With U.S. authorities increasing crypto scrutiny, businesses and entrepreneurs are heading abroad for easier growth conditions.
Hong Kong wants to attract entrepreneurs, scientists, and investors with friendly crypto rules to regain its financial center reputation. The plan seems to be working.
The annual Hong Kong Web3 event drew approximately 50,000 people in mid-April. This year, more Westerners attended than the previous year, when the event seemed like a haven due to mainland China’s crypto policies.
At this year’s gathering, local authorities listened intently to jetlagged entrepreneurs in scruffy clothes. Ark Invest billionaire founder Cathie Wood gave a video message. Vitalik Buterin, the creator of Ethereum, arrived at the last minute.
After the government legalized crypto trading for ordinary investors last June, Hong Kong’s Web3 scene grew. Since then, the city has established a stablecoin sandbox and a crypto exchange licensing framework. Following the United States, Hong Kong issued bitcoin ETFs in late April.
These actions contrast with the U.S. government’s crypto industry crackdown. Web3 festival attendees from the U.S., Europe, the Middle East, India, and other countries were optimistic about Hong Kong’s momentum. First Digital’s FDUSD, backed by U.S. Treasury bills and Hong Kong’s digital asset guidelines, has emerged as the fourth-largest stablecoin by market valuation.
People also recognize Hong Kong’s crypto hub limits. First, it’s a tiny market of seven million people, and mainland China’s huge market is off-limits for now. Investor protection may raise compliance costs and dissuade entrepreneurs who want a more relaxed corporate climate.
Hong Kong is one of the few jurisdictions, along with the UAE, Japan, and Singapore, that supports cryptocurrencies. Head of crypto at global payments business Unlimit Jack Jia said: “The fact that Hong Kong is coming up with any crypto regulation at all, just from a reputation and optics standpoint, will attract everyone.”
Officials with open minds
Hong Kong doesn’t have the laxest cryptographic laws. HashKey, its crypto posterchild, sought a Bermuda license because of its strict exchange operator restrictions. Binance, Coinbase, and Kraken are missing among the 22 candidates for the city’s virtual asset exchange license.
Hong Kong’s biggest draw is its crypto regulation clarity.
“The SEC is notorious,” Jia said of the SEC’s crypto regulation. “Everything’s a security, but we’re not going to tell you precisely what license you need to apply for, and then we could simply reject your application anyway.” There is no set SEC procedure. But Hong Kong officials have a method for hearing your opinions.”
Multiple crypto CEOs told Eltrys they met with Hong Kong government officials privately. Chainlink, a San Francisco company that feeds real-world data to smart contracts, is in talks to provide its technology to major Hong Kong financial infrastructure, according to co-founder Sergey Nazarov.
People underestimate how compatible financial markets and crypto are. Nazarov, who invited Hong Kong’s Under Secretary for Treasury, Joseph Chan, to a fireside chat at Chainlink’s annual conference, SmartCon, in Barcelona last year, found that compatibility will accelerate here first because the government and regulators are more open to it.
For the first time in Asia, Chainlink is hosting the conference in Hong Kong at the local government’s request, according to Nazarov.
“The Hong Kong regulator regulates stablecoins and digital assets. Hong Kong may govern assets and payments under one system. That’s crucial because, without regulation, hundreds of billions of dollars and banks won’t relocate, Nazarov said.
According to Telegram’s official blockchain partner, Dubai-based TON Foundation president Steve Yun, Hong Kong may have the biggest competitive advantage over other crypto hubs because it “is trying to come up with a very comprehensive framework to make builders and entrepreneurs feel more comfortable and attract talent.”
Hong Kong’s financial rules are complicated, but Charles d’Haussy, CEO of Switzerland’s dYdX Foundation, formerly managed fintech for InvestHK, the government’s foreign direct investment agency. According to the CEO, the DYdX Foundation’s decentralized finance (DeFi) protocol has proven popular among Chinese-speaking users, so the Foundation wants to keep engaging them.
“The Hong Kong government was very open to crypto in the early days,” d’Haussy said. As market volatility soared, the city, like other authorities, restricted crypto activity to protect investors.
But around a year ago, I suppose they realized there was a new industry and needed restrictions to avoid missing out. During that time, the HKMA issued additional CBDCs, and the SFC issued crypto exchange and ETF licenses, d’Haussy added.
Access to China
Last year, Hong Kong allowed cryptocurrency, sparking anticipation that mainland China may follow. As China bans crypto trading, that prospect seems remote. However, firms also see Hong Kong as a gateway to another significant Chinese resource.
Hong Kong attracts financial expertise, while Shenzhen, home to Huawei, DJI, and Tencent, is a tech hub. Naturally, crypto businesses are taking advantage of Hong Kong’s welcoming rules and closeness to Shenzhen development resources.
The TON Foundation uses Hong Kong as its location. Telegram is teaming with TON to allow third-party developers to create blockchain applications as part of its super app quest. For Web3 Week, the Foundation sponsored a bootcamp in Hong Kong to attract Chinese developers acquainted with WeChat’s mini-app ecosystem.
Yun stated, “Now we are reaching out to regions where they have a high number of developers and entrepreneurs, especially those who grew up using mini apps through a super app and participated in such ecosystem growth.”
A16z-backed In February, Aptos held a three-day hackathon in Shenzhen that drew hundreds of applications and brought its DeFi event to Hong Kong. Founded by Meta’s Diem blockchain team, Aptos has partnered with Alibaba’s cloud computing arm to attract Asian developers.
Foreign entrepreneurs have established physical locations in the city. ZkMe, a German startup that verifies private credentials, is headquartered in Hong Kong.
“We came here to build a sustainable business and take advantage of the tech expertise here, and then obviously, the cooperation with the Greater Bay Area is also really beneficial,” said zkMe’s founder and CEO, Alex Scheer. The initiative aims to integrate Hong Kong with nine adjacent Chinese cities through policies like tax benefits for Hong Kong firms to set up in Shenzhen. Out of zkMe’s 16 employees, 14 work in Shenzhen.
Some creators believe Hong Kong will lead China to crypto. Dubai-based modular blockchain business Avail founder Anurag Arjun believes governments that realize the full benefits of crypto technology will be more cooperative.
Over the last several years, the crypto business has developed sophisticated technologies. He cited zero-knowledge proof technology as an example, implying that the development of cryptocurrency aimed to enhance the industry’s fundamental technology, not to encourage fraudulent NFTs or speculative trading.
Since Hong Kong is significant, we believe it will be a gateway to China in the future, said Arjun. If China opens up in the future and we speak to more government officials and make our argument for technology, not just cash, what we do in Hong Kong will be a valuable lesson to spread to China.
