Hong Kong has too many smart people, there are no more “leeks” in the currency circle.

Hong Kong has so many intelligent individuals that there is a scarcity of uninformed people in the financial industry.

Author: Luo Fei, Tencent News “Qian Wang”

It’s only been 2 months, and the craze of the cryptocurrency circle is gradually receding in Hong Kong.

“My team and I have decided to place the core technical team outside of Hong Kong, leaving only a few marketing personnel here,” said the founder of a Web3 product to Tencent News “Qian Wang”. He had just returned to Hong Kong at the end of last year after leaving because of the epidemic.

After the official release of the “Policy Statement on the Development of Virtual Assets in Hong Kong” at the end of October last year, a series of Web3-related activities were held in Hong Kong after clearance in April this year, preparing to actively participate in and embrace virtual asset business. Web3 is a concept of global network development, related to decentralized, encrypted currencies, and non-fungible tokens (NFTs) based on blockchain, representing the next stage of the Internet and its ecology.

• NFT’s Darkest Hour: Can These 24 Positive Developments Boost the Market?
• Azuki “Bringing Collapse” NFT Market, taking stock of bad debt caused by NFT lending protocols.
• An Explanation of Bitcoin L2 Stacks: Creating Smart Contracts on Bitcoin

The peak occurred in the third week of April. That week, four large-scale events related to Web3, including the Web3 Carnival, were held at the Hong Kong Convention and Exhibition Centre in Wan Chai. Hotels in Central, Wan Chai, and Causeway Bay were almost “occupied” by the global cryptocurrency circle.

Even the Hong Kong Island Shangri-La Hotel, which has outdated facilities, had a price of HK$4000 per night, doubling its usual price of HK$2000, and could not even book a room. The pedestrian bridge connecting the Wan Chai MTR station to the convention centre, which had been empty for four years, was crowded for the first time.

Even Sun Yuchen, the “harvesting master” of the cryptocurrency circle who had not appeared in China for many years, appeared at the Web3 event in Causeway Bay. Most of the people Tencent News “Qian Wang” saw at the event talked about “Long Hong Kong” (buying more Hong Kong) and even some people known as “fanatical elements” of the cryptocurrency circle directly equated this with “Long Crypto” (buying more cryptocurrency).

These “fanatical elements” are mostly concentrated in the lowest level of the cryptocurrency circle, namely, the application products of the Web3 in the cryptocurrency circle, such as DeFi and GameFi. They are also the most active group in the “harvesting” of the cryptocurrency circle. Tencent News “Qian Wang” met them on different occasions in Hong Kong and found that they were still studying how to quickly find exchanges to go online with their products, sit on the market and control the market in Hong Kong. They all have investors, product development teams, and operators.

Among those who are relatively calm are those who originally transferred from Hong Kong’s traditional financial industry to the digital asset industry, and they are more focused on trading and products in the digital asset secondary market. They are also the group that most firmly supports and recognizes the Hong Kong government’s regulatory route in the digital asset industry.

Two months later, Tencent News “Qian Wang” found that some of those enthusiastic “cutting leek” communities have gradually left and continued their “digital nomad” next stop-Dubai or Malaysia, the Philippines, etc.; others have retreated to Shenzhen and continue to wait for more detailed regulations in Hong Kong’s supervision. Of course, some people are very determined to choose to stay in Hong Kong and work hard to apply for relevant licenses in Hong Kong as required.

Regardless of their respective choices, the consensus is unanimous: Hong Kong is a “sickle”, and there are no leeks in the digital asset industry here. Only smarter people can survive in this industry.

June 1st was supposed to be a big day for Hong Kong’s digital asset industry, when the Hong Kong regulatory authorities officially opened the door for virtual asset exchange license applications. However, this “historic moment” has hardly caused any waves in Central and Cyberport in Hong Kong as expected before.

According to incomplete statistics from Tencent News “Qian Wang”, the institutions that have announced plans to submit virtual licenses in Hong Kong include but are not limited to: HarshKey Pro under the Xiāo Fēng, the founder of Wanxiang Group, OKX under Xu Mingxing, who left the mainland during the epidemic and has been living in Singapore for a long time, BitgetX, Gate, and Greentown Group.

In accordance with the cryptocurrency license application requirements announced by the Hong Kong Securities and Futures Commission on May 25th, companies that originally had physical operations in Hong Kong before June 1st can have a one-year transition period to prepare for license applications. This allows companies such as OKX, which only have trading business outside of Hong Kong, to land in Hong Kong and register physical companies before June 1st.

However, for new players, the threshold for applying for an exchange license in Hong Kong has become much higher-this is also the main reason why the government did not stimulate the market when it opened the door to allow license applications.

According to Hong Kong regulatory requirements, institutions intending to apply for an exchange license must build their own trading, security, and custody systems before submitting their application. Multiple sources familiar with the matter told Tencent News “Qian Wang” that the custody of the currency circle itself is very demanding in terms of technology and security, and now Hong Kong regulators require applicants for licenses to build these systems themselves, which invisibly increases the threshold.

A person in charge of the trading license application currently underway told Tencent News “Qian Wang” that these systems require a lot of technical personnel, and Hong Kong itself does not have an IT dividend, so it is difficult to recruit people. In Hong Kong, hiring an IT person for HKD 30,000 is far less useful than hiring an engineer for RMB 10,000 in Shenzhen. Their team plans to put IT-related backends in the Mainland in the future to save costs.

For similar reasons, the founder of the aforementioned cryptocurrency application product ultimately decided to place the core technology team outside of Hong Kong. In his view, the cost of recruiting IT for start-ups in Hong Kong is too high.

Two people who are trying to apply for an exchange license told Tencent News “Qian Wang” that they expect the cost of submitting a license application to be at least HKD 100 million, of which, apart from the cost of management personnel, the “big head” falls on the technical system. And this is just a ticket to apply for an exchange license in Hong Kong.

What worries them even more is that even after the system is built, there is a risk that the license will not be approved, or even the possibility that the license will be granted but there will be no business.

These people believe that Hong Kong regulators should introduce some powerful custody companies, such as Coinbase and Fireblocks, which are already very mature in providing custody services, for exchanges to dock with.

Tencent News “Qian Wang” learned that a team that left Hong Kong has settled in Malaysia last month. For a monthly rent of RMB 60,000, they can rent a large flat in the city center, and there are very cheap IT technical personnel locally. These evacuated teams believe that doing currency circle projects in Southeast Asia is even more advantageous than in Hong Kong.

Tencent News “Qian Wang” learned from different sources that OSL, one of the existing compliant exchanges in Hong Kong, has decided to withdraw and has been looking for buyers to acquire it since the Spring Festival this year, but so far no one has taken over. As of press time, the news has not yet received OSL’s comment.

The exchange belongs to BC Technology Group, a Hong Kong-listed company. According to the company’s 2022 financial report, the losses have continued to increase, with OSL’s cryptocurrency revenue in 2022 only about one-third of the previous year’s HKD 270 million, at HKD 71.48 million.

One source told Tencent News “Qian Wang” that the company had previously been suspected of speculation, with its stock price having surged more than 60% due to the inclusion of blockchain concepts. However, today, the shell of the Hong Kong stock market is worthless, and the main assets of listed companies are exchanges. Public information shows that the shell company was once owned by Hong Kong shell king Gao Zhenshun, who still holds an executive director position in the listed company.

Regulators embrace, but cryptocurrency companies still struggle to open accounts

For start-ups engaged in cryptocurrency projects in Hong Kong, account opening has become the first hurdle that needs to be urgently addressed

Several practitioners told Tencent News “Qian Wang” that although regulators have been very active and diligent, the effect has not been as expected. In the past few months, they and their peers have found it difficult to successfully open corporate accounts in Hong Kong.

Compared with the caution and silence of market participants, the busiest people in this round of virtual asset frenzy in Hong Kong are the staff of Hong Kong regulatory agencies, mainly including the intermediary agency department and the information technology department of the Hong Kong Securities and Futures Commission, the former of which is in charge of licensing and intermediary supervision.

In addition, there is the Hong Kong Monetary Authority, which is now mainly responsible for Hong Kong’s stable currency and custody matters.

At present, except for the upstream part related to mining machines in the cryptocurrency ecosystem, the middle and lower reaches, such as funds, exchanges, and decentralized Web3 product terminals, all have the possibility of landing in Hong Kong.

An industry insider who deals with the above-mentioned regulatory departments in Hong Kong on a daily basis told Tencent News “Qian Wang” that, like other regions, the easiest area for Hong Kong regulatory departments to regulate now is the transaction link, including exchanges and funds.

“Exchanges are like casinos. If you manage the casinos well, the cryptocurrency ecosystem behind them will naturally become healthy,” he said.

Tencent News “Qianwang” learned from different sources that in the past few months, most of the head cryptocurrency companies with Chinese backgrounds have been looking for people to connect with these regulatory agencies in Hong Kong, including the wallet company Cobo under the cryptocurrency giant “Shen Yu” Mao Shihang and Zhao Changpeng’s Binance Group.

This has also made some people who have worked in regulatory agencies become the hot cakes in Central Hong Kong for a while. Many people in the cryptocurrency industry were far from traditional finance and even farther from Hong Kong’s regulation before this.

A person who has worked in traditional finance in Hong Kong for many years and has turned to the cryptocurrency industry told Tencent News “Qianwang” that the early Chinese cryptocurrency circle was mainly composed of grassroots and engineers born as miners, and there were not many people who really understood finance. The essence of the cryptocurrency circle is actually finance.

Different sources told Tencent News “Qianwang” that the regulatory agencies led by the Hong Kong Securities and Futures Commission and the Hong Kong Monetary Authority have changed their image of “difficult to deal with” in the early years and have become more grounded, and they are easier to contact and communicate with.

Tencent News “Qianwang” learned that people related to virtual assets and finance in Hong Kong, including the Secretary for Financial Affairs and Treasury of the Hong Kong Special Administrative Region Government, Mr. Xu Zhengyu, actively invited to meet during the epidemic.

Now, in addition to the virtual currency trading fund license and exchange license procedures that have been launched on schedule, Tencent News “Qianwang” has learned that in the near future, they will also launch matters related to stablecoin licenses, and even explore derivatives of diversified virtual currencies, such as spot Bitcoin ETFs.

However, a cryptocurrency entrepreneur in Hong Kong told Tencent News “Qianwang” that with the support of relevant government departments, he registered a company to land at Hong Kong Science and Technology Park, but still could not open a bank account for the company to transfer money. According to his recollection, the Hong Kong Trade Development Council and the Hong Kong Investment Promotion Agency were actively inviting him to come to Hong Kong.

Multiple practitioners have stated that it is not easy to open a corporate account for any business related to the cryptocurrency circle.

According to reports, staff from the Hong Kong Monetary Authority (HKMA) had previously been very proactive in providing a list of “blockchain-friendly banks in Hong Kong” to companies that had already registered for cryptocurrency-related businesses in Hong Kong. Tencent News “Qian Wang” has seen a list of more than 10 banks, including DBS Bank. However, banks still refuse to open accounts for these companies.

Tencent News “Qian Wang” learned that in the third week of June, personnel from the HKMA and other related parties have been communicating with institutions including HSBC, hoping to accelerate the account opening process for cryptocurrency-related companies. However, it is not yet known which bank has changed or adjusted its account opening strategy.

Tencent News “Qian Wang” also learned that some people familiar with banking procedures have even started intermediary businesses, which means helping to package company content, avoiding descriptions related to cryptocurrencies and successfully opening bank accounts. The intermediaries charge fees ranging from HKD 20,000 to HKD 40,000. Insiders revealed that the bank that the intermediary cooperated with is HSBC. As of the time of publication, Tencent News “Qian Wang” has not been able to contact HSBC for comment.

A cryptocurrency person who has also failed to open an account told Tencent News “Qian Wang” that this is because the government departments and enterprises in Hong Kong are separated from each other. For example, the Investment Promotion Bureau, which is responsible for investment promotion, is more concerned about how many companies have come to Hong Kong and landed in a year. However, banks that are responsible for account opening only care about their own risk control and are supervised by the HKMA.

Hong Kong’s cryptocurrency circle has no “leeks”: too many smart people

Hong Kong is not short of rich tycoons. Therefore, many people still hope to seize the opportunity in Hong Kong this round and do business related to cryptocurrencies around tycoons, such as funds or derivatives.

Ye Yizhou is a successful case. He is the head of Hong Kong’s only compliant hedge fund in the cryptocurrency circle-Forward Reason Asset Management Co., Ltd.

The initial management scale of the fund in 2022 exceeded US$100 million. It obtained a 100% virtual currency trading license from the Hong Kong Securities Regulatory Commission at the beginning of 2022 and was ranked third in the world’s cryptocurrency fund field net profit by Barclays in early 2022, with a net return rate of 9.2%-the industry generally loses 50%. Tencent News “Qian Wang” learned that Ye Yizhou’s fund distributed nearly HKD 70 million in dividends to LP (limited partners) at the end of 2022.

Unlike most cryptocurrency traders who are “grassroots”, Ye Yizhou is a “regular” trader who came from Wall Street. In 2014, Ye Yizhou chose to return to Hong Kong and joined a local stock hedge fund company. During this time, he began investing in Bitcoin early due to personal interest. He told Tencent News “Qianwang” that at the time, there was no clear regulation on Bitcoin trading in the market. He and his buddies started to get involved in large-scale Bitcoin secondary market trading in 2017. Later, he left the institution and started his own business, setting up Rational Capital Limited in Hong Kong.

After witnessing the traditional financial crisis in 2008 and the five cycles of the cryptocurrency industry in the past six years, Ye Yizhou told Tencent News “Qianwang” that Hong Kong is not suitable for all cryptocurrency industry people, and even not suitable for some people who want to enter the cryptocurrency industry from traditional finance for a “downward attack”. In his words, “you have to have the ability to withstand the blow to get in”, instead of recklessly following the blind stream.

There are many people with similar ideas as Ye Yizhou, and their backgrounds are similar to Ye Yizhou: they graduated from famous American schools, worked in traditional finance in Hong Kong for many years, and chose to take the regulatory route in Hong Kong. Their core goal is to find wealthy people in Hong Kong to raise funds and engage in cryptocurrency trading.

This group of “regular” traders have successively obtained fund licenses or are applying for exchange licenses. Compared with the gradual introduction of regulatory laws and regulations related to cryptocurrency trading, the Hong Kong government has not yet launched regulations on downstream Web3 products related to the cryptocurrency industry.

Web3 products are relatively the easiest place for the cryptocurrency industry to “cut leeks”. The biggest difference between these Web3 products and Web2 products is that they have added financial attributes to provide economic incentives to users. For example, the Web3 game product GameFi allows you to “play games and make money” at the same time. In this ecosystem, there are two types of currencies: cryptocurrency such as Bitcoin and non-fungible tokens (NFTs). Generally speaking, users can earn rewards NFTs by completing tasks in the game, and then transfer the NFTs out to trade them on exchanges and NFT markets to gain benefits.

Tencent News “Qianwang” learned that many Web3 products have locked in the fund pool of these two tokens from the beginning of the project, and even accurately to how long after the product goes online, they will “cut” and cash out – this is similar to the logic of operating listed companies. That is to control trading volume and fund pool. Later, the value of all tokens of the project instantly became 0. If players do not cash out before the project party leaves, it means they have been cut.

It looks more like a game of passing the buck. In the language of the currency circle, this is a “typical cut leeks”. The last and most successful “cut leeks” project in Web3 projects with a Chinese background in the currency circle was STEPN, a Gamefi game that claims to “make money by running”. In less than half a year, its market value once exceeded 1 billion US dollars, and its original users were among the first group from the mainland. According to Tencent News’ “Qianwang”, the team made hundreds of millions of dollars in half a year. As of the time of publication, the team has not been contacted for comment.

However, many people in the Hong Kong currency circle told Tencent News’ “Qianwang” that “there are no leeks in Hong Kong, only sickles”, and there is no soil for Web3 products to “cut leeks”. This is because the Hong Kong market is dominated by professional investors, and if you want to play a game of passing the buck, you need enough retail investors. Two people who have switched from traditional finance to the currency circle told Tencent News’ “Qianwang” that professional investors are all regular troops who have graduated from prestigious schools and have professional financial knowledge. Most of the time, they play the role of “sickle” rather than “leeks”.

“The most here are the rich, but they can’t cut the rich.” Someone summed up that because the rich have raised a group of professional investors.

This is also one of the reasons why most Web3 entrepreneurial teams who want to come to Hong Kong to make their dreams come true have chosen to leave Hong Kong in the past two months.

People come and go, and it is impossible to count the number of people who leave, but there are still many left. According to the latest speech by the Financial Secretary of Hong Kong, more than 150 Web3 companies have settled in the Cyberport incubation center for start-ups in Hong Kong in the past six months.

We will continue to update Blocking; if you have any questions or suggestions, please contact us!