Hong Kong’s Crypto Ambitions Get a Boost From U.S. Crackdown More than 20 crypto companies have said they plan to set up operations in the city Ambre Soubiran, CEO of Kaiko, a digital assets data provider that plans to build a team in Hong Kong with customer-facing roles.PHOTO: BENJAMIN GIRETTE/BLOOMBERG NEWS By Elaine Yu April 1, 2023 11:00 am ET 5 HONG KONG—Hong Kong’s attempt to attract cryptocurrency companies is getting help from an intensifying crackdown by American regulators. The city was once home to a number of prominent companies, including Crypto.com, BitMEX and now-bankrupt FTX. But increasing competition from Singapore, concerns about China’s tough approach to crypto and Hong Kong’s prolonged and strict response to Covid-19 meant many companies in the sector left. Hong Kong is now determined to bring some of that action back, in contrast with the U.S. In the past few weeks alone, U.S. regulators have cut off access to crypto products and services, targeted crypto friendly banks, brought civil charges against celebrities said to have touted digital assets and sued exchanges including Binance Holdings Ltd., the operator of the world’s largest crypto exchange. Prosecutors have also accused FTX founder Sam Bankman-Fried, who was based in Hong Kong at one point, of conspiring to bribe Chinese government officials in their latest indictment. “The U.S. being more stringent these days than ever on crypto and Hong Kong regulating in a more favorable way…is going to clearly shift the center of gravity of crypto assets trading and investments more towards Hong Kong,” said Ambre Soubiran, chief executive of Kaiko, a digital assets data provider based in Paris. “We want to be where our clients are,” she said. Hong Kong’s Securities and Futures Commission proposed a new licensing framework in February, focusing on investor protection. A senior official said at a briefing that the regulator wanted to prevent a recurrence of the problems that brought down FTX, as well as other fraudulent behavior. More than 20 crypto and blockchain companies from mainland China, Europe, Canada and Singapore have told the government they are planning to establish a presence in Hong Kong, while over 80 firms have expressed interest in doing so, according to official figures. Kaiko’s head of Asia-Pacific relocated to Hong Kong from Singapore in late March. The company, which provides valuation and risk-management data to financial institutions and crypto firms, plans to build a team in the city with customer-facing roles, Ms. Soubiran said. One reason Kaiko has set its sights on Hong Kong is its access to Chinese institutional investors in the city who may be warming to crypto, she added. Bybit, a cryptocurrency exchange based in Dubai, said it is working to build its core Asian operations in Hong Kong, with plans to put part of its research and development as well as marketing teams in the city. The exchange, founded in 2018, is planning to apply for a license in Hong Kong under proposed rules coming into effect in June. “In the exchange business, liquidity is king and Hong Kong has an abundance of it,” said Ben Zhou, Bybit’s co-founder and chief executive, referring to capital from institutional investors. He also credited the city’s mature capital markets, high financial literacy and its “many avid and professional investors.” Other companies have questioned how much profit an operation in Hong Kong can generate, as well as how much it will cost to obtain and maintain licenses. Some view the city’s proposed rules for centralized exchanges and retail trading—which will be restricted to highly liquid and well-known tokens such as bitcoin and ether—as too conservative. As the securities regulator completes its rules, others are waiting to see if exchanges can only serve local citizens, which make up a small market. FTX founder Sam Bankman-Fried, shown in Hong Kong in 2021, was based in the city at one point.PHOTO: ANTHONY KWAN FOR THE WALL STREET JOURNAL Metalpha, a digital assets wealth manager whose clients include crypto mining companies and Chinese family offices based outside the mainland, scrapped plans to set up its headquarters in Singapore and chose Hong Kong as its home after the latter unveiled plans to develop the industry late last year, Chief Executive Adrian Wang said. He made that decision because the company typically hired traders from Wall Street banks already based in Hong Kong. Investors in the city are more familiar with its large equity market and the volatility of stocks, giving them more risk appetite than investors in Singapore, he said. LD Capital, a crypto investment fund founded in Shanghai and now based in Singapore, is preparing to move its headquarters to Hong Kong this year, attracted by its financial-market infrastructure, more sophisticated secondary market and talent pool, said partner Joy Lou. The fund is working with recruiters in Hong Kong to hire traders as well as investor relations and compliance professionals locally, she said. Vivien Wong, general manager of Hong Kong-based New Huo Asset Management, said she has had discussions with about 200 investors in Asia in the last three months, who, following last year’s skepticism toward crypto assets, now see investments in Web3 companies as a longer-term endeavor. Web3 refers to the idea of a decentralized internet that uses crypto and blockchain technologies, which proponents say could be used to protect user privacy and give them control over their data. “What’s shocking is that the international branches of some Chinese state-owned enterprises have said they are interested in crypto venture capital,” Ms. Wong added. SHARE YOUR THOUGHTS What is the future for crypto adoption in Hong Kong? Join the conversation below. China’s government cracked down on crypto-related activities in 2021, including banning crypto trading. Before that, the country had been a major market for bitcoin mining. In 2020, China ranked fourth on the Global Crypto Adoption Index, which is compiled by blockchain data platform Chainalysis. Alessio Quaglini, chief executive of digital assets custody provider Hex Trust, said Hong Kong’s focus on regulating centralized exchanges—and requiring them to hold customer’s assets in wholly-owned subsidiaries—failed to address one of the industry’s most important issues. The custody of assets should be “as segregated, as independent as possible,” which can also minimize risks to customer funds if exchanges go bankrupt, Mr. Quaglini said. Hong Kong’s current licensing framework, which departs from traditional finance principles, puts custodians like his at a disadvantage, he added. Write to Elaine Yu at elaine.yu@wsj.com