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Global crypto companies are seeking refuge – and opportunity – in Hong Kong

As US regulators continue to tighten their grip on cryptocurrency, startups and founders in the space are looking abroad to find a more favorable climate to support their growth.

One such destination is Hong Kong, which, trying to regain its status financial center, is relying 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, the annual web3 festival in Hong Kong attracted over 50,000 visitors. There were noticeably more participants from the Western Hemisphere compared to last year, when the event felt like a gathering of those seeking refuge from mainland China’s restrictive crypto policies.

This year’s event also saw buttoned-up officials from the city, listening intently to the scantily clad founders battling jetlag. Although she did not make it 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, showed up at the last minute.

Excitement around the web3 scene in Hong Kong has started to build last June, when the government legalized retail investors to trade crypto. Since then, the city has implemented a number of measures to regulate crypto-related activities, including a stablecoin issuing sandbox like ia licensing regime for crypto exchange operators. Following in the footsteps of the US, Hong Kong has just listed a series of cryptocurrency exchange-traded funds at the end of April.

These moves are in stark contrast to the US government’s tough stance against crypto business. Participants of the web3 festival, who flew in from the US, Europe, the Middle East, India and other regions, expressed their optimism about the momentum in Hong Kong. First Digital’s FDUSD, issued under Hong Kong’s digital asset rules and backed by US Treasury bills, 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 an aspiring crypto hub. For one thing, it’s a relatively small market of seven million people, and the huge mainland Chinese market will be banned, at least for the time being. Moreover, the rules favor investor protection, which can result in higher compliance costs and deter those who prefer a freer business environment.

However, Hong Kong remains one of the few jurisdictions, alongside countries such as the United Arab Emirates, Japan and Singapore, that have shown a clear commitment to cryptocurrency. Jack Jia, head of crypto at global payments firm Unlimit, said: «The fact that Hong Kong is coming up with any sort of crypto regulation at all, just from a reputation and optics standpoint, will attract everyone.»

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Open minded officials

Hong Kong doesn’t really have the most lenient crypto regulations. Indeed, his strict rules for exchange operators pushed his crypto poster, HashKey, to apply for a permit in Bermuda. The world’s largest crypto exchanges, namely Binance, Coinbase and Kraken, are conspicuously absent from a list of 22 applicants for a city license to exchange virtual assets.

But Hong Kong’s biggest attraction is its effort to provide regulatory clarity for crypto activities.

“The SEC is notorious. «Everything is a security, but we won’t tell you clearly what licenses you need to apply for, and then we might just reject your application,» Jia said, describing the US Securities and Exchange Commission’s stance on regulating crypto companies. “There is no set SEC process. But Hong Kong regulators have launched a process to hear your views.»

Indeed, multiple crypto executives told TechCrunch that they held closed-door meetings with Hong Kong government officials. Working to feed real-world data into smart contracts, which are lines of code that execute predefined rules, San Francisco-based Chainlink is discussing providing its technology to Hong Kong’s major financial infrastructure, according to its co-founder Sergey Nazarov.

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

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

“The Hong Kong regulatory authority issues regulations on stablecoins and regulations on (digital) assets. This means that Hong Kong can be a place where assets and payments can reliably function in one system in a regulated manner. This is important, because if things are not regulated, then all the hundreds or hundreds of trillions of dollars and the banks will not migrate,» added Nazarov.

Steve Yun, chairman of Switzerland-based TON Foundation, Telegram’s official blockchain partner, shares an optimistic view, suggesting that Hong Kong may have the biggest competitive advantage over other aspiring crypto hubs as the city is «trying to come up with a very comprehensive framework to make developers and entrepreneurs feel more comfortable and attract talent.»

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Hong Kong’s financial regulations are complex, but Charles d’Haussy, CEO of the Swiss dYdX They are no strangers to the foundation, having previously run fintech for InvestHK, the foreign direct investment department of the Hong Kong government. DYdX, the decentralized finance (DeFi) protocol backed by the dYdX Foundation, has historically been popular with Chinese-speaking users, according to the executive, so the Foundation is looking to continue attracting an audience.

«The Hong Kong government was very open to crypto in the early days,» d’Haussy recalled. Like other jurisdictions around the world, the city suspended crypto activities to protect investors’ interests as market volatility spiraled out of control.

“But about a year or so ago, I think they realized there was a new market out there and there should be regulations to make sure this opportunity wasn’t missed. Then you saw the HKMA (Hong Kong Monetary Authority) doing more and more CBDCs (Central Bank Digital Currencies) and the Hong Kong SFC (Securities and Futures Commission) issuing licenses for crypto exchanges and ETFs,” he said. is d’Haussy.

Access to China

When Hong Kong opened up to cryptocurrencies last year, there was speculation that China might follow suit. That hope is still distant as China continues to ban its citizens from trading crypto. Despite this, companies are now recognizing Hong Kong’s potential as a gateway to another valuable resource in China.

While Hong Kong is a magnet for financial talent, its southern neighbor, Shenzhen, is home to some of the world’s biggest tech companies, such as Huawei, DJI and Tencent. Not surprisingly, crypto companies are capitalizing on the combination of Hong Kong’s friendly regulations and its proximity to development resources in Shenzhen.

One player that taps into Hong Kong’s geographic location is the TON Foundation. As part of its efforts to become a great app, Telegram has partnered with TON, which in turn enables third-party developers to build blockchain applications. During web3 week, the Foundation held a bootcamp in Hong Kong in the hope of attracting Chinese developers familiar with WeChat’s ecosystem of mini-apps.

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«We are now reaching regions where there are a large number of developers and entrepreneurs, especially those who have grown up using some sort of mini-app through the super app, and those who have participated in the growth of such an ecosystem,» Yun said.

A16z-support Aptos, for example, hosted a three-day hackathon in Shenzhen in February, which attracted hundreds of registrants and has brought its DeFi event to Hong Kong. Aptos also led a team that previously worked on Meta’s Diem blockchain partnered with Alibaba’s cloud computing division lure Asian developers.

Some foreign founders have taken it a step further by establishing a physical presence in the city. ZkMe, founded by a German entrepreneur to enable private credential checks, has decided to locate its headquarters in Hong Kong.

«We came here to build a sustainable business and take advantage of the technological expertise here, and obviously the collaboration with the Greater Bay Area is also very beneficial,» zkMe founder and CEO Alex Scheer said of the initiative, which aims to integrate Hong Kong with nine neighboring Chinese cities through policies such as tax breaks for Hong Kong companies to set up in Shenzhen. Of zkMe’s 16-member team, 14 are located in the Shenzhen office.

Some founders are more optimistic that Hong Kong will pave the way for China to embrace crypto 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 take a more lenient position.

“(The crypto industry has) been building very advanced technology over the past few years. Some examples are things like zero-knowledge technology,” he said, suggesting that the underlying technology behind cryptocurrency was developed not to support fake NFTs or speculative trading, but to improve the underlying technology of the industry.

«Because of the strategic nature of Hong Kong, we see it as 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 advocate for the technology not just for its currency elements – what we’re doing in Hong Kong will be a useful lesson for expanding into China. «

The article was updated on May 7, 2024 to correct the TON Foundation database.

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