With US regulators continuing to intensify their scrutiny of cryptocurrencies, industry startups and founders are looking abroad to find more favorable climates to support their growth.

One such destination is Hong Kong, which is trying to restore its status as a country financial hub, is banking on favorable crypto regulations to attract a new wave of entrepreneurs, technologists and investors. So far, his strategy seems to be working.

In mid-April, Hong Kong’s annual web3 festival attracted over 50,000 attendees. There were many more participants from the Western Hemisphere than last year, when the event seemed like a gathering of these seeking refuge from mainland China’s restrictive cryptocurrency policy.

This year’s event also featured buttoned-up city officials, who listened intently as shabbily dressed founders battled jet lag. While not at 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, appeared at the last minute.

The excitement around Hong Kong’s web3 scene has started to grow last June, when the government made cryptocurrency trading legal for retail investors. Since then, the city has implemented a number of measures to regulate cryptocurrency-related activities, including a sandbox for issuing stablecoins as well as a Licensing regime for cryptocurrency exchange operators. Following in the footsteps of the United States, Hong Kong has just listed a batch of cryptocurrency exchange-traded funds at the end of April.

These moves are in stark contrast to the US government’s tough stance towards cryptocurrency-related activities. Attendees of the web3 festival, who came from the United States, Europe, the Middle East, India and other regions, expressed their optimism about Hong Kong’s momentum. First Digital’s FDUSD, issued under Hong Kong’s digital asset rules and backed by U.S. Treasury bonds, for example, has quickly become the world’s fourth-largest stablecoin by market capitalization.

At the same time, people are aware of Hong Kong’s limitations as an aspiring crypto hub. First, this is a relatively small market of seven million people, and the huge mainland China market will be off-limits, at least for now. Furthermore, the rules prioritize investor protection, which can lead to higher compliance costs and discourage those who favor a freer business 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 cryptocurrency. Jack Jia, head of cryptocurrencies at global payments firm Unlimit, said: “The fact that Hong Kong is coming up with cryptocurrency regulation, just from a reputation and optics perspective, will appeal to everyone.”

Open-minded officials

Hong Kong doesn’t actually have the most lenient crypto regulations. In fact, its strict rules for exchange operators have pushed its cryptocurrency, HashKey, to do so look for a license in Bermuda. The largest cryptocurrency exchanges in the world, namely Binance, Coinbase and Kraken, are conspicuously absent from the city’s list of 22 virtual asset trading license applicants.

But Hong Kong’s greatest appeal is its effort to provide regulatory clarity for crypto businesses.

“The SEC is known. “Everything is a security, but we won’t tell you clearly which license you need to apply for, and then we might just reject your application,” Jia said, describing the U.S. Securities and Exchange Commission’s attitude to regulating crypto firms. “There is no set SEC process. But Hong Kong regulators have initiated a process to listen to your views.”

In fact, several crypto industry executives told TechCrunch that they have held closed-door meetings with Hong Kong government representatives. According to its co-founder Sergey Nazarov, San Francisco-based Chainlink is working to provide real-world data to smart contracts, which are lines of code that execute predefined rules, and is reportedly in discussions to provide its technology to major infrastructures financial institutions in Hong Kong.

“People don’t fully realize that capital markets and cryptocurrencies are very compatible. Coming to Hong Kong, I found that compatibility will be accelerated here first because the government and regulators are more open to such compatibility,” said Nazarov, who invited Hong Kong Undersecretary of the Treasury Joseph Chan to speak in Hong Kong . a fireside chat with him at SmartCon, Chainlink’s annual conference, in Barcelona last year.

This year, according to Nazarov, Chainlink will bring the event to Hong Kong at the invitation of the local government, making Hong Kong the first Asian city to host the conference.

“The Hong Kong regulator is issuing regulation on stablecoins and regulation on [digital] resources. This means that Hong Kong can be a place where business and payments can reliably operate in one system in a regulated manner. This is important, because if things are not regulated, all the hundreds or hundreds of trillions of dollars and banks will not migrate,” Nazarov added.

Steve Yun, president of the Dubai-based TON Foundation, Telegram’s official blockchain partner, shared the bullish sentiment, suggesting that Hong Kong may have the biggest competitive advantage over other aspiring crypto hubs as the city “is trying to work out a very complete framework to make builders and entrepreneurs feel more at ease and attract talent”.

Hong Kong’s financial regulations are intricate, but Charles d’Haussy, CEO of the Swiss company dYdX Foundation is no stranger to them, having previously led fintech for InvestHK, the foreign direct investment department of the Hong Kong government. DYdX, the decentralized finance (DeFi) protocol supported by the dYdX Foundation, is historically popular among Chinese-speaking users, according to the executive, so the Foundation seeks to continue engaging the public.

“The Hong Kong government was very open to cryptocurrencies at first,” d’Haussy recalled. Like other jurisdictions around the world, the city clamped down on cryptocurrency-related activities to safeguard investors’ interests as market volatility spiraled out of control.

“But about a year ago or so, I think they realized that there was a new market there and that there needed to be regulations to ensure that this opportunity wasn’t missed. That’s when you saw the HKMA [Hong Kong Monetary Authority] making more and more CBDC [central bank digital currencies]and the Hong Kong SFC [Securities and Futures Commission] issuing licenses for cryptocurrency exchanges and ETFs,” d’Haussy said.

Access to China

When Hong Kong opened up to cryptocurrencies last year, there was widespread speculation that mainland China might follow suit. This hope remains distant as China continues to block its citizens from trading cryptocurrencies. Nonetheless, companies are now recognizing Hong Kong’s potential as a gateway to another valuable Chinese resource.

While Hong Kong is a magnet for financial talent, its neighbor to the south, Shenzhen, is home to some of the world’s largest tech companies, such as Huawei, DJI and Tencent. Not surprisingly, crypto firms are taking advantage of the combination of Hong Kong’s favorable regulations and its proximity to Shenzhen’s developer resources.

One player taking advantage of Hong Kong’s geographic location is the TON Foundation. As part of his effort to become a super app, Telegram is partnering with TON, which in turn allows third-party developers to build blockchain apps. During web3 week, the Foundation held a bootcamp in Hong Kong in hopes of attracting Chinese developers who are familiar with WeChat’s established mini-app ecosystem.

“We are now reaching regions where they have a high number of developers and entrepreneurs, especially those who have grown using some type of mini app through a super app, and those who have participated in the growth of that ecosystem,” Yun said.

Supported by A16z Aptos, for example, hosted a three-day hackathon in Shenzhen in February that attracted hundreds of applicants and brought its DeFi event to Hong Kong. Run by a team that previously worked on Meta’s Diem blockchain, Aptos has done so too partnered with Alibaba’s cloud computing division to attract Asian developers.

Some foreign founders have gone a step further by establishing a physical presence in the city. ZkMe, founded by a German entrepreneur to allow the verification of private credentials, has chosen to locate its headquarters in Hong Kong.

“We came here to build a sustainable business and leverage the technology expertise here, and then, of course, the cooperation with the Greater Bay Area is also really beneficial,” said zkMe founder and CEO Alex Scheer, referring to the initiative that aims to integrate Hong Kong with nine adjacent Chinese cities through policies such as tax benefits for Hong Kong businesses wanting to establish in Shenzhen. Of zkMe’s 16-member team, 14 are based out of 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 Avail, a modular blockchain company, believes that governments that see the full benefits of crypto technologies will eventually adopt a more accommodative stance.

“[The crypto industry has] has built very advanced technologies in recent years. Some examples are things like zero-knowledge proof technology,” he said, suggesting that the technology behind cryptocurrency was developed not to support fraudulent NFTs or speculative trading, but to improve the industry’s fundamental technology.

“Due to 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 make our case for the technology and not just its currency elements – what we do in Hong Kong will be a useful lesson for expanding as well. in China. “

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