong Stock Exchange applied, it was more about native cryptocurrency institutions, but stablecoins are completely different, as they are more about internet giants and traditional financial giants applying. Therefore, it has become increasingly difficult for ordinary native cryptocurrency institutions to secure a place in Hong Kong's stablecoin landscape.
The compliance trend in Hong Kong is very clear, progressing from licensed exchanges to stablecoins and then to OTC, gradually establishing a comprehensive regulatory framework and system, which will continue to improve in the future.
Secondly, the friendliness of the Hong Kong government is the best globally. Over the past three years, we have emphasized that many people did not believe it, especially with Singapore as a comparison. In recent months, at least Asians are certainly convinced. Singapore's very strict regulatory policies officially took effect at the end of June, and many institutions are leaving Singapore. The reason is that Hong Kong is a small government but a relatively law-abiding place. As long as one does not violate the National Security Law and does not affect China's politics, if you are just an entrepreneur, it is definitely a very law-abiding place.
Although the U.S. has been very open in the past six months, from the cooperation and conflicts between Trump and Musk, I believe that the policy environment in the U.S. will definitely be very open in the long run. However, at different times, standing with different parties will always carry risks. However, in Hong Kong, under the premise of maintaining the unity of the Chinese motherland, there is no need to align with other parties or regulatory interest groups; one can focus on developing the Web3 business.
We believe that for Chinese individuals born in mainland China, Hong Kong is undoubtedly the most suitable bridgehead for developing Web3. The reason Hong Kong did not develop Web2 well in the past is that Web2 follows the barrel theory, where only by filling every short board can one succeed.
When you only have a few long boards in Hong Kong and cannot compensate for the short boards, you will definitely not be able to develop Web2. Web3 follows the long board theory; Tether has over 160 employees and profits exceeding 14 billion USD, and they only issue stablecoins without engaging in direct development of chains, wallets, or other ecosystems. The number of stablecoin users is global, extending their long board, while other chains and wallets have filled in their short boards.
"Hong Kong is precisely a place that allows you to extend your long board, especially suitable for Chinese individuals born in mainland China and Chinese individuals worldwide. Here, it is ideal for entrepreneurship and serves as a very good bridge in the future competition and cooperation between China and the U.S."
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