As the US cracks down on crypto, Hong Kong extends a warm welcome

On a balmy day in mid-April, thousands of people queued in line to enter the Hong Kong Convention Center where the city's inaugural web3 festival was underway. Most had flown in from mainland China, but many others had trekked from Singapore, Japan, Indonesia, Thailand and even the U.S. to see what the city had to offer to crypto ventures at a time regulation over digital assets is intensifying in the U.S.

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 restricted trading to only accredited investors.

The city is also paving the way to legalize stablecoins. One startup, which is 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 is facilitating communication between banks and crypto startups, many of which are scrambling to find alternatives following Silvergate Bank's meltdown.

These moves are contrasting with Beijing's heavy-handed crackdown on the crypto industry; they also highlight the degree to which the former British colony enjoys policy exceptions in certain areas, such as finance.

In 2021, China outlawed all forms of crypto transactions, sending the country's web3 entrepreneurs fleeing to more web3-friendly jurisdictions like Singapore. With Hong Kong extending a welcoming hand to digital assets, many Chinese founders in self-exile are weighing the option of setting up in the city. Companies from the West are also evaluating Hong Kong as a potential outpost for their Asia expansion.

At the weeklong Hong Kong web3 festival, TechCrunch talked to a dozen participants 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 spawn a new wave of crypto innovation. They feel reassured that they can now operate as a legitimate business on Chinese soil and are quick to tap the government's 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 doesn't historically have a vibrant tech ecosystem and is too expensive for most scrappy startups, so the types of crypto businesses it attracts will likely be those serving and interfacing with traditional finance, they reckon.

The East rises

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

"The tightening of regulation in the U.S. after the FTX implosion has a few consequences. In the past, several American banks played the key role of linking the traditional and crypto worlds, but that link is now broken, which presents a great opportunity for Hong Kong to step up," said Mao, who is amicably known as "Discus Fish" in the crypto community.

"Hong Kong has always been at the intersection of the East and West and played the important role as the bridge to enter China," observed Lily King, chief operating officer at 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 like FTX and Bitmex to set up shops there. Following China's crypto clampdown, FTX moved to the Bahamas for its friendlier and clearer regulatory stance toward the new asset class.

Hong Kong is regaining some attention from the West. Stephen Cheung, president at decentralized social network, flew all the way from the U.S. 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. Nonetheless, Cheung believed that if American crypto firms are going to leave the country, "they will stay within the western hemisphere."

"Hong Kong has the possibility [of attracting Western firms] only because the U.S. is currently openly hostile towards web3 companies," he said, adding that the city will be more appealing to other Asia-based companies before it will have any significant influence on the West.

Indeed, Hong Kong is increasingly on the radar of crypto businesses in Singapore, many of which had come from China after the country's crackdown on crypto. Now the tide is turning.

"After FTX's implosion, the Singapore government has grown more cautious towards 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 that is based in Singapore but recently set up an office in Hong Kong.

Confidence booster

For the most part, people are praising the Hong Kong government for providing more regulatory clarity on the crypto industry. But they are interpreting Hong Kong's open arms differently. Some view the move as a sudden shift in the government's attitude, while others see it as a reflection of the city's policy 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, set up in Hong Kong back in 2017 and has kept its office there since. "What we have seen [in Hong Kong] over the years is a relatively consistent government direction and sustainable policy," said Chao Deng, the firm's CEO. "The latest move is more of an update of the licensing regime."

Conflux, a Layer 1 blockchain that claims to be the only crypto company allowed to operate in China since the industry crackdown, was also put at ease after meeting various Hong Kong government delegates during the web3 festival.

"Hong Kong is showing a tremendous amount of support for web3 development," said Zhang Yuanjie, co-founder at Conflux. "From legislators and InvestHK [the city's department of foreign direct investment] to its financial secretary and monetary authority, everyone is serious about supporting the crypto industry."

Even though Hong Kong's new web3 regulation seems more favorable towards transaction-focused crypto services, there's 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 might start integrating crypto-related products, we can play the role of helping to onboard them," he said.

China's Big Tech is riding Hong Kong's crypto wave, too. Alibaba and Tencent were both present at the web3 festival with representatives from their cloud computing units. Like AWS, they want to get a headstart and be the decentralized world's go-to cloud provider. Even if the nascent industry won't likely generate any meaningful revenue anytime soon, the tech giants evidently don't want to miss out on an industry that keeps luring capital and talent from traditional industries.

Wait and see

The web3 festival, with its teeming conference room and lavish boat parties, appears to be a euphoric celebration of the city's new crypto regime. But not all attendees are hot-headed. One investor from a prominent China-focused venture capital firm, who declined to be named, said he wasn't looking to source deals at the event because "it's not where the real technical 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 conclusion on the city's level of crypto-friendliness.

Those who tend to be the 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 for crypto, but it's more about looking for the next investable assets. Right now, the financial markets are slowing and they can't find any other alternative assets," said Lin. Prior to running the DeFi protocol, she worked in the global markets division at Deutsche Bank, managed overseas payments solutions at Ant Group and was a founding partner of major crypto lender Matrixport.

"Crypto is very much close to what they've been doing in finance, unlike AI or biotech, which is something remote for them. I think the positive signal from the government also boosts their confidence," she said.

It comes as no surprise that Hong Kong is vouching for a fledgling industry that plays to its strength. In recent years, the city has seen an exodus of multinational corporations and local talent as it undergoes a string of political events.

"Hong Kong has hit a big bottleneck in traditional industries like finance and real estate, so it's in dire need of young talent and new blood to revitalize its economy," said King. "Given the foundation it laid for the finance sector, focusing on digital assets is its best and only option going forward."