Hong Kong has an on-again-off-again relationship with crypto: Before China outlawed all crypto-related activities in 2021, the Asian financial hub was the early home to several crypto startups, including the now-defunct FTX, which left for the Bahamas after the ban. Now, Hong Kong is again welcoming crypto businesses, only this time with more regulatory clarity.
During its government-backed fintech week late last year, Hong Kong indicated its intention to legalize crypto retail trading and introduce a licensing regime for digital asset providers. The plan took more shape in February when the city published draft rules that would allow individual investors to trade certain major cryptocurrencies starting June 1.
Companies are already responding to the city’s shift in attitude. As of February, the department for foreign direct investment had received “expressions of interest” from over 80 virtual asset-related companies from both mainland China and abroad in establishing a presence in Hong Kong. KuCoin, one of the world’s largest crypto exchanges, already said last year that it would open an office in the city.
While these developments are encouraging signs to some, others question whether the semi-autonomous region has the right conditions for building all forms of web3 organizations and businesses to thrive. The early consensus is that crypto-trading-related firms will probably be the first to reap the fruit of the policy change.
Too big to miss
When Hong Kong was handed back to China in 1997, Beijing established a “one country, two systems” regime that granted the city a high level of autonomy in the legal, economic and social realms. Export-oriented Chinese firms began using the city as a logistics and clearing center, and multinationals set up shops there as their gateway into China.
In recent years, however, Hong Kong is increasingly losing its allure as a springboard connecting China and the outside world after episodes of political fallout and stringent COVID controls.
One web3 startup founder who declined to be named reckoned that Hong Kong is “too close to mainland China” where all forms of crypto trading and mining are illegal. Fearing policy uncertainty, the founder, who was previously based in China, joined a wave of crypto-related entrepreneurs who have moved to Singapore in the last two years.
“What founders need is continuity and certainty, not a sudden burst of policy support,” said another Chinese web3 entrepreneur who also emigrated to Singapore, which has emerged as a top destination for expats leaving Hong Kong.
But for the more risk-tolerant crowd, Hong Kong is still the ideal bridge to China. “China is too huge and they do not want to kill the relationship off, so having a presence in Hong Kong is actually a must,” said Victor Lee, founder of decentralized finance infrastructure startup ThirdFi.
“I don’t think that people are looking strong enough; the amount of liquidity from China and Hong Kong is huge. It’s just that you got to play according to the Hong Kong rules and Chinese policy,” he added.
Despite China’s ban on crypto trading, crypto adoption remains resilient as the nation’s citizens access exchanges through virtual private networks and find platforms that turn a blind eye to potential know-your-customer violations.
In 2022, China bounced back to the top 10 countries by crypto transaction volume. The report, put out by research firm Chainalysis, said that China was “especially strong in usage of centralized services, placing second overall for purchasing power-adjusted transaction volume at both the overall and retail levels.”
China’s stance
People who are rosier about web3’s future in Hong Kong see Hong Kong’s dire need for new growth stimulus as its economy stumbles. Last year, the city’s GDP shrank worse-than-expected 3.5%. It might also be aiming to take back some of the financial leverage lost to competitors like Singapore. China recognized Hong Kong’s challenges, which is perhaps why it quietly supported the city’s embracing of crypto, according to Bloomberg.
Given its history as a regional financial hub, Hong Kong could be well positioned to dip its toes in digital assets trading and act as a sandbox for China.
“I think Hong Kong actually has a better chance [than Singapore] because of the China market,” Lee said. “China is going to launch their own CBDC [central bank digital currency] and I’m sure every government is looking at it. Hong Kong is still the innovative hub for a lot of financial products, and right now, if they actually incorporate blockchain and digital assets, this will definitely help to bring investors and funds back to Hong Kong.”
Opening Hong Kong up to crypto also benefits China, which is probably watching how much money and talent is pouring into the crypto industry, even in a bear market. The country might be wary of the volatile nature of cryptocurrencies, but it also likely fears missing out on a potentially disruptive technology — and falling behind the U.S. in the race.
Hong Kong’s move to create offshore Chinese yuan stablecoins signals China’s effort to challenge a digital asset industry currently dominated by U.S. dollars, just like the old world order. The city could be a laboratory for China to test out blockchain-powered assets but still have some buffer zone to help China withstand volatility in the global crypto market.
A middle path
In the Chinese web3 world, it’s said that there are generally two types of founders: those who hold up the anti-establishment ethos of the blockchain gospel and those who are here to capitalize on the emergence of a new asset class.
Hong Kong might be a lab for developing finance-focused crypto projects but not so much the underlying blockchain technology, argued the two Chinese founders who moved to Singapore.
“The city is very expensive and doesn’t have that much tech talent to start with,” said one of the entrepreneurs. “But it could be appealing to crypto exchanges whose bosses need to spend time in mainland China.”
Forrest Liu, a corporate finance veteran in Hong Kong, echoed the sentiment. “I feel that Hong Kong’s policy implementation for web3 is mainly tailored to the fintech regulatory framework.”
“In the past few years, Hong Kong’s crypto regulation has moved from being tight to more relaxed. At present, it stands somewhere between China’s outright ban and North America’s more lax attitude,” said Liu, who recently started a decentralized social network called ChewZ.
“This kind of selective approach is actually very similar to Hong Kong’s oversight of traditional finance, such as IPO. It helps manage risks better than a completely relaxed environment, but in a fast-growing industry, regulators might fail to keep up with the growth of the industry. Even if a project achieves progress, it might face regulatory pressure and start from other markets, leading to Hong Kong losing its alpha.”
As part of its annual budget, the city is allocating HK$50 million ($6.4 million) to support the web3 ecosystem, which doesn’t sound like much, given it’s setting aside a hefty HK$3 billion ($380 million) to enhance basic research “frontier technology fields” like AI and quantum technology. It remains to be seen the type of talent and investment the city is able to attract to advance its web3 dream as June approaches.