Hong Kong is Embracing Web3; What You Need To Know

Hong Kong, long known as a global financial center, is increasingly embracing the world of cryptocurrency. With the apparent support of Beijing and a push to become a crypto hub, Hong Kong is opening up to the crypto space and seeking to attract companies in the sector. Here's what you need to know about Hong Kong's embrace of web3.

Hong Kong Rolls out the Red Carpet for Web3

Despite scandals and high-profile bankruptcies prompting other governments to distance themselves from the industry, Hong Kong is pulling out all the stops to court web3 companies to rebase in the city.

Hong Kong officials, including chief executive John Lee, are touting their support for the industry, and the city is scheduled to hold 100 crypto-related conferences and lavish parties throughout April.

In October 2022, the Hong Kong government first floated the idea of introducing its own bill to regulate crypto, followed by the Securities and Futures Commission's proposal for a crypto exchange regime in February 2023.

The regime will require market players to meet several prerequisites, including asset custody and regulatory compliance.

Besides releasing a proposal for a licensing regime for cryptocurrency exchanges in June, the regulator is also seeking views on whether to allow licensed platforms to serve retail investors.

According to Xiao Feng, chairman of Hong Kong crypto exchange HashKey, the Hong Kong government is serious about building an international virtual asset center.

HashKey, one of the two licensed cryptocurrency exchanges in Hong Kong, received its license in November 2022, with its competitor OSL being the other.

Amidst this, Hong Kong's virtual bank, ZA Bank, also plans to facilitate the conversion of crypto-to-fiat currency for participants in the city's developing crypto sector, according to CEO Ronald Iu.

ZA Bank will act as a settlement bank for clients who deposit digital coins to the trading platforms and want to withdraw Hong Kong and US dollars or Chinese yuan through licensed exchanges.

Currently, the bank plans to engage only with licensed digital asset exchanges and is conducting anti-money laundering (AML) checks in compliance with existing requirements.

Following a successful trial in a regulatory sandbox, ZA Bank offers online accounts to Web3 startups and other small and medium enterprises.

The bank's offering will attract more crypto companies to set up shop in the Asian financial center as Hong Kong is trying to position itself as a crypto-friendly alternative to other hubs like the US and Singapore.

Chinese Banks also Embrace Crypto Firms as New Clients

In a bid to strengthen its status as a digital assets hub, not only banks in Hong Kong but also the local branch of a major Chinese state-owned lender are getting warm to crypto companies as new clients. These banks have started providing deposit accounts for crypto firms, which can be used to manage their daily operations, such as paying salaries to employees.

Moreover, some banks offer crypto trade-settlement services, which other lenders have avoided due to the potential risks associated with such activities.

According to sources, Chinese banks such as the Bank of Communications, Bank of China, and Shanghai Pudong Development Bank have either begun offering services to crypto firms in Hong Kong or have made inquiries with them.

Despite China's ongoing crypto ban, a representative from a Chinese bank even visited a crypto firm's office to pitch banking services. The move is a sign of the maturing understanding of the crypto sector among traditional financial institutions.

Representatives from the China Liaison Office have also reportedly been attending Hong Kong crypto gatherings.

On another note, Hong Kong investors are launching ProDigital Future, a $100 million fund to finance early-stage Web3 companies oriented towards the regional market.

The fund has already completed its half-year fundraising period and has raised $30 million, with plans to raise the remaining $70 million by the end of 2023.

Led by Ben Ng from SAIF Partners and Curt Shi, a tech investor from China, the fund has attracted support from Sunwah Kingsway Capital Holdings and Golin International Group. Hong Kong investors and some family offices from China, Australia, and Singapore have also contributed.

US Regulation Pushing Crypto to Hong Kong in 2023

In contrast, the United States is engaging in what is described as Operation Choke Point 2.0, a coordinated effort to discourage banks from working with crypto firms under the guise of ensuring safety and stability.

Industry experts assert that the government's efforts to limit entry to the cryptocurrency industry have intensified this year.

The US's strict stance on crypto regulation could push the industry's "center of gravity" towards Hong Kong, according to Ambre Soubiran, CEO of institutional crypto market data provider Kaiko.

While the US has been a leading player in the crypto sector, its current regulation-by-enforcement approach has led to concerns that companies, developers, and investors may seek friendlier environments elsewhere, with Asian countries emerging as prime alternatives.

Soubiran suggested earlier this month that Hong Kong's more favorable crypto regulation will make it an attractive option in 2023 for those looking to operate in the crypto space.

Meanwhile, the Hong Kong government's plans to become a crypto hub by rolling out progressive regulation to support high-quality crypto and fintech firms has more than 80 virtual asset-related firms already expressing interest in setting up shop in Hong Kong, with 23 crypto firms indicating that they plan to establish their presence.

A joint meeting is scheduled to be held by the Hong Kong Monetary Authority and the SFA to assist crypto companies in establishing domestic banking partnerships.

Kaiko is among those looking to relocate its Asian-Pacific headquarters from Singapore to Hong Kong due to the city's friendly crypto stance.

Click here to learn about the crypto companies that can benefit from the current chaos.

A Positive Sign for the Crypto Industry

Hong Kong's increasing acceptance of web3 can be a positive sign for the industry for many reasons.

For starters, Hong Kong has a reputation as a significant financial hub, and its efforts to become a hub for digital assets could increase institutional investment and mainstream adoption of cryptocurrencies. This could potentially bring more stability and legitimacy to the industry.

Also, as China is cracking down on crypto activities on the mainland, Hong Kong's efforts to attract crypto companies could provide an alternative avenue for these businesses to operate and expand in the region.

The involvement of established financial institutions and state-owned Chinese banks could further increase confidence in the industry and attract more traditional investors.

While some in the industry remain skeptical of Hong Kong's promise of a stable regulatory regime on cryptocurrencies, at least ten companies with Chinese founders, including OKX, Bybit, and Huobi, have announced or are planning to announce their bid for licenses in Hong Kong.