“Global crypto firms turn to Hong Kong for refuge --- and opportunity”

Author: Rita Liao, TechCrunch

Translation: Luffy, Foresight News

As U.S. regulators intensify their scrutiny of cryptocurrencies, startups and founders in the crypto industry are turning their attention overseas in search of a more favorable business environment.

Hong Kong is one such destination. The city is seeking to restore its former status as a financial hub, hoping to attract a new wave of entrepreneurs, tech experts, and investors through friendly cryptocurrency policies. So far, this strategy seems to be paying off.

In mid-April, Hong Kong's annual Web3 carnival attracted over 50,000 participants from around the world. Compared to last year, there was a noticeable increase in non-Chinese participants, with past events feeling like gatherings of cryptocurrency refugees fleeing restrictive policies in mainland China. In this year's event, Hong Kong officials listened attentively to founders from around the world, dressed casually and battling time zone differences. Billionaire founder Cathie Wood of Ark Invest delivered a speech via video, while Ethereum's nomadic founder Vitalik Buterin made a surprise appearance.

This evokes a sense of déjà vu: during the early stages of the cryptocurrency industry, Hong Kong was a significant center for foreign entrepreneurs operating crypto companies, including FTX, Crypto.com, and BitMEX. Like other jurisdictions around the globe, as market volatility in cryptocurrencies led to chaos, the Hong Kong government took a hardline approach to crack down on crypto-related activities to protect investors.

A turning point occurred last June when the Hong Kong government embraced the industry by legalizing cryptocurrency trading to attract retail investors, reigniting enthusiasm for the Web3 space in Hong Kong. Since then, Hong Kong has implemented a series of measures to regulate crypto-related activities, including a stablecoin issuance sandbox and a licensing system for cryptocurrency exchange operators. Additionally, Hong Kong has followed in the footsteps of the U.S., recently listing a batch of cryptocurrency exchange-traded funds (ETFs).

These measures stand in stark contrast to the U.S. government's tough stance on cryptocurrency startups. Participants from the U.S., Europe, the Middle East, India, and other regions at the Web3 carnival expressed optimism about Hong Kong's Web3 development momentum. For example, First Digital's FDUSD, issued under Hong Kong's digital asset rules and backed by U.S. Treasury bonds, has quickly become the fourth-largest stablecoin by market capitalization globally.

However, there is also an awareness of the limitations of Hong Kong as a cryptocurrency hub. Firstly, Hong Kong is a relatively small market with a population of only 7 million, while the vast market of mainland China is currently inaccessible. Moreover, Hong Kong's crypto-related policies prioritize investor protection, which may lead to higher compliance costs and hinder founders who prefer a more free environment.

Nevertheless, Hong Kong remains one of the few jurisdictions that explicitly support cryptocurrencies, alongside a handful of other countries including the UAE, Japan, and Singapore. As Jack Jia, head of cryptocurrency at global payment company Unlimit, stated: "Any cryptocurrency regulatory framework that Hong Kong is about to introduce is quite attractive from a reputation and image perspective."

Open-minded Officials

In fact, Hong Kong's cryptocurrency regulation is not the most lenient. The strict scrutiny of exchange operators has prompted its crypto representative firm 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 Hong Kong's virtual asset exchange licenses.

It turns out that Hong Kong's biggest appeal lies in its efforts to provide regulatory clarity for cryptocurrency activities.

"The SEC is notorious in the cryptocurrency industry. 'Everything is a security, but we won't clearly tell you what license you need to apply for, and then we might still reject your application,'" Jia described the SEC's attitude toward regulating cryptocurrency companies. "The SEC has no established process, but Hong Kong regulators have set up a process for public consultation."

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 Chainlink based in San Francisco, stated that the company is committed to bringing real-world data into smart contracts (lines of code that execute predefined rules) and is currently discussing providing its technology to Hong Kong's major financial infrastructure.

"People have not fully realized the inherent compatibility between 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 it," Nazarov said, recalling that last year he invited Hong Kong's Deputy Secretary for Financial Services and the Treasury, Chan Wing-choi, to have a fireside chat with him at Chainlink's annual conference SmartCon in Barcelona.

Nazarov noted that this year, at the invitation of the Hong Kong government, Chainlink will bring SmartCon to Hong Kong, making it the first Asian city to host the event.

"Hong Kong regulators are regulating stablecoins and crypto assets. This means that Hong Kong can become a place where crypto assets and payments can operate reliably in a regulated manner within one system," Nazarov added. "This is important because without regulation, trillions of dollars in assets cannot be transferred between banks."

Steve Yun, president of the TON Foundation (Telegram's official blockchain partner) based in Dubai, also holds an optimistic view, stating that compared to other aspiring cryptocurrency centers, Hong Kong may have the greatest competitive advantage because it "is trying to establish a very comprehensive policy framework to create an environment that makes builders and entrepreneurs feel more comfortable, thus attracting talent."

Hong Kong's financial regulation is quite complex, but Charles d'Haussy, CEO of the Swiss dYdX Foundation, is no stranger to these regulations, having previously served as the fintech chief in the Hong Kong government's Invest Hong Kong department.

"The Hong Kong government had a very open attitude toward cryptocurrencies early on," d'Haussy recalled. Subsequently, regulators 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 that existed and that regulations should be formulated to ensure that they do not miss this opportunity."

d'Haussy added: "At that time, you would see the Hong Kong Monetary Authority (HKMA) launching more and more CBDCs (Central Bank Digital Currencies), the Securities and Futures Commission (SFC) issuing licenses for cryptocurrency exchanges, and approving the listing of cryptocurrency spot ETFs."

Gateway to China

When Hong Kong began to embrace 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, businesses now recognize Hong Kong's potential as a gateway to another valuable resource in neighboring countries.

While Hong Kong attracts a wealth of financial talent, its neighboring city Shenzhen is home to some of the world's largest tech companies, including Huawei, DJI, and Tencent. Unsurprisingly, cryptocurrency companies are leveraging Hong Kong's friendly regulatory environment and the convenience of developer resources from Shenzhen and other Chinese cities.

The TON Foundation is one participant taking advantage of Hong Kong's geographical advantages. 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 boot camp in Hong Kong, aiming to attract Chinese developers, especially those familiar with WeChat mini-programs.

"Right now, we are trying to reach out to areas with a larger number of developers and entrepreneurs, particularly those who have grown through super apps using some mini-programs and those who have participated in the growth of this ecosystem," Yun said.

For instance, a16z-backed Aptos held a three-day hackathon in Shenzhen in February, attracting hundreds of participants. Aptos is operated by a team that previously worked on Meta's Diem blockchain and has partnered with Alibaba's cloud computing division to attract Chinese developers.

Some foreign founders have gone a step further by establishing physical entities in Hong Kong. zkMe, a company founded by a German entrepreneur aimed at enabling private certificate verification, has chosen to set up its headquarters in Hong Kong.

"We came here to build a sustainable business and leverage the technological advantages here; clearly, collaboration with the Greater Bay Area is also very beneficial," said Alex Scheer, founder and CEO of zkMe. He referred to a plan aimed at integrating Hong Kong with nine neighboring Chinese cities through tax incentives, including tax breaks for Hong Kong companies setting up offices in Shenzhen. Of zkMe's 16 team members, 14 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 modular blockchain company Avail based in Dubai, believes that governments will eventually take a more inclusive stance once they see the full benefits of crypto technology.

"In recent years, the cryptocurrency industry has been developing very advanced technologies, such as zero-knowledge proof technology," he stated, emphasizing that the underlying technology behind cryptocurrencies was not developed to support fraudulent NFTs or speculative trading, but to enhance the foundational technology of the crypto industry.

"Given Hong Kong's strategic nature, we believe it is 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 in more dialogues with government officials and demonstrate that our technology is not just applicable to monetary elements—what we do in Hong Kong will serve as useful experience for expanding into the overall Chinese market."