Global crypto companies look to Hong Kong for haven and opportunity

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As U.S. regulators continue to increase scrutiny of cryptocurrencies, startups and founders in the space are looking overseas for more friendly environments to support their growth.

One such destination is Hong Kong, which is aiming to regain its status as a financial hub and is banking on favorable crypto regulations to attract new entrepreneurs, technologists, and investors in droves. ing. So far, that strategy seems to be working.

In mid-April, the annual Web3 Festival in Hong Kong attracted more than 50,000 attendees. There were significantly more non-Chinese participants than last year, when the event felt more like a gathering of crypto refugees fleeing mainland China's restrictive policies. At this year's event, buttoned-up city officials listened intently to shabby-dressed founders battling jet lag. Although she did not attend the event in person, Ark Invest founder and billionaire Cathie Wood spoke via video. Then Ethereum Nomad founder Vitalik Buterin showed up at the last minute.

It evoked a feeling of deja vu. In the industry's early stages, Hong Kong was a major hub for crypto companies run by foreign entrepreneurs, such as FTX, Crypto.com, and BitMex. Like other jurisdictions around the world, the city has cracked down on cryptocurrency activity to protect investor interests as market volatility spirals out of control.

Excitement in Hong Kong's Web3 scene started to bubble up again after the government legalized cryptocurrency trading for retail investors in June last year. Since then, the city has implemented a series of measures to regulate crypto-related activities, including a sandbox for stablecoin issuance and a licensing system for crypto exchange operators. Following the United States, Hong Kong also listed a series of crypto exchange traded funds this week.

These moves are in stark contrast to the US government's hardline stance on virtual currency businesses. Web3 Festival attendees, who flew in from regions including the United States, Europe, the Middle East and India, expressed optimism about Hong Kong's momentum. For example, First Digital's FDUSD, issued under Hong Kong's Digital Asset Regulations and backed by US Treasury bills, quickly became the world's fourth-largest stablecoin by market capitalization.

At the same time, people are also aware of Hong Kong's limitations as a crypto hub. First, it is a relatively small market with a population of 7 million people, and mainland China's huge market will be off-limits, at least for the time being. Additionally, the rules prioritize investor protection, which may result in higher compliance costs and discourage those who prefer a freer environment.

Still, Hong Kong remains one of the few jurisdictions, along with the United Arab Emirates, Japan, and Singapore, to demonstrate a clear commitment to cryptocurrencies. “The fact that Hong Kong is coming up with all kinds of crypto regulations, just from a reputational and optical standpoint, should be on everyone's radar,” said Jack Jia, head of crypto at global payments firm Unlimit. Deaf,” he said.

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In fact, Hong Kong does not have the most lenient cryptocurrency regulations. In fact, the company's oversight of exchanges has led its cryptocurrency successor, Hashkey, to seek a license in Bermuda. The world's largest cryptocurrency exchanges, namely Binance, Coinbase and Kraken, are noticeably absent from the city's list of 22 applicants for a virtual asset exchange license.

Ultimately, Hong Kong's biggest draw lies in its efforts to clarify regulations on cryptocurrency activity.

“The SEC is notorious. “Everything is a security, but they're not going to tell you clearly what kind of license you need to apply for, so they might deny your application anyway. “Yes,” Zia said, explaining the U.S. Securities and Exchange Commission's stance on regulation. Cryptocurrency company. “There is no set SEC process. However, the Hong Kong regulator has a process in place to hear your views.”

In fact, multiple crypto executives told TechCrunch that they have met privately with Hong Kong government representatives. San Francisco-based Chainlink is working on feeding real-world data into smart contracts (lines of code that execute predefined rules) and is offering its technology to Hong Kong's key financial infrastructure. The co-founders said they are in discussions about the issue. Sergey Nazarov.

“People don't fully understand that capital markets and cryptocurrencies are very compatible. Coming to Hong Kong, first of all because the government and regulators are more open to that compatibility. We found that compatibility accelerates here,” said Nazarov, who invited Hong Kong Deputy Finance Minister Joseph Chan to speak. I chatted with him by the fireplace at SmartCon, Chainlink's annual conference in Barcelona last year.

According to Nazarov, this year Chainlink will hold Smartcon in Hong Kong at the invitation of the local government, making Hong Kong the first city in Asia to host the conference.

“Hong Kong regulators have set regulations for stablecoins, [digital] assets. So Hong Kong can be a place where assets and payments can work reliably in one system in a regulated way,” Nazarov added. “This is important because if things don't get regulated, hundreds of trillions and trillions of dollars of funds and banks won't all be able to move.”

Steve Yun, chairman of Dubai-based TON Foundation, Telegram's official blockchain partner, also shared his optimism, saying that Hong Kong is “trying to come up with a very comprehensive framework that will help other ambitious “It may have the biggest competitive advantage over virtual currency hubs.” To make builders and entrepreneurs feel more comfortable and to attract talent. ”

Hong Kong's financial regulations are complex, but Charles Dorsey, CEO of the Switzerland-based DYdX Foundation, has experience leading the fintech division at InvestHK, the foreign direct investment arm of the Hong Kong government, and is familiar with financial regulations. Familiar.

“The Hong Kong government was very open to cryptocurrencies in the early days,” Dorsey recalls. Then came a hostile era, as regulators sought to combat rampant crypto fraud. But “I think about a year or so ago they understood that there was a new market out there and that they needed regulation to make sure they didn't miss out on this opportunity.”

“Then you saw the HKMA. [Hong Kong Monetary Authority] We will continue to work on CBDC [central bank digital currencies]Hong Kong SFC [Securities and Futures Commission] We issue licenses for crypto exchanges and ETFs,” Dorsey added.

Access to China

When Hong Kong opened up to cryptocurrencies last year, there was widespread speculation that mainland China would follow suit. That hope remains remote as China continues to ban its citizens from trading in cryptocurrencies. Nevertheless, businesses are now realizing Hong Kong's potential as a gateway to other valuable resources from neighboring countries.

While Hong Kong attracts financial talent, its neighbor to the south, Shenzhen, is home to some of the world's biggest technology companies, including Huawei, DJI and Tencent. Naturally, crypto companies are taking advantage of Hong Kong's combination of friendly regulations and proximity to developer resources in Shenzhen and other Chinese cities.

One such player that is taking advantage of Hong Kong's geographical location is the TON Foundation. As part of its efforts to become a super app, Telegram has partnered with his TON to enable developers to build blockchain-based lite apps that run on top of the messenger. During Web3 week, the foundation held a bootcamp in Hong Kong in hopes of attracting Chinese developers, especially those familiar with his WeChat mini-app empire.

“We're now reaching out to a region that has a lot of developers and entrepreneurs, especially people who grew up using super apps to kind of mini apps, and people who have participated in the growth of that kind of ecosystem. “We are working hard,” Yun said. .

For example, A16z-backed Aptos hosted a three-day hackathon in Shenzhen in February that attracted hundreds of applicants. Aptos, run by the 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. ZkMe was founded by a German entrepreneur to enable private credentials and chose to locate its headquarters in Hong Kong.

“We came here to build a sustainable business and leverage the technology expertise here, and obviously working with the Greater Bay Area would also be very beneficial,” Founder of zkMe Alex Scheer, CEO and CEO, spoke about the initiative. The aim is to integrate Hong Kong with nine neighboring Chinese cities through policies such as tax incentives for Hong Kong companies setting up in Shenzhen. Of the 16 members of zkMe's team, 14 are based in the Shenzhen office.

Some founders are more optimistic that Hong Kong will pave the way for China to embrace cryptocurrencies in the future. Anurag Arjun, founder of Dubai-based modular blockchain company Avail, believes that governments that fully understand the benefits of cryptography will eventually take a more lenient stance.

“[The crypto industry has] We've built some very advanced technology over the past few years. Some examples include zero-knowledge proof technology,” he said, noting that the underlying technology behind cryptocurrencies is not intended to support fraudulent NFTs or speculative trading, but rather to support industry foundational technology. It was suggested that it was developed to strengthen.

“Due to the strategic nature of Hong Kong, we feel that Hong Kong is an important location as a gateway to China in the future,” Arjun said. “If China opens up in the future, and we are able to talk to more government officials and advocate on the technology, not just the currency component, what we are doing in Hong Kong will help us expand into China. It will also be a useful lesson.”