香港: the future top web3 hub? (Patreon)

Crypto went slightly higher over the past two weeks as the market focused on the new narrative of “China money”. The previous concerns of SFC’s actions were out the window as the market welcomed the positive policies coming out of Hong Kong as the city announced that crypto trading will be legal for all retail starting on June 1st. Without new money inflow, crypto money is rotating amongst the latest narratives. Let’s dig in and look at the implications and the associated price actions.

Hong Kong’s crypto retail announcement

Around mid Feb, HK government announced a consultation paper that will lead the way to full legalization of retail crypto trading by June 1st.  The market pump on the back of the narrative that China money will pour in by the billions to invest in crypto. This was especially clear as tokens related to China and Hong Kong rallied the most. 

HK/China narrative coins

But before we talk about price action, let's discuss what Hong Kong government has been doing for crypto and web3 in the past few month.

To set the backdrop, note that crypto is completely banned in Mainland China since 2021. And people also assumed it was also frowned upon in HK, hence this caused the massive exodus of crypto companies from HK to Singapore and offshore jurisdictions. However, things started to change in 2022; gradually at first but the picked up pace extremely fast.

In October 2022, when the government announced that Hong Kong is gunning to become the top web3 hub in the world and will push out a collection of supportive policies. This was the moment when it became very clear that HK has the blessing from the central government for this web 3 push, they were serious and things started to happen very fast.

Within several weeks, crypto backed financial instruments started to pop up in Hong Kong. Notably, the first crypto ETFs were listed on HKEX in Dec. And a tokenized bond was issued jointly by HKMA, Goldman Sachs and Fidelity using blockchain technology.

From a policy perspective, the pace have picked up considerably. First, HKMA finalized the stablecoin policy that was open for public consultation. And now SFC is opening up consultation for the framework that will allow legalized retail trading of crypto. The document is over 300 pages long. But the high-level interpretation is that more retail money, especially from China, will find its way into HK and into crypto. Of course the nuanced view is that it’ll still be difficult from a piping and infrastructure perspective for that to happen. Nonetheless, price action went wild for a period of time.

Price Action

There are a few tokens that’s associated as China plays either because the projects were started there or the businesses are related to China. Some of these tokens include Filecoin (FIL), Arweave (AR), VeChain (VET), EOS (EOS) and others. These have all risen significantly since mid Feb. But one token that has really outperformed is Conflux (CFX) which is up more than 280% MTD versus flattish performance in BTC.

Conflux is considered to be China’s only regulatory-compliant public blockchain who announced a partnership with China Telecom to develop a blockchain SIM (BSIM) card service in Hong Kong, opening the network to China Telecom’s 390+ million customers. The BSIM card claims to lower the barrier to entry into Web3 and Metaverse by providing a secure place for users to store private and public keys to ensure overall safe and easy access to Web3.

To be honest, I don’t really know what this means but it sure does sound significant. There’s only 300mn blockchain wallets out there, and here we potentially could double that number through one partnership between China Telecom and a obscure Chinese blockchain. At this point, execution doesn’t really matter as market plays up the expectations.

But that’s also the risk. Because there’s little fundamental developments in crypto, there is little actual money inflow into the space. And hence the existing money is simply rotating amongst different themes to trying to generate alpha. The China narrative was popular for about two weeks but now is already running out of steam, and it seems like the narrative is switching into Layer 2 tokens (due to Coinbase announcing their own layer 2 launch) and liquid staking (impending shanghai upgrade for Eth).