Hong Kong is intensifying its efforts to attract cryptocurrency companies, and recent crackdowns by US regulators have given the city an opportunity to woo firms back. Once home to several high-profile companies including Crypto.com, BitMEX, and now-bankrupt FTX, Hong Kong lost out to Singapore due to competition and concerns over China’s strict approach to cryptocurrency.
Hong Kong Emerges Safe Haven
However, the city is now looking to regain its footing in the sector, as US regulators crack down on cryptocurrency products and services, target crypto-friendly banks, and sue exchanges including Binance Holdings, the operator of the world’s largest crypto exchange. Additionally, prosecutors have accused FTX founder Sam Bankman-Fried, who was based in Hong Kong at one point, of conspiring to bribe Chinese government officials in their latest indictment.
This crackdown by US regulators is leading many companies in the cryptocurrency industry to look towards Hong Kong, where the Securities and Futures Commission proposed a new licensing framework in February. The framework is focused on investor protection and aims to prevent a recurrence of the problems that brought down FTX, as well as other fraudulent behavior.
Growing interests in Hong Kong
According to official figures, more than 20 crypto and blockchain companies from mainland China, Europe, Canada, and Singapore have told the government they are planning to establish a presence in Hong Kong, while over 80 firms have expressed interest in doing so. This interest is partly due to Hong Kong’s access to Chinese institutional investors in the city, who may be warming to crypto.
One such company is Bybit, a cryptocurrency exchange based in Dubai, which is working to build its core Asian operations in Hong Kong. Bybit plans to put part of its research and development as well as marketing teams in the city and is planning to apply for a license in Hong Kong under proposed rules coming into effect in June.
However, other companies are questioning how much profit an operation in Hong Kong can generate, as well as how much it will cost to obtain and maintain licenses. Some view the city’s proposed rules for centralized exchanges and retail trading as too conservative, as they will be restricted to highly liquid and well-known tokens such as bitcoin and ether. Additionally, there are concerns that exchanges may only be able to serve local citizens, which make up a small market.
Increasing Web3 Investments
Despite these concerns, some companies are already making the move to Hong Kong. Digital assets wealth manager Metalpha, whose clients include crypto mining companies and Chinese family offices based outside the mainland, chose Hong Kong as its home after the city unveiled plans to develop the industry late last year. LD Capital, a crypto investment fund founded in Shanghai and now based in Singapore, is also preparing to move its headquarters to Hong Kong this year.
Hong Kong-based New Huo Asset Management has had discussions with about 200 investors in Asia in the last three months, who now see investments in Web3 companies as a longer-term endeavor. Vivien Wong, general manager of New Huo Asset Management, said, “What’s shocking is that the international branches of some Chinese state-owned enterprises have said they are interested in crypto venture capital.”
While some companies are bullish on Hong Kong’s potential as a cryptocurrency hub, others are concerned that the city’s current licensing framework puts custodians at a disadvantage. The custody of assets should be “as segregated, as independent as possible,” which can minimize risks to customer funds if exchanges go bankrupt, said Alessio Quaglini, chief executive of digital assets custody provider Hex Trust. Hong Kong’s current licensing framework, which departs from traditional finance principles, fails to address this important issue, he added.