Author: Rita Liao

Article source: Internet Computer

As US regulatory agencies continue to strengthen their scrutiny of cryptocurrencies, startups and founders in this field are seeking more friendly environments overseas to support their development.

Hong Kong is one of them, seeking to restore its position as a financial center, hoping to attract a new group of entrepreneurs, technical experts, and investors through favorable cryptocurrency regulations. So far, its strategy seems to be working.

In the middle of April, the annual Web3 Carnival in Hong Kong attracted more than 50000 participants. Compared with last year, the number of non Chinese participants increased significantly. At that time, the event felt like a gathering of cryptocurrency refugees fleeing the restrictive policies of Chinese Mainland. During this year's event, Hong Kong officials listened carefully to the statements of founders who were dressed sloppily and struggling with jet lag.

Although Cathie Wood, the billionaire founder of Ark Invest, did not attend the event in person, she gave a speech via video, and Vitalik Buterin, the founder of Ethereum's "Nomad", also attended the event at the last minute.

This gives a feeling of familiarity: in the early stages of the cryptocurrency industry, Hong Kong was the main center for foreign entrepreneurs to operate cryptocurrency companies, including FTX, Crypto.com, and BitMex. Like other jurisdictions around the world, as market volatility spiraled out of control, Hong Kong severely cracked down on cryptocurrency activities to protect the interests of investors.

Last June, the Hong Kong government legalized cryptocurrency trading for retail investors, reigniting enthusiasm for the Web3 sector in Hong Kong. Since then, Hong Kong has implemented a series of measures to regulate cryptocurrency related activities, including stablecoin issuance sandboxes and licensing systems for cryptocurrency exchange operators. Following in the footsteps of the United States, Hong Kong has also listed a number of cryptocurrency exchange traded funds.

These measures are in stark contrast to the US government's tough stance on cryptocurrency companies, with Web3 Carnival participants from the US, Europe, the Middle East, India, and other regions expressing optimism about Hong Kong's development momentum. For example, First Digital's FDUSD, issued under Hong Kong's digital asset rules and supported by US Treasury bills, has quickly become the world's fourth largest stablecoin by market value.

At the same time, people are also aware of the limitations of Hong Kong as a cryptocurrency center. First of all, Hong Kong is a relatively small market with a population of only 7 million, while the huge market of Chinese Mainland is still inaccessible at least for the time being. In addition, the rules give priority to investor protection, which may lead to higher compliance costs and hinder those who prefer a freer environment.

Despite this, Hong Kong is still one of the few jurisdictions that explicitly supports cryptocurrency, along with several other countries including the United Arab Emirates, Japan, and Singapore. As Jack Jia, the head of cryptocurrency at global payment company Unilimit, said, "Any cryptocurrency regulation introduced in Hong Kong will attract everyone from a reputation and image perspective

Hong Kong's cryptocurrency regulation is not the most relaxed. In fact, Hong Kong's strict scrutiny of exchange operators has prompted its cryptocurrency representative company HashKey to seek a license in Bermuda. The world's largest cryptocurrency exchanges, Binance, Coinbase, and Kraken, did not appear on the list of 22 applicants for Hong Kong's virtual asset exchange license.

It has been proven that the biggest attraction of Hong Kong lies in its efforts to provide regulatory clarity for cryptocurrency activities.

The US Securities and Exchange Commission is notorious for everything being securities, but we won't explicitly tell you what license you need to apply for, and then we may still reject your application, "Jia said, describing the SEC's attitude towards regulating cryptocurrency companies." The SEC doesn't have an established process, but Hong Kong regulators have established a process for listening to opinions

In fact, multiple cryptocurrency executives have told TechCrunch that they have held closed door meetings with Hong Kong government representatives. Sergey Nazarov, co-founder of Chainlink, a San Francisco based company, stated that the company is committed to inputting real-world data into smart contracts (i.e. lines of code that execute predefined rules) and is currently discussing providing its technology to Hong Kong's major financial infrastructure.

People are not fully aware that the capital market and cryptocurrencies are very compatible. After coming to Hong Kong, I found that this compatibility will first accelerate here because the government and regulatory agencies are more open to this compatibility, "Nazarov said. He invited Hong Kong's Deputy Director of Finance, Chan Wing sing, to have a fireplace talk with him at Chainlink's annual SmartCon conference held in Barcelona last year.

Nazarov stated that this year, Chainlink was invited by the Hong Kong government to bring SmartCon to Hong Kong, which will become the first Asian city to host the conference.

The regulatory authorities in Hong Kong are regulating stablecoins and digital assets, which means that Hong Kong can become a place where assets and payments can operate reliably in a regulated manner within a system. "Nazarov added," This is important because without regulation, hundreds of trillions of dollars and banks will not be able to transfer

Steve Yun, President of the TON Foundation (Telegram's official blockchain partner) based in Dubai, is also optimistic, stating that Hong Kong may have the biggest competitive advantage compared to other aspiring cryptocurrency centers, as it is "trying to establish a very comprehensive framework that makes developers and entrepreneurs feel more comfortable and attracts talent

The financial regulation in Hong Kong is very complex, but Charles d'Haussy, CEO of the Swiss dYdX Foundation, is no stranger to these regulations. He has previously served as the head of financial technology at Invest Hong Kong, the government's foreign direct investment department.

The Hong Kong government had a very open attitude towards cryptocurrencies in the early days, "recalled d'Haussy. Subsequently, regulatory agencies attempted to crack down on rampant cryptocurrency fraud, resulting in a period of hostility. However," about a year ago, I think they realized there was a new market there and regulations should be enacted to ensure that this opportunity was not missed

D'Haussy added, "At that time, you would see the Hong Kong Monetary Authority (HKMA) launching more and more CBDCs (central bank digital currencies), and the Hong Kong Securities and Futures Commission (SFC) issuing licenses for cryptocurrency exchanges and ETFs

Entering China

Although Hong Kong attracts numerous financial talents, its southern neighbor Shenzhen is home to the world's largest technology companies such as Huawei, DJI, and Tencent. There is no doubt that cryptocurrency companies are taking advantage of Hong Kong's friendly regulatory environment and the convenience of its developer resources with Shenzhen and other Chinese cities.

The TON Foundation is a participant that utilizes Hong Kong's geographical location. In order to become a super application, Telegram is collaborating with TON to enable developers to build lightweight applications based on blockchain and run them on the communication tool. During the web3 carnival week, the foundation held a training camp in Hong Kong, hoping to attract Chinese developers, especially those familiar with the WeChat mini program empire.

Now, we are reaching out to regions with a large number of developers and entrepreneurs, especially those who have grown up using some kind of mini program through super applications, as well as those who participate in the growth of this ecosystem, "Yun said.

For example, Aptos, supported by a16z, held a three-day hackathon in Shenzhen in February, attracting hundreds of applicants. Aptos is operated by a team that previously worked on Meta's Diem blockchain and also collaborates with Alibaba's cloud computing department to attract Chinese developers.

Some foreign founders have gone further and established physical institutions in Hong Kong. zkMe is a company founded by a German entrepreneur with the aim of achieving private certificate verification, and the company has chosen to have its headquarters in Hong Kong.

We are here to establish a sustainable business and leverage our technological expertise. Obviously, cooperation with the Greater Bay Area is also very beneficial, "said Alex Scheer, founder and CEO of zkMe, referring to a plan aimed at integrating Hong Kong with nine neighboring Chinese cities through tax incentives and other policies, including providing tax incentives for Hong Kong companies established in Shenzhen. Among zkMe's 16 team members, 14 come from the Shenzhen office.

Some founders hold a more optimistic attitude towards Hong Kong paving the way for China to embrace cryptocurrency in the future. Anurag Arjun, founder of Dubai based modular blockchain company Avail, believes that governments that see the full benefits of cryptocurrency technology will ultimately adopt a more inclusive stance.

In the past few years, the cryptocurrency industry has been developing very advanced technologies, such as zero knowledge proof technology. He stated that the underlying technology behind cryptocurrencies was not developed to support fraudulent NFTs or speculative trading, but to enhance the industry's foundational technology.

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