With US regulatory authorities As crypto scrutiny continues to tighten, startups and founders in the space are looking abroad to find friendlier climates to support their growth.
One such destination is Hong Kong, which, seeking to restore its status as a economic hub, relies on favorable crypto regulations to attract a new set of entrepreneurs, technologists and investors. So far, her strategy seems to be working.
In mid-April, Hong Kong’s annual web3 festival attracted more than 50,000 attendees. There were noticeably more non-Chinese attendees compared to last year, when the event resembled a gathering of crypto-refugees fleeing the restrictive policies of mainland China. At this year’s edition, buttoned-up dignitaries from the city listened intently to sloppily dressed founders battling jetlag. While she didn’t make it to the event in person, Cathie Wood, the billionaire founder of Ark Invest, gave a speech via video. And Vitalik Buterin, the nomadic founder of Ethereum, made a last-minute appearance.
It caused a sense of deja vu: in the industry’s infancy, Hong Kong was a major hub for crypto companies run by foreign entrepreneurs, including FTX, Crypto.com and BitMex. Like other jurisdictions around the world, the city banned crypto activities to protect investors’ interest as market volatility spiraled out of control.
Excitement around Hong Kong’s web3 scene started to pick up again last June when the government made it legal for retail investors to trade cryptocurrencies. Since then, the city has implemented a number of measures to regulate crypto-related activities, including a sandbox for stablecoin issuance as well as licensing regime for cryptocurrency exchange operators;. Following in the footsteps of the US, Hong Kong has just launched a batch of cryptocurrency exchange-traded funds this week.
These moves are in stark contrast to the US government’s tough stance against crypto businesses. Web3 festival attendees, who flew in from the US, Europe, the Middle East, India and other regions, expressed optimism about the momentum in Hong Kong. First Digital’s FDUSD, issued under Hong Kong’s digital asset rules and backed by US Treasury bills, for example, quickly became the world’s fourth-largest stablecoin by market capitalization.
At the same time, people are mindful of Hong Kong’s limitations as a would-be crypto hub. First, it is a relatively small market of seven million people, and the huge market of mainland China will be off limits at least for now. In addition, the rules prioritize investor protection, which can lead to higher compliance costs and deter those who favor a freer environment.
However, Hong Kong remains one of the few jurisdictions, along with countries such as the United Arab Emirates, Japan and Singapore, that have shown a clear commitment to cryptocurrencies. As Jack Jia, head of crypto at global payments firm Unlimit, observed: “The fact that Hong Kong comes up with any crypto regulation, just from a reputation and visual standpoint, it’s going to attract everybody.”
Open-minded officials
Hong Kong doesn’t really have the most lenient encryption regulations. Indeed, the scrutiny of exchanges has prompted crypto’s baby HashKey to seek permission in Bermuda. The world’s largest crypto exchanges, namely Binance, Coinbase and Kraken, are conspicuously absent from the list of 22 applicants for the city’s virtual asset exchange permit.
As it turns out, Hong Kong’s biggest appeal is its effort to provide regulatory clarity for crypto activities.
“The SEC is notorious. “It’s all security, but we’re not going to tell you clearly what license you need to apply for, and then we might just reject your application anyway,” Jia said, describing the US Securities and Exchange Commission’s stance on regulating crypto firms . “There is no set SEC process. But Hong Kong regulators have put in place a process to listen to your views.”
Indeed, several crypto executives told TechCrunch that they have held closed-door meetings with Hong Kong government officials. Working to feed real-world data into smart contracts, which are lines of code that execute predetermined rules, San Francisco-based Chainlink is in discussions to provide its technology to major financial infrastructure in Hong Kong, its co-founder said. Sergey Nazarov.
“People don’t fully realize that capital markets and cryptocurrencies are very compatible. When I come to Hong Kong, I found that this compatibility will be accelerated here first because the government and regulators are more open to this compatibility,” said Nazarov, who called on Hong Kong’s Undersecretary for Finance Joseph Chan to said in a fireside chat at SmartCon, Chainlink’s annual conference, in Barcelona last year.
This year, Chainlink is moving SmartCon to Hong Kong at the invitation of the local government, making Hong Kong the first Asian city to host the conference, according to Nazarov.
“The Hong Kong regulator issues regulations for stablecoins and regulations for [digital] assets. This means that Hong Kong can be a place where assets and payments can work reliably in a system in a regulated way,” Nazarov added. “This is important, because if things are not regulated, then all the hundreds or hundreds of trillions of dollars and the banks will not migrate.”
Steve Yun, chairman of the Dubai-based TON Foundation, Telegram’s official blockchain partner, shared the optimistic sentiment, saying that Hong Kong may have the biggest competitive advantage over other would-be crypto hubs as the city “tries to come up with a very comprehensive framework to make manufacturers and entrepreneurs feel more comfortable and attract talent.”
Hong Kong’s financial regulations are complex, but Charles d’Haussy, CEO of Switzerland-based DYdX Foundation, is no stranger to them, having previously been head of fintech for InvestHK, the foreign direct investment arm of the Hong Kong government Kong.
“The Hong Kong government was very open to cryptocurrencies in the early days,” d’Haussy recalled. Then came a period of hostility as regulators have tried to crack down on rampant crypto scams. 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 isn’t lost.”
“Then you saw the HKMA [Hong Kong Monetary Authority] making more and more CBDCs [central bank digital currencies]and the Hong Kong SFC [Securities and Futures Commission] issuance of crypto exchanges and ETF licenses,” added d’Haussy.
Access to China
When Hong Kong opened up to cryptocurrencies last year, speculation was rife that mainland China might follow suit. That hope remains distant as China continues to ban its people from trading cryptocurrencies. However, companies are now recognizing Hong Kong’s potential as a gateway to another valuable resource from its neighbor.
While Hong Kong is a magnet for financial talent, its neighbor to the south, Shenzhen, is home to some of the world’s biggest tech companies, including Huawei, DJI and Tencent. Not surprisingly, crypto companies are capitalizing on the combination of Hong Kong’s friendly regulations and its proximity to developer resources in Shenzhen and other Chinese cities.
One such player tapping Hong Kong’s geographic location is the TON Foundation. As part of its effort to become a super app, Telegram is partnering with TON, which allows developers to build blockchain-based lite apps that run on the messenger. During web3 week, the Foundation held a bootcamp in Hong Kong in hopes of attracting Chinese developers, particularly those familiar with WeChat’s empire of mini-apps.
“Now we’re reaching out to areas where they have a large number of developers and entrepreneurs, especially those who grew up using some kind of mini-app through a super app and those who have been involved in developing such an ecosystem,” Yun said. .
A16z-backed Aptos, for example, hosted a three-day hackathon in Shenzhen in February, attracting hundreds of applicants. Aptos, run by a team that previously worked on Meta’s Diem blockchain, has also partnered with Alibaba’s cloud computing arm to attract Chinese developers.
Some foreign founders have gone a step further by establishing a physical presence in the city. Founded by a German entrepreneur to enable private credential verifications, ZkMe chose to locate its headquarters in Hong Kong.
“We came here to build a sustainable business and take advantage of the expertise here, and obviously, working with the Greater Bay Area is also really beneficial,” zkMe founder and CEO Alex Scheer said of the initiative he’s targeting. to integrate Hong Kong with nine neighboring Chinese cities through policies such as tax benefits for Hong Kong businesses to locate in Shenzhen. Of zkMe’s 16-member team, 14 are based out of its Shenzhen office.
Some founders are more optimistic that Hong Kong is paving the way for China to embrace crypto in the future. Anurag Arjun, founder of Dubai-based Avail, a modular blockchain company, believes that governments that see the full benefits of crypto technologies will eventually adopt a more favorable position.
“[The crypto industry has] has been building very advanced technology in recent years. Some examples are things like zero-proof-of-knowledge technology,” he said, indicating that the underlying technology behind cryptocurrencies was not developed to support fraudulent NFTs or speculative trading, but to enhance the industry’s core technology.
“Because of the strategic nature of Hong Kong, we believe it is an important place – a gateway to China in the future,” Arjun said. “If China opens up in the future — and once we talk to more government officials and support the technology for more than just its monetary components — what we’re doing in Hong Kong will be a useful lesson for expanding into China. “
