Regulation
Global crypto companies look to Hong Kong for refuge – and opportunity
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As U.S. regulators continue to step up their oversight of crypto, startups and founders in the sector are looking overseas to find more favorable climates to support their growth.
One such destination is Hong Kong which, seeking to restore its status as financial center, 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 more than 50,000 attendees. There were noticeably more non-Chinese participants compared to last year, when the event resembled a gathering of Crypto Refugees Fleeing Mainland China’s Restrictive Policies. At this year’s edition, buttoned-up city officials listened intently to poorly dressed founders battling jet lag. Although she didn’t come 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 evokes a sense of déjà vu: In the early days of the industry, 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 has cracked down on crypto activities to protect investors’ interests as market volatility spiraled out of control.
Excitement around Hong Kong’s web3 scene has started to bubble again Last June, when the government legalized cryptocurrency trading for retail investors. The city has since implemented a series of measures to regulate crypto-related activities, including a sandbox for stablecoin issuance and a licensing regime for cryptocurrency exchange operators. Following in the footsteps of the United States, Hong Kong has just introduced a batch of cryptocurrency exchange-traded funds. this week.
These measures contrast sharply with the measures taken by the US government. tough stance against crypto companies. Attendees of the web3 festival, from the United States, 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 U.S. Treasuries, for example, quickly became the world’s fourth-largest stablecoin by market capitalization.
At the same time, people are aware of Hong Kong’s limitations as a budding crypto platform. On the one hand, it is a relatively small market of seven million people, and the huge market of mainland China It’s going to be banned for now at least. Additionally, the rules prioritize investor protection, which can lead to higher compliance costs and deter those who favor a freer environment.
Hong Kong nevertheless remains one of the few jurisdictions, alongside countries like the United Arab Emirates, Japan and Singapore, to have demonstrated a clear commitment to cryptocurrencies. As Jack Jia, head of crypto at global payments company Unlimit, noted: “The fact that Hong Kong is proposing any crypto regulation, purely from a reputation and optics perspective, will attract everyone. »
Open-minded civil servants
Hong Kong doesn’t actually have the most lenient crypto regulations. Indeed, its scrutiny of exchange operators has pushed its cryptocurrency model, HashKey, to apply for a permit in Bermuda. The world’s largest crypto exchanges namely Binance, Coinbase and Kraken are visibly absent from the list of 22 applicants for the city’s virtual asset exchange license.
It turns out that Hong Kong’s biggest appeal lies in its efforts to clarify the regulation of crypto activities.
“The SEC is notorious. “Everything is a security, but we’re not going to tell you clearly what license you need to apply for, and then we might reject your application anyway,” Jia said, describing the attitude of the U.S. Securities and Exchange Commission. United in regulation. crypto companies. “There is no defined SEC process. But Hong Kong regulators have a process in place to hear your opinions.
Indeed, several crypto executives told TechCrunch that they held closed-door meetings with Hong Kong government officials. Striving to feed real data into smart contracts, which are lines of code executing predefined rules, San Francisco-based Chainlink is in discussions to provide its technology to Hong Kong’s major financial infrastructure, its co. -founder Sergey Nazarov.
“People don’t fully realize that capital markets and crypto are very compatible. Coming to Hong Kong, I found out that this compatibility is going to be accelerated here first because the government and regulators are more open to this compatibility,” said Nazarov, who invited Hong Kong’s Deputy Treasury Secretary Kong, Joseph Chan, to speak by the fire. chat with him at SmartCon, Chainlink’s annual conference, in Barcelona last year.
This year, Chainlink is taking 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.
“Hong Kong regulator issues regulation on stablecoins and regulation on [digital] assets. This means that Hong Kong can be a place where assets and payments can operate reliably in one system and in a regulated manner,” Nazarov added. “It’s important because if things aren’t regulated, the hundreds of billions of dollars and banks won’t migrate.”
Steve Yun, chairman of the Dubai-based TON Foundation, Telegram’s official blockchain partnershared the optimistic sentiment, saying Hong Kong could have the biggest competitive advantage over other budding crypto hubs as the city is “trying to provide a very comprehensive framework to make builders and entrepreneurs feel more comfortable.” comfort and to attract talent.
Hong Kong’s financial regulations are complex, 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.
“The Hong Kong government was very open to cryptocurrencies at the beginning,” d’Haussy recalled. Then came a period of hostility as regulators tried to combat widespread crypto fraud. 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 wasn’t missed.”
“That’s when you saw the HKMA [Hong Kong Monetary Authority] make more and more CBDC [central bank digital currencies]and Hong Kong SFC [Securities and Futures Commission] issuing crypto exchanges and ETF licenses,” d’Haussy added.
Access to China
When Hong Kong opened up to cryptocurrencies last year, speculation was rife that mainland China might follow suit. This hope remains distant as China continues to ban its people from trading cryptocurrencies. Nonetheless, businesses now recognize Hong Kong’s potential as a gateway to another valuable resource of its neighbor.
While Hong Kong attracts financial talent, its southern neighbor Shenzhen is home to some of the world’s biggest tech companies, such as Huawei, DJI and Tencent. Unsurprisingly, crypto companies are capitalizing on Hong Kong’s combination of favorable regulations and its proximity to developer resources in Shenzhen and other Chinese cities.
One such player exploiting Hong Kong’s geographic location is the TON Foundation. As part of its efforts to become a super app, Telegram partners with TON, which allows developers to create lightweight blockchain-based applications that run on top of the messenger. During web3 week, the Foundation hosted a bootcamp in Hong Kong in hopes of attracting Chinese developers, particularly those familiar with WeChat’s mini-app empire.
“Now we are looking to regions where there are a large number of developers and entrepreneurs, especially those who grew up using some type of mini-apps through a super app, and those who participated in the growth of such an ecosystem,” Yun said. .
supported by a16z Aptos, for example, hosted a three-day hackathon in Shenzhen in February, attracting hundreds of applicants. Aptos, led by a team that previously worked on Meta’s Diem blockchain, also in partnership with Alibaba’s cloud computing branch to attract Chinese developers.
Some foreign founders have gone further by establishing a physical presence in the city. zkMe, founded by a German entrepreneur to enable private identity verifications, has chosen to establish its headquarters in Hong Kong.
“We came here to build a sustainable business and take advantage of the technological expertise here, and obviously the cooperation with the Greater Bay Area is also very 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 companies setting up shop in Shenzhen. Of zkMe’s 16-member team, 14 are based in its Shenzhen office.
Some founders are more optimistic that Hong Kong is paving the way for China to adopt crypto in the future. Anurag Arjun, founder of Avail, a modular blockchain company based in Dubai, believes that governments that see the full benefits of crypto technologies will eventually adopt a more accommodating stance.
“[The crypto industry has] developed very advanced technology 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 core technology of the industry.
“Because of the strategic nature of Hong Kong, we believe it is an important location, 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 technology, not just its monetary elements – what we do in Hong Kong will be a useful lesson for us to also expand to China. »