On a sultry One day in mid-April, thousands of people lined up to enter the Hong Kong Convention Center where the city’s inaugural web3 festival was underway. Most had flown in from mainland China, but many others had come from Singapore, Japan, Indonesia, Thailand and even the US to see what the city had to offer crypto companies at a time when regulation of digital assets in the US is intensifying
In February, Hong Kong proposed a set of welcome rules to regulate crypto-related activities. Under the new regulatory regime, retail investors will be allowed to trade certain digital assets on licensed exchanges, replacing a 2018 framework that limited trading to only accredited investors.
The city is also paving the way to legalize stablecoins. A startup backed by popular exchange KuCoin and USDC issuer Circle recently launched an offshore Chinese yuan (CNH) pegged stablecoin, the first of its kind in Greater China.
To create a favorable environment for web3 companies, the city is facilitating communication between banks and crypto startups, many of which are looking for alternatives after the collapse of Silvergate Bank.
These steps are in stark contrast to Beijing’s crackdown on the crypto industry; they also highlight the extent to which the former British colony enjoys policy exemptions in certain areas, such as finance.
In 2021, China banned all forms of crypto transactions, forcing the country’s web3 entrepreneurs to flee to more web3-friendly jurisdictions like Singapore. With Hong Kong extending a welcome hand to digital assets, many Chinese founders in self-exile are considering the option of settling in the city. Western companies are also evaluating Hong Kong as a potential outpost for their expansion in Asia.
At the week-long Hong Kong web3 festival, MinRegion spoke to a dozen participants from the web3 realm, including investors, early stage startups and established players, as well as “traditional” web2 tech giants, to highlight Hong Kong’s attractiveness as the next cryptohub.
Some believe the new regulatory regime will spark a new wave of crypto innovation. They feel reassured that they can now operate as a legitimate company on Chinese soil and are quick to take advantage of government policy support, such as subsidized office space for crypto companies.
Others are more hesitant to accept the olive branch. As the financial center of Asia, Hong Kong traditionally lacks a vibrant tech ecosystem and is too expensive for most shoddy startups, so the types of crypto companies it attracts are likely to be those that serve and interact with traditional finance, they believe.
The East rises
The timing is favorable for Hong Kong’s friendly move to crypto, said Shixing Mao, co-founder and CEO of Cobo, a Singapore-based digital asset custody solution backed by DST Global.
“The tightening of regulations in the US after the FTX implosion has some consequences. In the past, several US banks played key roles in linking the traditional and crypto worlds, but that link has now been broken, presenting a great opportunity for Hong Kong to take things a step further,” Mao said. known as ‘Discus Fish’. in the crypto community.
“Hong Kong has always been at the crossroads of East and West, playing an important role as a bridge to enter China,” said Lily King, chief operating officer at Cobo.
That advantage has been proven before. Hong Kong played an important role in the early development of the crypto industry by attracting once-influential exchanges such as FTX and Bitmex to set up stores there. After the Chinese crypto crackdown, FTX moved to the Bahamas due to its friendlier and clearer regulatory attitude towards the new asset class.
Hong Kong is getting some attention from the West again. Stephen Cheung, president of the decentralized social network Bi.social, flew all the way from the east coast of the US to Hong Kong to feel the heartbeat on the ground.
“As an American-born Chinese whose parents grew up in Hong Kong, I am extremely optimistic about Hong Kong’s crypto open door policy,” he said. Nevertheless, Cheung believed that if US crypto firms start leaving the country, “they will remain in the Western Hemisphere”.
“Hong Kong has the opportunity [of attracting Western firms] only because the US is currently openly hostile to web3 companies,” he said, adding that the city will be more attractive to other Asian-based companies before it has any significant impact on the West.
Indeed, Hong Kong is increasingly on the radar of crypto companies in Singapore, many of which came from China following the country’s crackdown on crypto. Now the tide is turning.
“After the implosion of FTX, the Singapore government has become more cautious towards crypto. Hong Kong, on the other hand, is trying to attract talent and companies to build the basic infrastructure of the crypto industry,” said Luke Huang, director of business development at Safeheron, a Singapore-based provider of digital asset self-custody solutions. but recently opened an office in Hong Kong.
For the most part, people are praising the Hong Kong government for providing more regulatory clarity in the crypto industry. But they interpret Hong Kong’s open arms differently. Some see the move as a sudden change in government attitudes, while others see it as a reflection of the city’s policy consistency.
HashKey Capital, one of the world’s largest web3 venture capital firms that recently closed a $500 million Fund III, belongs to the latter camp.
The fund, which is Ethereum’s first institutional investor, was established in Hong Kong in 2017 and has held offices there ever since. “What we saw [in Hong Kong] over the years has been a relatively consistent government direction and sustainable policy,” said Chao Deng, the company’s CEO. “The latest step is more of an update to the licensing regime.”
Conflux, a Layer 1 blockchain that claims to be the only crypto company allowed to operate in China since the industry crackdown, was also put at ease after meeting with several Hong Kong government delegates at the web3 festival.
“Hong Kong is showing tremendous support for web3 development,” said Zhang Yuanjie, co-founder of Conflux. “From legislators and InvestHK [the city’s department of foreign direct investment] to his finance secretary and monetary authority, everyone is serious about supporting the crypto industry.”
While Hong Kong’s new web3 regulation seems more favorable to transaction-oriented crypto services, there is room for infrastructure builders, Safeheron’s Huang believed.
“Anyone entering the crypto industry needs a cybersecurity infrastructure, be it a traditional or web3 native company. With Hong Kong financial institutions potentially starting to integrate crypto-related products, we can play the role in helping them get on board,” he said.
China’s Big Tech is also riding the Hong Kong crypto wave. Alibaba and Tencent both attended the web3 festival with representatives from their cloud computing divisions. Like AWS, they want to get ahead and become the decentralized cloud provider in the world. Even if the emerging industry isn’t likely to generate any significant revenue anytime soon, the tech giants don’t seem to want to miss an industry that continues to lure capital and talent from traditional industries.
The web3 festival, with its teeming conference room and lavish boat parties, appears to be a euphoric celebration of the city’s new crypto regime. But not everyone present is hot-headed. An investor from a leading China-focused venture capital firm, who would not be named, said he was not looking for deals at the event because “it’s not where the real tech developers hang out.”
Three Chinese web3 founders who moved to Singapore and declined to be named said they were in Hong Kong to simply catch up with partners and investors and that they are “waiting and see” before jumping to a conclusion about the level of crypto-friendliness of the city.
Those most passionate about Hong Kong’s new crypto regulation are fund managers, stock traders and others in traditional finance, noted Rachel Lin, CEO and co-founder of SynFutures.
“It’s not that they feel that way about crypto, but it’s more about looking for the next investable asset. At the moment, financial markets are slowing down and unable to find other alternative assets,” said Lin. Prior to managing the DeFi protocol, she worked in the Global Markets division at Deutsche Bank, managed overseas payment solutions at Ant Group, and was a founding member of major crypto lender Matrixport.
“Crypto is very close to what they have done in finance, unlike AI or biotech, which is a long way off for them. I think the positive signal from the government also boosts their confidence,” she said.
It is no surprise that Hong Kong is home to a young industry that is playing to its full potential. In recent years, the city has seen an exodus of multinational companies and local talent as it undergoes a series of political events.
“Hong Kong has reached a major bottleneck in traditional industries such as finance and real estate, so it is in dire need of young talent and new blood to revitalize its economy,” said King. “Given the foundation it has laid for the financial industry, focusing on digital assets is the best and only option going forward.”