Hong Kong’s cryptocurrency entrepreneurs and investors are looking to the government to take more measures to support the industry amid growing concerns about the city’s diminishing status as a crypto hub resulting from regulatory uncertainty.

“There was a point in time where Hong Kong had a leading position in cryptocurrency and business related to crypto,” said Padraig Walsh, a partner at the Hong Kong law firm Tanner De Witt. “That isn’t the case any more, and I think regulation has been a key part of the reasons why.”

While Hong Kong is the birthplace of some of the world’s most well-known cryptocurrency and non-fungible token (NFT) companies, the local community has grown increasingly frustrated over the past year as companies unsure about the city’s regulatory stance on digital assets leave for cities that appear to be more friendly, such as Singapore and Dubai.

Token2049, a major industry conference that was held in Hong Kong before the pandemic, will take place in Singapore next week for the first time.

“A lot of the guys were in Hong Kong, but for one reason or another they have moved to different places,” said Yang He, co-founder and CEO of Aspen Digital, a Hong Kong-based crypto asset management firm. “Obviously it’s a shifting world and crypto is very fluid, but part of that is a lack of clarity and a lack of the speed of things.”

Through an amendment to the city’s anti-money-laundering law, Hong Kong is moving forward with a new regulatory framework that requires mandatory licensing for cryptocurrency trading platforms. This would require companies to only offer such services to professional investors, meaning individuals with a portfolio of at least HK$8 million (US$1 million).

At a legislative council meeting addressing the amendment in July, May Chan, deputy secretary for Hong Kong’s Financial Services and the Treasury Bureau, said that the administration was “mindful of the need to maintain a balance between regulation and healthy development” of the virtual asset market. But given that virtual assets are a “relatively novel investment product involving high risks”, limiting the services to professional investors is “a prudent measure”.

“Looking at virtual asset exchanges, I don’t think anyone would say it is wrong to have proper policies around anti-money-laundering and Know Your Customer, but I don’t think it necessarily follows logically that virtual asset exchanges can provide services to professional investors only,” Tanner De Witt’s Walsh said. “I think that sets a tone in respect of regulatory standards that have disheartened people in the crypto community.”

Lucy Gazmararian, founder and managing partner of Hong Kong-based Token Bay Capital, echoed that sentiment: “If you’re too heavy-handed too early-on, the ecosystem will move to other jurisdictions that are more supportive of emerging technologies, and that’s exactly what we’ve seen.”

“Messaging is critically important, and intention is the core piece that’s missing,” she added. “We need to position Hong Kong as a Web3 hub and give confidence to the industry so they choose Hong Kong as their base, create jobs and invest here over the long-term.”

Web3 is a loosely defined vision for a next-generation World Wide Web that is decentralised through the use of blockchain and similar technologies. However, the term is most commonly used today in relation to applications involving cryptocurrencies and NFTs.

Industry players are now fighting to restore Hong Kong’s status as a crypto hub, and some believe there are reasons to be optimistic, including the loosening of Covid-19 controls that have been in place for two years. The government recently announced the end of mandatory hotel quarantines for incoming travellers starting Monday, with three days of home monitoring still required.

“Removal of quarantine restrictions will definitely boost sentiment in the immediate term,” said Bowie Lau, a Hong Kong-based partner at venture capital firm True Global Ventures and founder of MaGESpire, the organiser of StartmeupHK’s metaverse- and blockchain-focused Game On! Summit.

Bowie Lau (left) discussed Web3 investing with Marshal Gu, vice-president of Principal Finance at Macquarie on September 8, 2022.

“One of my main objectives [for the summit] was to put the spotlight back on Hong Kong as the place to be for innovators, entrepreneurs and hardcore professionals looking to shape the future of Web3 and crypto,” she said.

“While the stringent requirements and regulations did slow down the development of crypto market in general,” she added, “I believe constant and open dialogue between regulators and digital asset service providers on the lessons learnt, along with a gradual plan for opening-up of the space, would definitely help Hong Kong restore its status as a leading crypto hub.”

Interest in cryptocurrencies remains high in the city. Earlier this week, some Hong Kong-based Web3 companies including Animoca Brands, Aspen Digital and blockchain venture firm Everest Ventures Group (EVG) jointly organised an event that was aimed at “celebrating the invention of ERC-721”, a widely used standard for NFTs, and it drew some 300 attendants with more than 100 people on the wait-list, according to Jerome Wong, a partner and co-founder at EVG.

“The event exceeded our expectations in terms of attendance and enthusiasm,” said Aspen Digital’s He. “Hong Kong came out in force, showing the energy and passion for which it is known, reinforcing its place as one of the world’s top financial and cultural hubs.”

The city also has one of the highest concentrations of crypto ATMs in the world, according to Forex Suggest, but adoption is low relative to its income level. It ranked 46th on Chainalysis’ latest Crypto Adoption Index.

For Gazmararian, though, it is not too late for Hong Kong to correct course. Hong Kong “has yet to show its cards” in terms of crypto regulations, and the “one country, two systems” framework means the city is “in a very strong position between China and the rest of the world to play a critical role for Web3 integration”, she said.

“I’m optimistic that Hong Kong will listen and come out with something exciting,” she added. “And if they want help from the industry, what’s left of it, then they should start reaching out in a far more targeted way.”