Just about four years ago, when the FinTech startup scene was heating up and not many people have much knowledge about blockchain, let alone what it exactly means, a conference was held at one of the Big Four accounting-turned-consultancy firms in Hong Kong. The talk was that Singapore was doing all the right things to attract fintech firms, and that Hong Kong has been lagging behind the lion city. How can Hong Kong become a fintech hub?
At that time, Singapore has moved far ahead of Hong Kong in such areas as payments, cryptocurrencies and RegTech. During the conference, a Singapore-based fund manager suggested in his talk that Hong Kong “should directly move into blockchain” much to the consternation of the audience, many of whom did not know what he meant by “moving into blockchain.” At the time blockchain was a novel idea with no major use cases except for Bitcoin.
What he probably meant was that Hong Kong should welcome crypto exchanges and in particular crypto assets and also encourage crypto funds, and to create an eco-system for these firms that are commensurate with Hong Kong’s role as a big financial center.
At the time, there were a few crypto exchanges in Hong Kong – and not much else by way of blockchain. But over the last three years interesting things have happened. Besides the exchanges, some of which have grown to be amongst the world’s most significant, it was also leading the way in attracting various blockchain-related firms, as a recent survey backed by the government show. (This despite the political instability that rocked Hong Kong for months in 2019 and 2020 followed by the virus fears.)
As an aside, I once met a famous management guru who specialized in trade based in Hong Kong and interviewed him about the emerging fintech eco-system. I curiously asked which of the two cities either Hong Kong or Singapore are likely to emerge as winners as the two cities are often seen to be competing against each other. He told me that Singapore is usually much better at public relations. Still, the history shows whenever there were transformative events or a new technology that often pitted the two cities against one another, Hong Kong often comes out more robust in the end. He did not say why, but it could be perhaps due to the laissez-faire nature of its economy. By this mean, the government often stays out of business and let innovation and entrepreneurship run its own course. Therefore, while Singapore is often seen as winning the competition at the outset, he said, but, in the end, it is often Hong Kong that might emerge stronger. In terms of fintech however, each is playing to its strengths, aand much of it is determined by their geographical locations: Singapore being a hub to Southeast Asia and Hong Kong as the center for China, especially the Greater Bay area.
It might be too early to say, but the latest survey published by Hong Kong’s government backed the Financial Services Development Council says that a large chunk of all the new startups in Hong Kong now have a blockchain-related component.
Amongst the 57 new fintech startups that was established in Hong Kong in 2019, blockchain firms showed the biggest growth, with 39% of all startups having a blockchain component, up from 27% in 2018, according to a latest survey published by Hong Kong’s Financial Services and Treasury Bureau and presented to Legislative Council (LegCo) on June 1, 2020.
By sub-sector, enterprise solutions using blockchain technology accounted for 43%, followed by trading (27%), custodies of digital assets (14%), trade finance and settlement (9%) and companies exploring the area of security tokens (5%).
In terms of the sector, amongst the 57 fintech firms, blockchain is followed by wealthtech accounted for 20%, followed by payments (16%), Insurtech (9%), RegTec (7), CreditTech (6%) and Cybersecurity (2%) in that order.
Interestingly, amongst the survey respondents 51% of HK Fintech firms operating and planning to expand in the Greater Bay Area. Nearly 76 % of the firms are focusing on the B2B area (more specifically on enterprise blockchain field.)
The total number of fintech firms have increased from 160 in 2016 to over 600 in 2019. They come from all over the world. Of those that entered Hong Kong, 23% were from the mainland, followed by 18% from the US and 6% from the UK. Nearly 30% are based in Hong Kong with foreign founders.
The increase in number of blockchain firms is a positive sign for Hong Kong and that the city state’s efforts at creating more regulatory clarity and sustainable startup ecosystem for blockchain are showing the results.
Hong Kong-based experts told BAR that Hong Kong welcomes blockchain and digital asset firms, and that it provides a great base for the firms to engage with financial institutions across Asia. This is in addition to the fact that some of the world’s largest and well-known Digital Asset Exchanges (such as BitMex, BC Group) and other firms have been established in Hong Kong for several years now. Secondly, Hong Kong’s regulators have been using blockchain for various applications, including in trade finance and cross-border payment, and have been quite clever in dealing with crypto and digital assets.
Moreover, the regulatory framework in HK now provides blockchain firms with a structure to work with and comply accordingly. Not to mention, Hong Kong has one of the few regulatory frameworks in the world with an opt-in sandbox – which allows tech firms (in this case, crypto exchanges) to be regulated for a fixed period of time under specifically designed rules–for digital asset firms. Some Hong Kong exchanges have reportedly decided to be included in the regulatory sandbox. Some crypto funds such as Arrano Capital has recently announced that it has decided to launch a USD100mn open-ended hedge fund in Hong Kong with strategy and asset class focused on cryptocurrency. Based on the above analysis, it seems Hong Kong is, whether intentionally and unintentionally, slowly becoming a blockchain hub in its own way.