Can Hong Kong leverage Web3 to regain its status as an Asian financial center and welcome the next "Octopus moment"?

Original Title: 《Will NFT, metaverse developments in Hong Kong help deliver the city's next 'Octopus moment' in a post-pandemic world?》

Written by: Bien Perez

Translated by: Peter Pan, Rhythm BlockBeats

On October 31, the Hong Kong SAR government published a policy declaration regarding the development of virtual assets in Hong Kong, clarifying the government's policy stance and guidelines for developing a vibrant virtual asset industry and ecosystem in Hong Kong. A pilot program was also launched, including the issuance of non-fungible tokens (NFTs) during the 2022 Hong Kong FinTech Week, green bond tokenization, and digital Hong Kong dollars.

Singapore's rise in Asia has made it extremely uncomfortable for several major cities in Asia, including Hong Kong. The most obvious manifestation was in September 2022, when almost all global events in Asia were held in Singapore, leading to skyrocketing accommodation costs there. However, the former Asian hub did not sit idly by; today’s declaration is just the beginning. It seems that after experiencing growing pains, Hong Kong is trying to regain its status as the financial center of Asia, with Web3 being an important direction for its efforts.

Many people have stated that Hong Kong's over twenty years in the tech industry have been years of missed opportunities. The term "missed" is used because Hong Kong has not lacked innovation capabilities.

In September 1997, the launch of the Octopus card quickly became the most popular electronic payment system in the region and became a symbol of the city's ability to foster innovative technology.

However, during the mobile internet era, Hong Kong was the first to launch a voice IM application called Talkbox, which was ultimately completely surpassed by WeChat; in the more recent era of artificial intelligence, the well-known AI unicorn SenseTime was originally founded by a team from the Chinese University of Hong Kong led by Tang Xiaowou, but later chose to establish itself in Shanghai. Moreover, universities such as the Chinese University of Hong Kong and the Hong Kong University of Science and Technology are annually supplying a vast number of talents to enterprises and academia.

The slow development of Hong Kong's tech industry was initially attributed by some to the failure of the "Silicon Harbour Plan" around 2000.

In October 1998, then Chief Executive Tung Chee-hwa proposed in his second policy address after taking office to promote technology in Hong Kong and develop it into an international innovation and technology center. However, this project has been slow to advance, partly due to the government's low authority in land allocation, and also due to restrictions on the export of semiconductor manufacturing equipment to Hong Kong from the United States at that time.

However, these reasons are clearly insufficient to explain the subsequent issues. In the wave of the rise of mobile internet and AI, many enterprises only began to develop around 2010 as latecomers. The failures in these fields mainly stem from factors such as high labor costs in Hong Kong, a lack of capital attention in the tech sector, and an incomplete industrial chain and market.

Wang Tao, founder of the Shenzhen drone company DJI, once stated when asked by the third Chief Executive Leung Chun-ying whether DJI would move to Hong Kong: "The best industrial chain division in the world is in Shenzhen, the best engineers are in Shenzhen, the startup costs here are very low, and Shenzhen has the best industrialization system, which DJI cannot do without."

In addition, Hong Kong's real estate industry, financial services industry, trade and logistics industry, and tourism industry together account for 60% of its GDP, leading to insufficient capital attention to technology. For example, although SenseTime's facial recognition technology was born in Hong Kong, the capital and market it relied on for growth still depended on the mainland. How can Hong Kong break the deadlock and catch up on the over twenty years it has lost?

However, today, industries such as NFTs and the metaverse are rapidly developing in Hong Kong, gradually giving rise to a new batch of startups led by digital technology, and the city may welcome its next "Octopus moment." Last year, SenseTime also returned to Hong Kong to list on the Hong Kong Stock Exchange, with its stock price rising over 23% on the first day, surprising the market.

Perhaps Hong Kong will gradually shed its label of "having innovation capabilities but lacking an innovative soil" and overtake in the Web3 race.

The "Octopus Card" Symbolizing Technological Innovation

When the "Octopus card" was launched in September 1997, this locally born electronic payment system became the most eye-catching high-tech application in Hong Kong, and thus became a symbol of what can be achieved in a city with world-class infrastructure, rule of law, favorable business policies, and an ever-expanding pool of technical talent.

According to the operator of the Octopus card, due to its widespread acceptance by the public, the use of this contactless smart card successfully expanded from the city's public transport network to parking facilities, tunnel tolls, schools, retail, and even access control for residential and commercial buildings. Subsequently, this technology was adopted by various projects in the mainland, the Netherlands, the UAE, and New Zealand.

Even when there were other electronic wallets available on the market, most Hong Kong residents (about 70% of the 6.3 million eligible residents) still chose the Octopus digital payment platform last year to store the government-provided HK$5,000 consumption vouchers. As of December 31, 2020, there were approximately 30.4 million Octopus cards in circulation in Hong Kong.

Citizens swipe their Octopus cards to receive the latest batch of consumption vouchers from the Hong Kong government at the Sham Shui Po MTR station.

However, nearly 25 years later, the hope for Hong Kong's next "Octopus moment" has yet to be realized.

This aspiration has recently become complicated by a series of disruptive events: Hong Kong's anti-government protests, the US-China trade war, the COVID-19 pandemic, the restrictions imposed by the city's "dynamic zero COVID-19" policy, and a series of economic slowdowns and talent losses experienced during the recent wave of immigration.

COVID-19 Accelerates the Expansion of the Web3 Industry

However, after the rapid development of companies like AI firm SenseTime and freight logistics service provider GoGoX Holdings (formerly GoGoVan) in recent years, some studies in Hong Kong's tech industry indicate that a new wave of digitally-driven enterprises may achieve breakthroughs and become a new hallmark of the city.

Recently, Yat Siu, co-founder and CEO of Animoca Brands, a large video game and venture capital company headquartered in Cyberport, Hong Kong, also stated that the tech industry in Hong Kong has shown some exciting innovations.

Animoca was listed on the Australian Securities Exchange from January 2015 to March 2020 and has made over 200 investments in various blockchain companies related to NFTs, including the popular NFT marketplace OpenSea, NBA Top Shot digital collectibles manufacturer Dapper Labs, and metaverse game Alien Worlds.

"During the past few years of the COVID-19 pandemic, industries related to the metaverse and Web3, including NFTs, have taken off. Many new startups have emerged in this field, thriving in areas such as Play to Earn, virtual real estate, and esports," Yat Siu added.

The metaverse is an immersive virtual world where people's digital identities can interact with each other just like in real life. Web3 is a new version of the World Wide Web based on decentralization and blockchain, with blockchain being the digital ledger technology behind cryptocurrencies like Bitcoin.

NFTs are unique strings of blockchain-registered data representing ownership of digital files. Therefore, NFTs are considered valuable because people can buy and trade these digital assets like physical items.

"NFTs represent the future of digital property and the metaverse," Siu also stated, "This space is still young, and there are many opportunities for anyone with ambition. This is one of the best areas for people to consider when developing their careers and exploring new ideas."

Additionally, Casey Lau, co-founder of the Hong Kong startup community StartupsHK, which has about 5,000 members, also expressed optimism about this field: "Overall, I think Web3 is exciting and will eventually touch every industry."

Following that, Lau, who also co-hosts Asia's largest tech event "RISE," stated, "Although we haven't truly solved all the problems in Web2, the market has changed significantly compared to Web1, but we still need to keep moving forward."

NFT and Metaverse Businesses Flourishing in Hong Kong

Web1 is the earliest version of the internet, developed under the initiative of the U.S. government's Defense Advanced Research Projects Agency. Meanwhile, Web2 describes the current state of the internet, which features more user-generated content and usability.

Web3 takes the internet to a new level, using decentralized networks to return control of data to all users. Currently, Hong Kong has formed a vibrant community of metaverse and NFT enthusiasts, where artists sell their works as NFTs using cryptocurrencies, and various cartoon avatar projects compete for people's money and attention.

Degenerate Ape Academy is a popular NFT project on the Solana blockchain; they rented advertising space in Central during the recent Christmas and New Year holidays to promote their NFTs.

In addition, the Hong Kong-based Metaworld Development project launched in March aims to attract people to invest in NFTs. These NFTs are expensive virtual lands created on the metaverse platforms Decentraland and The Sandbox. The strategy of the Metaworld team is to trade virtual land portfolios, lease them to major brands, and then distribute capital gains to NFT holders.

In the same month, the South China Morning Post announced the spin-off of its blockchain-based NFT business to establish a new company called "Artifact Labs," which will convert the art, photos, and content of the 118-year-old English newspaper into tradable NFTs. As an independent entity, Artifact Labs can also help other organizations, including schools and museums, turn their properties into digital collectibles.

Among them, the initial collectible project—"1997 Premium Series"—achieved sales of $126,000 in March, developed using a blockchain metadata standard called ARTIFACT. This standard is specifically designed for historical and archival NFTs, built on the Flow blockchain, and the second series of the same NFT sold out in just over two hours in April.

The success of this project indicates the continued growth momentum of NFTs. According to data from blockchain data platform Chainalysis, the NFT market has flourished over the past year, with its value exceeding $40 billion.

According to data from blockchain data platform Chainalysis, global NFT market sales exceeded $40 billion in 2021.

Earlier this month, internet company Yahoo and metaverse platform Meta also boosted confidence in Hong Kong's nascent metaverse industry. Meta stated that the city will serve as a testing ground where it will launch initiatives to explore the potential uses of virtual worlds in everyday life. Subsequently, Yahoo also announced a series of metaverse activities to explore immersive advertising technology and will release a limited number of NFTs.

Investment Risks Increase, Industry Needs Regulation

On the other hand, Paul Haswell, a partner at the international law firm Seyfarth Shaw, stated, "While Web3 and the metaverse are expected to impact potential local innovation and broader internet development, other businesses need funding and government support more urgently." Paul has previously provided consulting for tech companies.

"The tech industry in Hong Kong operates on two levels," Paul added. "There are some flashy new technologies, such as NFTs and the metaverse, which have generated a lot of new investments, and there are innovators working hard to change the way we do business and improve our health and enhance our lives."

"However, before investing in an NFT of a cat, consider investing in a new health tech startup or a company seeking to address climate change." Additionally, "instead of using NFTs to sell photos of monkeys, think about how to use them to fundamentally change various record systems or even property transactions in Hong Kong."

Currently, the growing interest in NFTs and the virtual world has made this field a fertile ground for fraud and scams, with victims having little recourse, and regulators have struggled to keep up with the rapid market developments.

However, in February this year, the government-operated cybersecurity regulatory body "Hong Kong Computer Emergency Response Team Coordination Centre" identified risks related to NFTs and the metaverse as one of the major security threats to watch this year. The warning indicated that criminals could steal sensitive user information or access their accounts to steal wealth, whether in places where assets are traded or stored.

At the same time, the investment frenzy has exacerbated criminal activities in this field. Data from Chainalysis shows that last year, the total value of cryptocurrencies stolen through phishing scams from illegal online addresses reached $14 billion. On June 6, the Hong Kong Securities and Futures Commission also stated that some NFTs constitute investment products that must be regulated and warned investors about the risks involved in investing in such tokens.

Talent Drain Becomes Apparent, Economy Set to Recover as Pandemic Eases

Additionally, the skilled labor market in Hong Kong is increasingly short of talent, with a continuous outflow of skilled workers, especially in the tech sector. A survey by the Hong Kong General Chamber of Commerce indicated that some businesses have been struggling to cope with talent loss during the recent wave of immigration, with nearly two-fifths of companies reporting adverse impacts on their operations.

Last year alone, about 40,000 Hong Kong residents applied to the police for a certificate of no criminal conviction, which is an important requirement for immigration to Canada, the United States, and Australia, with the last time such a high number of applications was in 1989. Additionally, data from the Canadian Immigration, Refugees and Citizenship Canada shows that in 2021, 3,444 Hong Kong residents obtained permanent residency in the country, more than double the number before the pandemic in 2019 and 15 times that of 2010.

"Talent drain is Hong Kong's biggest long-term challenge," Siu from Animoca stated. "Currently, the city is still subject to travel restrictions, while other parts of the world are gradually reopening, allowing people to conduct business. Ultimately, the loss of diversity and creativity will affect all aspects of Hong Kong's business, culture, education, and society."

The soon-to-be-retired Chief Executive Carrie Lam also expressed concern about this, stating in March that strict pandemic restrictions have led to the exit of business talent, and the large outflow of expatriates will force more companies to seek new talent overseas.

However, Paul from Seyfarth stated, "As the pandemic is gradually brought under control, we also need to think about how to minimize losses, and investments in the Greater Bay Area and Northern Metropolis Plan may help encourage talent to return to Hong Kong."

Currently, discussions about the advantages of emerging industries like NFTs and the metaverse compared to traditional industries are still rare, which may also be a significant obstacle for Hong Kong to welcome another "Octopus moment."

But as more global economies open up, Hong Kong is also expected to follow suit, providing a quality platform for creating and promoting innovation. "There will always be graduates from excellent schools wanting to start their careers in Asia, and for them, Hong Kong will still be an unmissable choice," Lau from StartupsHK confidently stated.