Title: "Global crypto firms turn to Hong Kong for refuge — and opportunity"
Author: Rita Liao, TechCrunch
Translation: Luffy, Foresight News
As US regulatory agencies continue to tighten scrutiny on cryptocurrencies, startups and founders in the crypto industry are turning their attention overseas in search of a more favorable environment for business development.
Hong Kong is one such destination. Hong Kong is seeking to restore its former status as a financial center and hopes to attract a new wave of entrepreneurs, technical experts, and investors through crypto-friendly policies. So far, this strategy seems to be working.
In mid-April, Hong Kong's annual Web3 Carnival attracted over 50,000 participants from around the world. This year, there was a noticeable increase in non-Chinese participants compared to previous years, making the event feel like a gathering of cryptocurrency refugees fleeing from mainland China's restrictive policies. Officials in Hong Kong took the event seriously, attentively listening to founders from around the world who were casually dressed and battling jet lag. While billionaire founder of Ark Invest, Cathie Wood, did not attend the event in person, she delivered a speech via video. Ethereum's nomadic founder, Vitalik Buterin, also made a last-minute appearance at the event.
This evokes a sense of déjà vu: in the early stages of the cryptocurrency industry, Hong Kong was an important hub for foreign entrepreneurs operating cryptocurrency companies, including companies like FTX, Crypto.com, and BitMEX. Like other jurisdictions around the world, when cryptocurrency market fluctuations led to a loss of control, the Hong Kong government took strict measures to crack down on cryptocurrency-related activities to protect investors.
The turning point came in June of last year when the Hong Kong government opened its arms and legalized cryptocurrency trading to attract retail investors, reigniting enthusiasm for the Web3 sector in Hong Kong. Subsequently, Hong Kong implemented a series of measures to regulate cryptocurrency-related activities, including a stablecoin issuance sandbox and a licensing system for cryptocurrency exchange operators. In addition, following in the footsteps of the United States, Hong Kong recently listed a batch of cryptocurrency exchange-traded funds (ETFs).
These measures stand in stark contrast to the tough stance of the US government on cryptocurrency startups. Participants from the US, Europe, the Middle East, India, and other regions at the Web3 Carnival expressed optimism about the development of Web3 in Hong Kong. For example, First Digital's FDUSD, issued based on Hong Kong's digital asset regulations and backed by US Treasury bonds, has quickly become the world's fourth-largest stablecoin.
However, at the same time, people also realize the limitations of Hong Kong as a cryptocurrency hub. Firstly, Hong Kong is a relatively small market with a population of only 7 million, and the vast market of mainland China is currently inaccessible to Hong Kong. Additionally, Hong Kong's cryptocurrency-related policies prioritize investor protection, which may lead to higher compliance costs and hinder founders who prefer a more liberal environment.
Nevertheless, Hong Kong remains one of the few jurisdictions that explicitly support cryptocurrencies, along with other countries such as the UAE, Japan, and Singapore. As Jack Jia, head of cryptocurrency at global payment company Unlimit, said, "Any cryptocurrency regulations that Hong Kong is about to introduce are quite attractive from the perspective of reputation and image."
Enlightened Officials
In fact, cryptocurrency regulation in Hong Kong is not the most lenient. Hong Kong's strict scrutiny of exchange operators has prompted cryptocurrency representative company HashKey to apply for a license in Bermuda. The world's largest cryptocurrency exchanges, Binance, Coinbase, and Kraken, are not among the 22 applicants for virtual asset exchange licenses in Hong Kong.
In fact, Hong Kong's greatest appeal lies in its efforts to provide regulatory clarity for cryptocurrency activities.
"The US Securities and Exchange Commission (SEC) is notorious in the cryptocurrency industry. 'Everything is a security, but we won't tell you explicitly what license you need to apply for, and then we might still reject your application,'" Jia said, describing the SEC's attitude towards regulating cryptocurrency companies. "The SEC does not have a set process, but Hong Kong regulators have established a process for listening to opinions."
In fact, several cryptocurrency executives told TechCrunch that they have held closed-door meetings with representatives of the Hong Kong government. Sergey Nazarov, co-founder of San Francisco-based Chainlink, said the company is dedicated to bringing real-world data into smart contracts (code that executes predefined rules) and is currently discussing providing its technology to Hong Kong's major financial infrastructure.
"People have not fully realized the inherent compatibility of capital markets and cryptocurrencies. After coming to Hong Kong, I found that this compatibility will accelerate here first because the government and regulators are more open to this compatibility," Nazarov said, adding that last year he invited Hong Kong's Deputy Secretary for Financial Services and the Treasury, Joseph Chan, to have a fireside chat at Chainlink's annual SmartCon conference in Barcelona.
Nazarov stated that this year, at the invitation of the Hong Kong government, SmartCon will be held in Hong Kong, making it the first Asian city to host the conference.
"Hong Kong regulators are regulating stablecoins and cryptocurrencies. This means that Hong Kong can become a place where cryptocurrency assets and payments can operate reliably in a regulated manner within a single system," Nazarov added. "This is important because without regulation, the transfer of trillions of dollars in assets between banks would not be possible."
Steve Yun, president of the TON Foundation (official blockchain partner of Telegram) based in Dubai, also expressed optimism, stating that compared to other aspiring cryptocurrency hubs, Hong Kong may have the greatest competitive advantage because it is "trying to establish a very comprehensive policy framework to create a more comfortable environment for builders and entrepreneurs, thus attracting talent."
Hong Kong's financial regulation is very complex, but Charles d'Haussy, CEO of the dYdX Foundation in Switzerland, is no stranger to these regulations, having previously served as the head of fintech at InvestHK, the investment promotion agency of the Hong Kong government.
"The Hong Kong government had a very open attitude towards cryptocurrencies in the early days," d'Haussy recalled. Subsequently, regulatory agencies attempted to crack down on rampant cryptocurrency fraud, leading to a period of hostility. However, "about a year ago, I think they realized that there was a new market there and regulations should be put in place to ensure that this opportunity is not missed."
d'Haussy added, "At that time, you would see the Hong Kong Monetary Authority (HKMA) rolling out more and more central bank digital currencies (CBDCs), the Securities and Futures Commission (SFC) issuing licenses to cryptocurrency exchanges, and approving the listing of cryptocurrency spot ETFs."
Gateway to China
When Hong Kong began embracing cryptocurrencies last year, there was widespread speculation that mainland China might follow suit. However, as China continues to prohibit its citizens from trading cryptocurrencies, this hope remains distant. Nevertheless, companies are now realizing the potential of Hong Kong as a gateway to another valuable resource in the neighboring country.
While Hong Kong attracts numerous financial talents, its neighbor Shenzhen is home to some of the world's largest tech companies such as Huawei, DJI, and Tencent. As expected, cryptocurrency companies are leveraging Hong Kong's favorable regulatory environment and the convenience of its developer resources in Shenzhen and other Chinese cities.
The TON Foundation is one of the participants leveraging Hong Kong's geographical advantage. In order to become a super app, Telegram is collaborating with TON to enable developers to build lightweight applications based on blockchain and run them on the messaging platform. At the Web3 Carnival, the TON Foundation held a training camp in Hong Kong, aiming to attract Chinese developers, especially those familiar with WeChat mini-programs.
"Now, we are trying to reach out to regions with a larger number of developers and entrepreneurs, especially those who have grown through using some kind of mini-program via a super app, and those who are involved in the growth of this ecosystem," Yun said.
For example, Pionex-backed Aptos held a three-day hackathon in Shenzhen in February, attracting hundreds of applicants. Aptos, operated by a team previously working on the Diem blockchain at Meta, also partnered with Alibaba's cloud computing department to attract Chinese developers.
Some foreign founders have gone further to establish physical entities in Hong Kong. zkMe, a company founded by a German entrepreneur aiming to achieve private certificate verification, chose to establish its headquarters in Hong Kong.
"We are here to build a sustainable business and leverage the technological advantages here, and obviously, cooperation with the Greater Bay Area is also very beneficial," said Alex Scheer, founder and CEO of zkMe. He referred to a plan to integrate Hong Kong with nine neighboring Chinese cities through policies such as tax incentives for Hong Kong companies setting up offices in Shenzhen. 14 of zkMe's 16 team members are from the Shenzhen office.
Some founders are more optimistic about Hong Kong paving the way for China's future embrace of cryptocurrencies. Anurag Arjun, founder of Dubai-based modular blockchain company Avail, believes that governments that see the benefits of cryptocurrency technology will eventually take a more inclusive stance.
"In the past few years, the cryptocurrency industry has been developing very advanced technologies, such as zero-knowledge proof technology," he said. The underlying technology behind cryptocurrencies is not developed to support fraudulent NFTs or speculative trading, but to enhance the foundational technology of the crypto industry.
"Given the strategic nature of Hong Kong, we see it as an important place that will be a gateway to China in the future," Arjun said. "If China opens up to cryptocurrencies in the future—once we start engaging with more government officials and prove that our technology is not only applicable to monetary elements—what we are doing in Hong Kong will become a useful experience for expanding into the overall Chinese market."
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