Back in October 2022, the Hong Kong government formally announced its plan to promote the city as an international blockchain hub.
The announcement has caused a ripple effect across the industry, spurring both incumbents and newcomers alike to take advantage of new opportunities.
A New Frontier
Around the same time, Hong Kong’s Securities and Futures Commission (SFC) announced a regime for crypto futures ETFs, giving retail investors indirect access to digital assets trading.
Re-emphasizing the city’s desire to become a premier digital assets destination, the SFC announced proposed legislation requiring all centralized digital asset trading platforms to be licensed with a regulatory body, which would allow all types of investors, including retail investors, to participate.
Local Institutional Support
In early 2023, Hong Kong established the Web3 Institute to supplement its regulatory efforts in the space.
The aim is to gather Web3-related companies and professionals, improve Web3 technology and applications, and provide strong support for the construction of digital ecosystems in Hong Kong, the Greater Bay Area, and the world.
Importantly, the launch of the Web3 Institute has been met with full support from the Chinese government.
Although China had previously imposed a stringent ban on digital currencies in 2021, it has since appointed Li Feng, the CEO of China Mobile International, as the Institute’s honorary chairperson. This is seen as a positive sign towards China’s view on Hong Kong positioning itself as Asia’s digital assets hub, and is definitely a first step toward China re-opening the door to the industry.
Given our strong history and network in Hong Kong, Cadenza has reached out to the Web3 Institute and we are actively exploring potential avenues for collaboration.
One of the big motivations behind Hong Kong’s aggressive regulatory push is to regain its position as Asia’s premier financial hub.
In recent years, amidst China’s digital assets clampdown and rigorous COVID policies, many founders have fled and relocated to Singapore to set up their businesses.
Post-FTX, however, Singaporean regulators have become increasingly cautious, placing blanket bans across many different areas of the industry.
Thus, the establishment of institutions to support the industry’s development could serve as a catalyst for many Singaporean-based companies to reconsider Hong Kong.
Additionally, the Hong Kong Monetary Authority announced in mid-May 2023 that a trial run for a digital Hong Kong Dollar (e-HKD) is in the works. A timely move that is reflective of recent trends.
According to one report, ‘digital wallets will account for 40%‘ of the city’s online transaction value by 2025, overtaking credit cards.
Alongside other institutions that are playing a role in fostering Web3 adoption in the region, the e-HKD trial run will involve ‘around 16 handpicked banks and payment companies, including industry heavyweights HSBC and Standard Chartered, who will undertake tests involving six potential use cases for the digital asset.
Startup Opportunities
With a clear regulatory framework now in place, a new wave of companies have begun moving in.
For example, CNHC, an offshore Chinese-yuan pegged stablecoin project, raised $10M of funding from KuCoin Ventures, Circle Ventures and IDG Capital in 2022.
Founded in 2021, CNHC is registered in the Cayman Islands as a cross-border payment service provider; however with the latest announcement, they are now in the process of moving their headquarters to Hong Kong, which itself has historically been a large offshore financial center.
Other established players are also looking to tap into the space – in December of 2022, the Tron blockchain launched TCNH, a stablecoin pegged to the Offshore Chinese Yuan.
With both the Hong Kong and Chinese government looking for ways to push digital currency adoption in their jurisdictions, companies can benefit by building solutions that complement these political agendas with increasingly visible regulatory guidelines.
Currently, only two local exchanges – HashKey Group and OSL – have received authorization to operate in Hong Kong.
However, other internationally-based exchanges such as OKX have expressed their desire to move into the region as well, although such transitions may prove tedious.
Take the case of digital assets exchange, Bitget, who announced that Hong Kong users will be required to move to www.BitgetX.hk and ‘close any open perpetual contract or margin trading positions and withdraw their virtual assets from Savings products at Bitget.com’.
Such not-so-minor inconveniences present an opportunity for new exchange players to enter the space and provide a product that is both compliant and user-friendly.
Take Conflux Network, a Layer 1 protocol that claims to be the only regulatory compliant, public and permissionless blockchain in China, who announced that it has partnered with China Telecom – the second largest wireless carrier in China with an estimated 390MM subscribers – to build blockchain-based SIM cards.
These BSIM cards will allow users to ‘store digital assets safely, transfer their digital assets conveniently, and display their assets in a variety of applications’.
In May 2023, Conflux unveiled their BSIM card, as well as announcing that they will be piloting the product in Hong Kong before introducing it to Mainland China and overseas. This shows that companies have identified an existing market large enough in Hong Kong to test their products, hinting at the potential of a startup ecosystem that is yet to be realized.
This point is driven home by the fact that in recent years, Hong Kong has become home to a budding blockchain startup ecosystem.
There are presently over 800 FinTech-related companies in the city, with blockchain representing the largest FinTech segment (24%).
Venture Ecosystem
According to Pitchbook, there are approximately 294 active blockchain-focused investment funds with at least one location in Hong Kong, highlighting the appetite for investments in the region.
With the new regulations in place, we expect that this number will continue to grow, as investors feel increasingly comfortable deploying capital in the space.
Looking Ahead
Last year, the Hong Kong SFC concluded its consultation on the regulation of digital asset trading platforms, these are the key takeaways:
- In order for a token to be eligible for retail investor trading, ‘tokens must [at the minimum] be eligible large-cap virtual assets included in at least two acceptable indices issued by two independent index providers’.
- To provide clients with sufficient liquidity on trading platforms, the SFC will allow ‘market making activities to be conducted by third-party market makers’.
- The aforementioned stablecoin regulations have since become clearer; with new legislation addressing stablecoins likely to be tabled in the near future.
- Currently, trading platforms are not allowed to offer services such as earning, deposit-taking, lending, and borrowing.
Additionally, the SFC has said that they have not approved any virtual asset trading platforms to provide their services to retail investors. However, there now exists a very concrete and actionable framework for companies to follow.
There have been mixed reactions from the community regarding these new rules. Some think that they are too restrictive, and that they are not enough to enact any sort of significant change in the ecosystem. However, others welcome the change, stating that clear cut boundaries are a positive sign showing the city is ready to properly embrace adoption of digital assets.
Ultimately, the regulatory landscape for digital assets and Web3 is shifting everyday, and there remains a lot to be seen on how Hong Kong’s Web3 ecosystem takes shape.
For now, the new regulatory frameworks supported by institutional involvement will definitely propel Hong Kong’s position as a digital assets destination.
At Cadenza we plan to actively monitor deal flow for new and exciting investment opportunities, and build out a robust investor network in the region to stay updated on the latest activities.
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If you would like more information on our thesis surrounding Digital Assets or other transformative technologies, please email info@cadenza.vc
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