Hong Kong, which ranks number three among 190 economies for ease of doing business, has been leading the narrative in Asia around the blockchain-based evolution of the internet, or Web3, since the end of last year when the city announced a raft of initiatives to attract digital asset businesses, including cryptocurrency platforms.

While those plans include strict regulations to prevent a repeat of the multibillion dollar collapses of the Terra-Luna cryptocurrency project and FTX exchange last year, companies ranging from non-fungible token developers to trading platforms and metaverse builders seem to like what they see in the Hong Kong strategy.

Cryptocurrency trading platforms like OKX and Bitget have applied for operation licenses in Hong Kong, while cryptocurrency data provider Kaiko and cryptocurrency exchange Huobi said they are moving their Asia headquarters to Hong Kong from Singapore.

“Hong Kong will more than likely become not just Asia’s cryptocurrency hub, but the de facto cryptocurrency hub globally,” Vincent Chok, chief executive officer of Hong Kong-based consultancy First Digital Trust, told Forkast. “The US is in a holding pattern with its regulation paralysis, and Dubai has ambitions to become a cryptocurrency hub, but in terms of innovation, Hong Kong still leads.”

Gracy Chen, managing director of Seychelles-based cryptocurrency exchange Bitget, agreed: “The development of Web3 in Hong Kong is [due to] right timing, right place and right people.”

But other cities and countries in Asia want a piece of the action, with Singapore, Japan, South Korea as well as Dubai all positioning themselves to be a part of this new digital asset economy. And the stakes are high.

According to Statista, revenue in the digital assets market is expected to grow at an annual rate of 16.1 per cent from 2023 to exceed US$102 billion by 2027 with almost a billion users tapping in. In Deloitte’s 2021 blockchain report found that almost 80 per cent of respondents in its global survey said digital assets will be important to their businesses. The survey covered 1,280 finance executives in 10 jurisdictions.

Hong Kong is drawing up new rules of the road for the digital asset industry at a time when US regulators have come under criticism by the same industry for slapping fines and filing lawsuits on cryptocurrency exchanges.

The argument from the trading platforms is the US is failing to set clear regulations for how the industry should operate, yet punishing them anyway.

The US regulator, the Securities and Exchange Commission (SEC), in February fined US cryptocurrency exchange Kraken and shut its cryptocurrency staking programme. In April, the SEC charged Seattle-based cryptocurrency platform Bittrex with operating an unregistered exchange.

Coinbase, the publicly listed and largest cryptocurrency exchange in the US, sued the SEC in April and sought clearer cryptocurrency regulations. In March, the SEC had issued a so-called Wells notice to Coinbase and said it was considering legal action against the exchange over its cryptocurrency staking services and other products.

“The US regulatory framework for cryptocurrency exchanges is complex and evolving, with different rules and requirements at the federal and state levels,” said Bitget’s Chen. “Wyoming, Colorado, and Ohio, have introduced cryptocurrency-friendly laws as they want to attract the industry. Others, like New York and Washington, have strict cryptocurrency requirements.”

Binance, the world’s largest cryptocurrency exchange, and founder Zhao Changpeng were sued by the US Commodity Futures Trading Commission (CFTC) in March for allegedly violating derivative rules. Binance has said it is “very difficult” to do business in the US.

On May 15, Binance said it would pull out of Canada, citing new guidance related to stablecoins and investor limits that make the Canada market no longer tenable.

“We have seen US regulatory agencies aggressively handling their relationships with cryptocurrency firms, even going as far as outright suing them. This contrasted with Europe or the Middle East where governments have been building friendlier environments for some time now,” Denys Peleshok, head of Asia at London-based financial trading firm CPT Markets, told Forkast.

“The initiatives taken by Hong Kong could help nurture a stronger local cryptocurrency industry and help attract firms from other countries and from China in particular,” Peleshok added.

Still, Singapore is also regarded as one of the world’s most business-friendly environments and that includes digital asset businesses, with a Singapore twist.

While the city state allows cryptocurrency trading platforms to operate under exemption while applying for licenses, the Monetary Authority of Singapore (MAS), the central bank, has said becoming a leading technology-driven financial centre in Asia does not need to include cryptocurrencies.

“Public and media attention has tended to focus on cryptocurrencies. But cryptocurrencies and cryptocurrency exchanges are just one part of the entire digital asset ecosystem,” MAS told Forkast last month.

“Our aim is to develop an innovative and responsible digital asset ecosystem,” MAS said, adding that tokenisation and the distributed ledger technology that underpins blockchain are key areas of focus.

While these cities and countries in Asia are welcoming cryptocurrency platforms, India is not one of them. The world’s most populous country imposes a 30-per cent flat tax on all cryptocurrency income, a 1-per cent tax deducted at source on all cryptocurrency trades above 10,000 Indian rupees (US$120), and has drawn up penalties that can include jail time.

As a result, about US$3.8 billion in digital assets may have fled India between February and October 2022, according to Esya Centre, a technology policy think tank in India.

“If other countries are restricting and expelling companies, and if Hong Kong can accept these companies conditionally, then this will be a favourable factor for the development of Web3 in Hong Kong,” David Li, Chairman and CEO of Singapore-based Web3 development company GreaterHeat told Forkast.