As the U.S. cracks down on crypto, Hong Kong extends a warm welcome

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On a balmy day in mid-April, thousands of people queued to enter the Hong Kong Convention Center where the city’s first web3 festival was underway. Most had flown in from mainland China, but many others had made the trip from Singapore, Japan, Indonesia, Thailand and even the US to see what the city had to offer crypto businesses at a time when regulation of digital assets is intensifying in the US

In February, Hong Kong proposed a set of welcoming rules to regulate crypto-related activities. Under the new legal 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 businesses, the city facilitates communication between banks and crypto startups, many of which are struggling to find alternatives after the collapse of Silvergate Bank.

These moves contrast with Beijing’s heavy-handed attack on the crypto industry; they also highlight the extent to which the former British colony has political exemptions in certain areas, such as finance.

In 2021, China banned all forms of crypto transactions, sending the country’s web3 entrepreneurs fleeing to more web3-friendly jurisdictions such as Singapore. As Hong Kong extends a welcoming hand to digital assets, many self-exiled Chinese founders are considering establishing themselves in the city. Companies from the West are also considering Hong Kong as a potential outpost for their Asia expansion.

At the weekly Hong Kong web3 festival, TechCrunch spoke to a dozen attendees from the web3 realm, including investors, nascent startups and established players, as well as “traditional” web2 tech giants, to gauge Hong Kong’s attractiveness as the next crypto hub.

Some believe the new regulatory regime will create a new wave of crypto innovation. They feel confident that they can now operate as a legitimate business on Chinese soil and are quick to take advantage of government policy support, such as subsidized office space for crypto ventures.

Others are more hesitant to accept the olive branch. As Asia’s financial center, Hong Kong historically lacks a vibrant tech ecosystem and is too expensive for most scrappy startups, so the types of crypto businesses it attracts are likely to be those that serve and interface with traditional finance, they reckon.

The East is rising

The timing is favorable for Hong Kong’s crypto-friendly move, said Shixing Mao, co-founder and CEO of Cobo, a Singapore-headquartered digital asset solution backed by DST Global.

– The tightening of regulation in the USA after the FTX implosion has a few consequences. In the past, several US banks played the key role of connecting the traditional world and the crypto world, but that link has now been broken, giving a big opportunity for Hong Kong to step up, said Mao, who is affectionately known as ‘Discus Fish’ . ‘ in the crypto community.

“Hong Kong has always been at the intersection of East and West and played the important role of the bridge to enter China,” said Lily King, Chief Operating Officer of Cobo.

That advantage was already proven before. Hong Kong played an important role in the early development of the crypto industry by drawing once influential exchanges such as FTX and Bitmex to set up shop there. After China’s scramble, FTX moved to the Bahamas for its friendlier and clearer regulatory stance on the new asset class.

Hong Kong is regaining some attention from the West. Stephen Cheung, president of the decentralized social network Bi.social, flew all the way from the US East Coast to Hong Kong to feel the pulse on the ground.

“As an American-born Chinese whose parents grew up in Hong Kong, I am extremely optimistic about the open-door policy for crypto in Hong Kong,” he said. Nevertheless, Cheung believed that if US crypto firms are to leave the country, “they will stay within the Western Hemisphere.”

“Hong Kong has the opportunity [of attracting Western firms] just because the US is currently openly hostile to web3 companies,” he said, adding that the city will be more appealing to other Asia-based companies before it will have any significant influence in the West.

In fact, Hong Kong is increasingly on the radar of crypto businesses in Singapore, many of which had come from China following the country’s crackdown on crypto. Now the tide is turning.

“After FTX’s implosion, the Singapore government has become more cautious about 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 digital asset self-custody solution provider based in Singapore but recently set up an office in Hong Kong.

Boosts self-confidence

Mostly, people praise the Hong Kong government for providing more regulatory clarity about the crypto industry. But they interpret Hong Kong’s open arms differently. Some see the move as a sudden shift in the government’s stance, while others see it as a reflection of the city’s political 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, established itself in Hong Kong back in 2017 and has kept its office there ever since. “What we have seen [in Hong Kong] over the years is a relatively consistent government direction and sustainable policy,” said Chao Deng, the company’s CEO. “The latest move is more of an update to the licensing regime.”

Conflux, a Layer 1 blockchain that claims to be the only crypto company permitted to operate in China since the industry crash, was also relieved to meet with various Hong Kong government delegates during the web3 festival.

“Hong Kong is showing a huge amount of support for web3 development,” said Zhang Yuanjie, co-founder of Conflux. “From legislators and InvestHK [the city’s department of foreign direct investment] to the Treasury Secretary and the Monetary Authority are all serious about supporting the crypto industry.”

Although Hong Kong’s new web3 regulation seems more favorable towards transaction-focused crypto services, there is room for infrastructure builders, reckoned Huang from Safeheron.

“Anyone entering the crypto industry needs cybersecurity infrastructure, whether it’s a traditional or web3-native company. Now that Hong Kong’s financial institutions can start integrating crypto-related products, we can play the role of helping them,” he said.

China’s Big Tech is riding Hong Kong’s crypto wave as well. Alibaba and Tencent were both present at the web3 festival with representatives from their cloud computing units. Like AWS, they want to get a head start and be the decentralized world’s go-to cloud provider. While the nascent industry likely won’t generate any meaningful revenue anytime soon, the tech giants clearly don’t want to miss out on an industry that continues to lure capital and talent from traditional industries.

Wait and see

The Web3 festival, with its teeming conference room and lavish boat parties, appears as a euphoric celebration of the city’s new crypto regime. But not everyone present is hot-headed. An investor from a prominent China-focused venture capital firm, who declined to be named, said he was not looking to find deals at the event because “it’s not where the real tech developers hang out.”

Three Chinese web3 founders who have moved to Singapore and declined to be named said they were in Hong Kong simply to catch up with partners and investors and would “wait and see” before drawing any conclusions about the city’s level of crypto-friendliness.

Those who tend to be most passionate about Hong Kong’s new crypto regulation are fund managers, stock traders and others in traditional finance, observed Rachel Lin, CEO and co-founder of SynFutures.

“It’s not that they feel so much about crypto, but it’s more about looking for the next investable assets. Right now the financial markets are slowing down and they can’t find any other alternative assets,” Lin said. Before she ran the DeFi protocol , she worked in the global markets division of Deutsche Bank, managed foreign payment solutions at Ant Group and was the founder of the major crypto lender Matrixport.

“Crypto is very close to what they have done in finance, unlike AI or biotechnology, which is somewhat distant for them. I think the positive signal from the government also increases their confidence,” she said.

It comes as no surprise that Hong Kong is vouching for a new industry that plays to its strengths. In recent years, the city has seen an exodus of multinational companies and local talent while undergoing a series of political events.

“Hong Kong has hit a major bottleneck in traditional industries such as finance and real estate, so there is a great need for young talent and new blood to revitalize the economy,” King said. “Given the foundation it laid for the financial sector, focusing on digital assets is the best and only option going forward.”