The cryptocurrency industry is not lacking in intelligent people, and there are no longer any 'leeks' in Hong Kong.

Original Title: " Hong Kong is too smart, there are no more "leeks" in the cryptocurrency industry"

Source: Luo Fei, Tencent Technology

Only two months later, the cryptocurrency craze has gradually subsided in Hong Kong.

"My team and I have decided to relocate our 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 due to the pandemic.

After the official release of the "Policy Statement on the Development of Virtual Assets in Hong Kong" in late October last year, a series of Web3-related events were held in China's Hong Kong in April this year, ready to actively engage 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 ecosystem.

The peak occurred in the third week of April. During that week, four large-scale events, including the Web3 Carnival, were held at the Hong Kong Convention and Exhibition Centre in Wan Chai. Hotels in areas such as Central, Wan Chai, and Causeway Bay were almost entirely occupied by the global cryptocurrency community.

At that time, even the outdated facilities of the Hong Kong Island Shangri-La Hotel saw its nightly rate double from the usual 2000 Hong Kong dollars to 4000 Hong Kong dollars, and rooms were fully booked. Pedestrian bridges connecting the Wan Chai MTR station to the Convention and Exhibition Center, which had been deserted for four years, saw crowded scenes for the first time.

Even the "master of cutting leeks in the currency circle" Sun Yuchen, who has 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 some people known as "fanatics" in the currency circle directly equated this with "Long Crypto" (buying more cryptocurrency).

These "fanatics" are more concentrated in the lowest level of the currency circle, that is, the application products of Web3 in the currency circle, such as DeFi, GameFi, etc. They are also the most active group of people in the currency circle who "cut leeks". Tencent News "Qianwang" met them at different occasions in Hong Kong and found that they were still studying how to quickly find exchanges to list products, sit on the market, and control the market in Hong Kong. They all have investors, product development teams, and traders.

Relatively calm are those who originally transitioned from Hong Kong's traditional financial industry to the cryptocurrency industry. These individuals are more focused on trading and products in the secondary market of the cryptocurrency industry. They are also the most staunch supporters and endorsers of the Hong Kong government's regulatory approach in the cryptocurrency industry.

Two months have passed, and Tencent News' "Qian Wang" found that some of the fanatical "harvesting leeks" groups have gradually left, continuing their "digital nomad" journey to Dubai, Malaysia, the Philippines, and other places. Others have retreated to Shenzhen, waiting for more detailed regulatory provisions in Hong Kong. Of course, some are very determined to stay in Hong Kong and work hard to apply for relevant licenses in Hong Kong as required.

Regardless of their individual choices, the consensus is clear: Hong Kong is a "scythe" in the cryptocurrency industry, with no "leeks" to be found. The crypto community here is only suitable for the more intelligent to survive.

01 A ticket worth over HKD 100 million? Dream Maker withdraws

June 1st was supposed to be a big day for the cryptocurrency industry in Hong Kong, as the regulatory authorities were set to officially open the door for virtual asset exchange license applications. However, this "historic moment" did not cause any waves in Central and Cyberport in Hong Kong as expected.

According to Tencent News' "Qian Wang" incomplete statistics, institutions that have announced plans to submit applications for virtual licenses in Hong Kong include but are not limited to: HarshKey Pro under Wanxiang Group's Xiao Feng, OKX and BitgetX under Xu Mingxing, who left the mainland during the epidemic and has been living in Singapore for a long time, as well as Gate and Greenland Group.

According to the cryptocurrency license application requirements announced by the Hong Kong Securities and Futures Commission on May 25th, companies that already have physical operations in Hong Kong before June 1st can have a one-year transition period to prepare for license application. This has led to companies such as OKX, which only have trading operations outside of Hong Kong, rushing to register physical entities in Hong Kong before June 1st.

However, for new players, the threshold for applying for a trading license in Hong Kong has become much higher - which is also the main reason why the market did not ignite when the government opened the door to license applications.

According to Hong Kong regulatory requirements, institutions planning to apply for exchange licenses must build their own trading, security, and custody systems before submitting their applications. Multiple sources familiar with the matter told Tencent News' "Deep Insight" that custody in the cryptocurrency industry already requires high levels of technical and security standards, and now Hong Kong regulators are requiring exchange applicants to build these systems themselves, which increases the barrier to entry.

A person in charge of participating in the trading license application told Tencent News "Qian Wang" that these systems require a lot of technical personnel, and Hong Kong itself does not have an IT dividend, making it difficult to recruit people. In Hong Kong, recruiting an IT for HKD 30,000 is not as useful as hiring an engineer for RMB 10,000 in Shenzhen. Their team may plan to put the IT-related background in the Mainland to save costs.

For similar reasons, the founders of the aforementioned cryptocurrency application products ultimately decided to place their core technical teams outside of Hong Kong. In their view, the cost of hiring IT personnel for startups in Hong Kong is too high.

Two people who are trying to apply for a cryptocurrency exchange license told Tencent News' "Qian Wang" that they expect the cost of the necessary technology to be at least HKD 100 million, in addition to the cost of management personnel. This is just the cost of entry for applying for a cryptocurrency exchange license in Hong Kong.

What worries them even more is that even if the system is built, there is a risk of not being able to obtain the license, or even the possibility of obtaining the license but not having any business.

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

Tencent News "Qian Wang" learned that a team that left Hong Kong has settled in Malaysia last month. They can rent a large flat in the city center for a monthly rent of 60,000 RMB, and there are very cheap IT technicians locally. These evacuated teams believe that doing cryptocurrency projects in Southeast Asia may even be more advantageous than in Hong Kong.

Tencent News "Qian Wang" learned from different sources that OSL, one of the local compliant exchanges in Hong Kong, has decided to withdraw and has been looking for buyers in the market since the Spring Festival this year, but so far no one has taken over. As of the time of publication, OSL has not yet commented on this news.

This exchange is affiliated with the Hong Kong-listed company BC Technology Group. According to the company's 2022 financial report, losses have continued to increase, with OSL's cryptocurrency revenue in 2022 being HKD 71.48 million, which is less than one-third of the approximately HKD 270 million in the previous year.

One source told Tencent News' "Qian Wang" that the company had previously been suspected of speculation, and its stock price had soared by more than 60% due to the concept of blockchain. However, now the shell in the Hong Kong stock market is worthless, and the main asset of the listed company is the exchange. Public information shows that the shell company was once under the control of Hong Kong shell king Gao Zhenshun, and Gao still holds an executive director position in the listed company.

02 Regulators actively embrace, but cryptocurrency companies still struggle to open accounts

For entrepreneurial teams engaged in cryptocurrency projects in Hong Kong, opening an account has become the first hurdle that needs to be urgently addressed.

Multiple industry practitioners told Tencent News "Qian Wang" that although the regulatory authorities 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 to the caution and quietness of market participants, the busiest people in this round of virtual asset boom in Hong Kong are undoubtedly the staff of Hong Kong regulatory agencies, including the intermediary department and information technology department of the Hong Kong Securities and Futures Commission, which oversees the licensing and supervision of intermediary institutions.

In addition, there is also the Hong Kong Monetary Authority, which is now mainly responsible for stablecoins and custody matters in Hong Kong.

Currently, except for the upstream part related to mining machines, which is not suitable for landing in Hong Kong, the middle and downstream parts of the cryptocurrency ecosystem, such as funds, exchanges, and decentralized Web3 product terminals, all have the possibility of landing in Hong Kong.

A industry insider who has dealt with the above-mentioned regulatory authorities in Hong Kong on a daily basis told Tencent News "Qian Wang" that, like other regions, the easiest aspect for Hong Kong regulatory authorities to regulate now is the transaction process, including exchanges and funds.

"Exchanges are like casinos. If we manage the casinos well, the cryptocurrency ecosystem behind them will naturally become healthier," he said.

Tencent News "Qian Wang" learned from different sources that in the past few months, most of the top Chinese cryptocurrency companies have been looking for people to connect with regulatory agencies in Hong Kong. This includes "Fish God" Mao Shihang's wallet company Cobo and Zhao Changpeng's Binance Group.

This has also made some people who have worked in regulatory agencies become hot cakes in Central Hong Kong - many people in the currency circle were very far away from traditional finance and even further away from Hong Kong's regulation before this.

A person who has worked in traditional finance in Hong Kong for many years and then switched to the cryptocurrency industry told Tencent News' "Qian Wang" that the early Chinese cryptocurrency community was mainly composed of grassroots and engineers who were born as miners, and there were not many people who truly understood finance. The essence of the cryptocurrency industry is actually finance.

Different sources have told Tencent News "Qian Wang" that regulatory agencies, led by the Hong Kong Securities and Futures Commission and the Monetary Authority, have changed their image of being difficult to deal with in the early years and have become more approachable and easier to communicate with.

Tencent News "Qian Wang" learned that during the epidemic, including the Financial Secretary and Treasury Bureau Director of the Hong Kong Special Administrative Region Government, Mr. Paul Chan Mo-po, actively invited financial professionals related to virtual assets in Hong Kong to meet.

Now, in addition to the virtual currency trading fund license and exchange license programs that have been launched as scheduled, the regulatory authorities in Hong Kong will soon launch matters related to stablecoin licenses, and even explore diversified virtual currency derivatives, such as spot Bitcoin ETFs, according to Tencent News' "Qian Wang".

However, a cryptocurrency entrepreneur in Hong Kong told Tencent News' "Qian Wang" that with the support of government agencies, he registered his company in Hong Kong and settled in the Hong Kong Science and Technology Park, but still cannot open a bank account and cannot use the company for transactions. He recalled that it was the Hong Kong Trade Development Council and the Hong Kong Investment Promotion Agency that actively invited him to come to Hong Kong.

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

It is reported that the staff of the Hong Kong Monetary Authority have been very proactive in providing a list of "blockchain-friendly banks in Hong Kong" to companies registered in Hong Kong with cryptocurrency-related businesses. Tencent News' "Qian Wang" has seen a list of as many as a dozen banks, including DBS Bank. However, the banks still refuse to open accounts for these companies.

Tencent News "Qian Wang" learned that in the third week of June, personnel from the Hong Kong Monetary Authority and other relevant agencies have been communicating with institutions including HSBC, hoping to accelerate the account opening process for companies in the cryptocurrency industry. 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 bank procedures have even started intermediary business, that is, helping to package corporate content, avoiding descriptions related to the currency circle in order to successfully open a bank account. The fee for this service is between HKD 20,000 and HKD 40,000. Informed sources revealed that the bank cooperating with this intermediary is HSBC. As of the time of publication, Tencent News "Qian Wang" has not been able to contact HSBC for comment.

A cryptocurrency industry practitioner who has not yet opened an account stated to Tencent News' "Qian Wang" that this is because the government departments and enterprises in Hong Kong are separated. For example, the Investment Promotion Agency responsible for investment promotion is more concerned about how many companies come to Hong Kong to land in a year, but the banks responsible for account opening only care about their own risk control and are regulated by the Hong Kong Monetary Authority.

03 No "Leeks" in Hong Kong's Crypto Industry: Too Many Smart People

Hong Kong is not short of wealthy tycoons. Therefore, many people still hope to seize the opportunity in Hong Kong and engage in businesses related to the cryptocurrency industry around these tycoons, such as funds or derivatives.

Ye Yizhou is a successful case in the encryption industry. He is the head of Frontier Wisdom Asset Management Co., Ltd., the only compliant cryptocurrency hedge fund in Hong Kong.

The fund had an initial management size of over $100 million in 2022. It obtained a 100% virtual currency trading license from the Hong Kong Securities and Futures Commission at the beginning of 2022 and was ranked third in the 2022 global cryptocurrency fund net income rankings selected by Barclays at the beginning of this year, with a net return rate of 9.2% - the industry generally lost 50%. Tencent News "Qianwang" 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 come from humble beginnings, Ye Yizhou is a "legitimate" 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, due to personal interest, he began investing in Bitcoin very early on. He told Tencent News "Qian Wang" that at that time, there was no clear regulation for Bitcoin trading in the market, and he and his friends began to enter the large-scale Bitcoin secondary market trading in 2017. Later, he left the institution to start his own business and established YOONIT 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' "Qian Wang" that Hong Kong is not suitable for all cryptocurrency enthusiasts, and even not suitable for those who want to enter the industry from traditional finance for a "dimensional reduction attack". In his words, "you need to have the ability to withstand the impact before entering", instead of recklessly following the trend.

There are many people with similar ideas to Ye Yizhou in the encryption industry. Their backgrounds are also similar to Ye Yizhou's: they graduated from prestigious universities in the United States, worked in traditional finance in Hong Kong for many years, and chose to pursue a regulatory path in Hong Kong. Their core goal is also to raise funds from wealthy individuals in Hong Kong to invest in funds and trade cryptocurrencies.

These "regular army" have already obtained fund licenses or are applying for exchange licenses. Compared with the regulations on cryptocurrency-related businesses and downstream Web3 products in the cryptocurrency industry, the Hong Kong government has not yet launched any regulations.

Web3 products are relatively the easiest place in the currency circle to "cut leeks". The biggest difference between these Web3 products and Web2 products is the addition of financial attributes, providing economic incentives for users. For example, Web3's gaming product GameFi allows users to "play games and make money at the same time". In this ecosystem, there are two types of currencies: cryptocurrencies such as Bitcoin and non-fungible tokens (NFTs). Generally, users can earn in-game rewards NFTs by completing tasks, and then transfer the NFTs out and trade them on exchanges and NFT markets to gain profits.

According to Tencent News' "Qian Wang", many Web3 products have locked in the funding pool of two types of tokens since the project was launched, even to the point of accurately "cutting" and cashing out after the product goes online for a certain period of time - similar to the logic of manipulating and controlling trading volume and funding pool of listed companies. Subsequently, the value of all tokens in the project instantly became 0. If players did not cash out before the project party left, it meant that they were cut off.

This is more like a game of passing the buck. In the jargon of the coin circle, this is a "typical cutting of leeks". In the Web3 projects with Chinese background in the coin circle, the last and most successful "cutting leeks" project is STEPN, which is a Gamefi game that claims "you can make money by running". In less than half a year, its market value once exceeded 1 billion US dollars, and its earliest users came from the mainland. According to Tencent News "Qianwang", the team has earned hundreds of millions of dollars in half a year. As of the time of publication, the team has not been contacted for comment.

However, multiple individuals in the Hong Kong cryptocurrency industry have told Tencent News' "Qian Wang" that "there are no lambs to be slaughtered in Hong Kong, only sickles," and there is no soil for Web3 products to "harvest lambs." This is because the Hong Kong market is mainly composed of professional investors, and in order to play games like "hot potato," there needs to be enough retail investors. Two individuals who have transitioned from traditional finance to the cryptocurrency industry told Tencent News' "Qian Wang" that professional investors are mostly graduates from prestigious schools with specialized financial knowledge, and more often play the role of "sickle" rather than "lambs."

"Here, there are many wealthy people, but they cannot get a share of the wealth. Some people have summarized that this is because the wealthy have hired a group of professional investors."

This is also one of the reasons why most Web3 startup teams who wanted to come to Hong Kong to realize their dreams chose to leave Hong Kong in the past two months.

People come and go, and it's impossible to keep track of those who leave, but there are still many who stay. According to the latest speech by the Financial Secretary of Hong Kong, over the past six months, Hong Kong has attracted more than 150 Web3 companies to settle in the Cyberport incubation center for startups.

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