With US regulators As we proceed to increase control over cryptocurrencies, startups and founders in this space are looking abroad for a more friendly climate to support their development.
One of such destinations is Hong Kong, which wants to restore its status as a city financial centre, is counting on favorable regulations regarding cryptocurrencies to attract a latest crowd of entrepreneurs, technologists and investors. So far, his strategy seems to be working.
In mid-April, Hong Kong’s annual web3 festival attracted over 50,000 participants. There were noticeably more non-Chinese participants compared to last 12 months, when the event resembled a gathering of crypto refugees fleeing the restrictive policies of mainland China. During this 12 months’s edition, buttoned-up city officials listened attentively to sloppily dressed founders struggling to cope with jetlag. Although she didn’t attend the event in person, Cathie Wood, the billionaire founding father of Ark Invest, delivered a speech via video. At the last minute, Vitalik Buterin, the nomadic founding father of Ethereum, appeared.
This created a sense of déjà vu: in the industry’s early days, Hong Kong was a major hub for foreign-run crypto companies, including the likes of FTX, Crypto.com and BitMex. Like other jurisdictions around the world, the city clamped down on crypto activities to protect investors’ interests as market volatility spiraled uncontrolled.
Excitement around Hong Kong’s web3 scene began to boil again in June last 12 months when the government allowed retail investors to trade cryptocurrencies. Since then, the city has implemented a variety of measures to regulate cryptocurrency activities, including a sandbox for stablecoin issuance, in addition to a platform licensing regime for cryptocurrency exchange operators. Following in the footsteps of the United States, Hong Kong has just listed a batch of cryptocurrency funds on its stock exchange this week.
These moves stand in stark contrast to the US government’s tough stance towards cryptocurrency companies. Web3 festival participants who flew from the US, Europe, the Middle East, India and other regions expressed their optimism about the dynamics of events in Hong Kong. First Digital’s FDUSD, for example, issued under Hong Kong’s digital asset regulations and backed by U.S. Treasury bills, for example, quickly became the world’s fourth-largest stablecoin by market capitalization.
At the same time, people are aware of Hong Kong’s limitations as an aspiring cryptocurrency hub. First, it is a relatively small market of seven million people, and the huge market of mainland China can be off limits, at least for now. Additionally, the regulations prioritize investor protection, which can result in higher compliance costs and discourage those that favor a more relaxed environment.
Still, Hong Kong stays one of the few jurisdictions, alongside countries reminiscent of the United Arab Emirates, Japan and Singapore, that have shown a clear commitment to cryptocurrency. As Jack Jia, head of cryptocurrency at global payments firm Unlimit, noted: “The fact that Hong Kong is coming up with any cryptocurrency regulation at all, just from a reputational and optics standpoint, will attract everyone.”
Open-minded officials
Hong Kong doesn’t actually have the most lenient cryptocurrency regulations. Indeed, its control over exchange operators pushed its crypto poster child, HashKey, to do so apply for a license in Bermuda. These are the largest cryptocurrency exchanges in the world, namely Binance, Coinbase and Kraken conspicuously absent from a list of twenty-two applicants for the city’s virtual asset exchange license.
As it seems, Hong Kong’s biggest attraction is its efforts to bring regulatory transparency to crypto activities.
“The SEC is famous. “Everything is secured, but we won’t explicitly tell you what licenses you need to apply for, otherwise we might just reject your application anyway,” Jia said, describing the U.S. Securities and Exchange Commission’s stance on regulating crypto companies. “There is no established SEC process. However, regulators in Hong Kong have launched a process to listen to your views.
Indeed, multiple cryptocurrency executives told TechCrunch that they held closed-door meetings with Hong Kong government officials. Working to feed real-world data into smart contracts, lines of code that implement predetermined rules, San Francisco-based Chainlink is in talks to deliver its technology to Hong Kong’s foremost financial infrastructure, its co-founder said Sergei Nazarov.
“People don’t fully realize that capital markets and cryptocurrencies are very compatible. Coming to Hong Kong, I discovered that compliance can be accelerated here first because the government and regulators are more open to it,” said Nazarov, who invited Hong Kong Treasury Undersecretary Joseph Chan for a fireside talk with him at SmartCon, an annual conference Chainlink, which took place last 12 months in Barcelona.
This 12 months, Chainlink is taking SmartCon to Hong Kong at the invitation of local authorities, which Nazarov said makes Hong Kong the first Asian city to host the conference.
“The regulator in Hong Kong issues stablecoin regulations and cryptocurrency regulations [digital] assets. This means that Hong Kong can be a place where assets and payments can reliably function in one system in a regulated manner,” Nazarov added. “That’s important because if things don’t get sorted out, all those hundreds of trillions of dollars and the banks won’t migrate.”
Steve Yun, president of the Dubai-based TON Foundation, Telegram’s official blockchain partner, shared the optimism, saying Hong Kong may have the biggest competitive advantage over other aspiring cryptocurrency hubs as the city is “trying to develop a very comprehensive framework” for builders and entrepreneurs they felt more comfortable and attracted talent.”
Hong Kong’s financial regulations are complex, but Charles d’Haussy, CEO of Switzerland’s dYdX Foundation, is no stranger to them, having previously headed fintech at InvestHK, the foreign direct investment arm of the Hong Kong government.
“At first, the Hong Kong government was very open to cryptocurrencies,” d’Haussy recalls. Then got here a period of hostility, like regulators have tried to crack down on rampant cryptocurrency fraud. But “about a year ago, I think they realized there was a new market there and there should be regulations to make sure that opportunity wasn’t missed.”
“Then you saw HKMA [Hong Kong Monetary Authority] making more and more CBDC [central bank digital currencies]and SFC in Hong Kong [Securities and Futures Commission] issuing licenses for cryptocurrency exchanges and ETFs,” added d’Haussy.
Access to China
When Hong Kong opened up to cryptocurrencies last 12 months, there was speculation that mainland China could follow suit. That hope stays distant as China continues to prevent its residents from trading cryptocurrencies. Nevertheless, companies are now recognizing Hong Kong’s potential as a gateway to one other worthwhile resource from its neighbor.
While Hong Kong is a magnet for financial talent, its southern neighbor Shenzhen is home to some of the world’s largest technology companies, reminiscent of Huawei, DJI and Tencent. It’s no surprise that crypto companies profit from the combination of Hong Kong’s friendly regulations and proximity to developer resources in Shenzhen and other Chinese cities.
One such player benefiting from Hong Kong’s geographical location is the TON Foundation. As a part of its efforts to develop into a super app, Telegram is partnering with TON, which allows developers to create blockchain-based lite apps that run on top of the messenger. During web3 week, the Foundation organized a bootcamp in Hong Kong in hopes of attracting Chinese developers, especially those familiar with the WeChat mini-app empire.
“We are now reaching out to regions where there are a large number of developers and entrepreneurs, especially those who grew up using some kind of mini-apps within super apps, and those who have participated in the development of such an ecosystem,” Yun said.
For example, a16z-backed Aptos hosted a three-day hackathon in Shenzhen in February, which attracted a whole lot of applicants. Aptos, run by a team that previously worked on Meta’s Diem blockchain, has also partnered with Alibaba’s cloud computing division to lure Chinese developers.
Some foreign founders have gone a step further by establishing a physical presence in the city. zkMe, founded by a German entrepreneur to enable private verification of credentials, has decided to locate its headquarters in Hong Kong.
“We came here to build a sustainable business and take advantage of technological expertise, and the cooperation with the Greater Bay Area is also really beneficial,” said zkMe founder and CEO Alex Scheer, referring to the initiative that goals to integrate Hong Kong with China’s nine neighbors cities through policies reminiscent of tax breaks for Hong Kong companies to arrange headquarters in Shenzhen. Of the 16-person zkMe team, 14 work in the Shenzhen office.
Some founders are more optimistic that Hong Kong is paving the way for China to adopt cryptocurrencies in the future. Anurag Arjun, founding father of Dubai-based Avail, a modular blockchain company, believes that governments that recognize the full advantages of crypto technologies will ultimately take a more favorable stance.
“[The crypto industry has] has been building very advanced technology over the last few years. Some examples include zero-knowledge resistant technology,” he said, suggesting that the technology underlying cryptocurrency was developed not to support fraudulent NFT transactions or speculative trading, but to improve the underlying technology in the industry.
“Due to the strategic nature of Hong Kong, we believe it is an important place – a gateway to the future China,” Arjun said. “If China opens up in the future – and as we talk to more government officials and make the case for this technology beyond just its currency components – what we do in Hong Kong can be a useful lesson that can help us expand into China. “