Searching for Hong Kong's cryptocurrency "unicorn"

Written by: Zhou Zhou, Foresight News

"Sequoia Capital, IDG, and Northern Light are all looking for investment opportunities in Hong Kong's cryptocurrency exchanges," said venture capitalist Henry to me.

In addition to venture capital firms, Foresight News has observed that internet companies (such as Futu Securities, Tiger Brokers), cryptocurrency giants (OKX, Bitget, Binance), and traditional financial institutions (Victory Securities, Interactive Brokers, Harvest Fund) are also flocking to Hong Kong's cryptocurrency industry, hoping to seize the opportunity presented by Hong Kong's favorable policies to secure a ticket to the next era.

"A unicorn will definitely emerge in Hong Kong's crypto industry," judged Adam Zhou, co-founder of Hong Kong cryptocurrency company VDX. Adam Zhou was previously the managing director of Victory Securities in Hong Kong and has over 10 years of experience in financial institutions.

"This will be a multi-billion dollar market," said Pan Zhiyong, CEO of Hong Kong licensed cryptocurrency exchange OSL, to Foresight News.

2023 marks the first complete compliance year for Hong Kong's cryptocurrency industry. This year, Hong Kong approved two cryptocurrency companies (HashKey and OSL) to become licensed financial institutions, and as of January 31, 2024, announced 14 other cryptocurrency companies that are applying for licenses. The unicorn of Hong Kong's cryptocurrency industry is expected to emerge from these 16 companies.

Several heads of cryptocurrency companies have assessed: "The 14 companies applying for licenses will be officially approved for Hong Kong cryptocurrency licenses before mid-2024."

As a nascent industry, Hong Kong's crypto sector has not been smooth sailing. Many issues that arose during its rapid development have been laid bare: leading exchanges struggle to achieve profitability, account opening procedures are cumbersome, product offerings are limited, competition is fierce, and costs are high… "Is Hong Kong embracing the cryptocurrency industry too late?" some practitioners have raised questions.

The latest data shows that over 500 million people worldwide currently hold cryptocurrencies, with Binance alone having over 170 million registered users, while the number of registered users at Hong Kong's leading cryptocurrency exchanges is less than 200,000, merely one-thousandth of Binance's user base.

"Binance is large, but (future compliant cryptocurrency exchanges) can be many times larger," Adam Zhou said. Many practitioners remain optimistic about the prospects of Hong Kong's cryptocurrency exchanges.

Can Hong Kong's compliant cryptocurrency exchanges leverage their latecomer advantage to overtake the competition? What are the real advantages and opportunities for licensed cryptocurrency exchanges in Hong Kong? This has become a concern for anyone interested in the Web3 opportunities in Hong Kong and the Chinese-speaking regions of Asia.

Rediscovering the Unicorn

"(We hope) to become a truly influential exchange like the Hong Kong Stock Exchange," Adam Zhou said.

As a new form of asset exchange, some practitioners in Hong Kong believe that the emergence of cryptocurrency exchanges signifies the arrival of a new "Hong Kong Stock Exchange," a new "Nasdaq."

As of January 30, 2024, there are 2,600 listed companies on the Hong Kong Stock Exchange, the largest compliant cryptocurrency exchange in the U.S., Coinbase, has listed 238 cryptocurrencies, while Hong Kong's leading licensed cryptocurrency exchange, HashKey Exchange, has only listed 19 cryptocurrencies. Cryptocurrency exchanges have a long way to go.

It is foreseeable that Hong Kong's licensed cryptocurrency exchanges will not only list hundreds or even thousands of tokens in the future but will also see non-Web3 institutions choosing to "list tokens" on licensed cryptocurrency exchanges in Hong Kong. A co-founder of a cryptocurrency exchange told me: "Startups in AI, gaming, and the metaverse can also list on cryptocurrency exchanges; theoretically, the SFC has not prohibited this."

The New York Stock Exchange was established in 1792, the American Stock Exchange in 1817, Nasdaq in 1971, and the first U.S. cryptocurrency exchange, Coinbase, was established in 2012. Every century and era sees the emergence of new types of exchanges, reflecting a shift in large-scale economic forms.

Due to institutional differences, the New York Stock Exchange typically accommodates large, long-established, and stable companies like Coca-Cola, Alibaba, and IBM; Nasdaq attracts more high-tech companies, such as the four major U.S. tech giants: Apple, Google, Amazon, and Facebook; companies listing on cryptocurrency exchanges tend to favor smaller "blockchain organizations" and "metaverse companies," such as Ethereum, Binance, and Bored Apes. Decentralized cryptocurrency exchanges fundamentally change traditional finance, allowing individuals to "list" at almost no cost.

For investors, this is undoubtedly an investment opportunity not to be missed, and indeed it is. "Sequoia Capital, IDG, and Northern Light are all looking for investment opportunities in Hong Kong's cryptocurrency exchanges," said venture capitalist Henry.

Henry added, "Venture capital firms find themselves in an awkward position in the cryptocurrency industry because cryptocurrencies have changed the entire underlying logic of finance (including investment logic), making the status of venture capital firms in this industry much lower than in others. Many opportunities have been seized by more native crypto investment firms or individuals, but the Hong Kong cryptocurrency industry presents a naturally fitting opportunity for us."

Some practitioners believe that Hong Kong, as a financial center in Asia, has unique advantages for developing cryptocurrencies, backed by China's rich internet talent and market resources. Japan, South Korea, and Europe also have their own compliant cryptocurrency exchanges, but many investors are more optimistic about Hong Kong's cryptocurrency exchanges.

HashKey Exchange CEO Weng Xiaoqi said, "Europe lacks internet talent, Japan lacks both internet talent and is not a financial center, while Hong Kong is not only a financial center with sufficiently powerful financial institutions but also backed by mainland China, continuously attracting excellent internet talent." Weng Xiaoqi believes, "The talent needed for compliant cryptocurrency exchanges must understand cryptocurrencies, the operation of financial institutions, and internet products; all three are essential."

Looking at the technological and commercial developments of the 21st century, China seems to have rarely been absent and excels in leveraging latecomer advantages for technologies that bring significant economic transformations. If we must draw a comparison, the relationship and global status of "Hong Kong's cryptocurrency unicorn" to Coinbase may resemble that of Tencent to Facebook (internet social), Alibaba to Amazon (internet e-commerce), and "Weilai, Xiaopeng, Li Auto" to Tesla (electric and smart vehicles).

Such a narrative is grand and captivating, making Hong Kong's cryptocurrency exchanges a focal point of attention for many investors.

Three Long Slopes and Thick Snow

The birth of a new unicorn often accompanies the successful resolution of a sufficiently large problem.

Compared to non-compliant exchanges, the unique problem that Hong Kong's cryptocurrency exchanges must solve is: how to deeply integrate cryptocurrencies with traditional finance and accelerate the influx of funds from the traditional financial world into the cryptocurrency industry. This opportunity was previously unavailable to non-compliant exchanges.

Currently, in addition to the cryptocurrency exchange business we are familiar with, the competitiveness of Hong Kong's licensed cryptocurrency exchanges includes ETF, RWA, and B2B2C cryptocurrency sales models. Overall, competitiveness stems from the "integration" and "innovation" with the traditional financial world.

These three tracks are sufficiently new, sufficiently differentiated, and have a broad business outlook, representing a new increment that can impact the overall size of the cryptocurrency market.

HashKey Exchange CEO Weng Xiaoqi told Foresight News, "ETF and RWA are opportunities for compliant cryptocurrency exchanges to overtake the competition."

Taking the U.S. Bitcoin spot ETF as an example, since the approval of the U.S. Bitcoin spot ETF on January 10, 2024, a large amount of capital has flowed into Bitcoin. As of January 30, the total holdings of BlackRock and Fidelity have exceeded $2 billion, and the holdings of ten Bitcoin spot ETFs have surpassed $27.7 billion. Standard Chartered Bank analysts believe that by the end of 2024, the inflow of funds into Bitcoin spot ETFs could reach $50 billion to $100 billion, which would be a massive influx for Bitcoin, whose total market cap is currently less than $900 billion.

Foresight News has found that over 70 companies in the U.S. are involved in the upstream and downstream of Bitcoin spot ETFs, a significant portion of which are traditional financial institutions.

And this is just the situation of the U.S. Bitcoin spot ETF less than a month after its launch. With the official launch of the U.S. Bitcoin spot ETF, Hong Kong's Bitcoin spot ETF is also "on the verge." Tencent News reported that on January 26, Harvest Fund's Hong Kong company submitted an application for a Bitcoin spot ETF to the Hong Kong Securities and Futures Commission, making it the first institution in Hong Kong to submit such an application, expected to be listed on the Hong Kong Stock Exchange after the Spring Festival.

An executive from a cryptocurrency exchange revealed to me that currently, a dozen or so financial institutions plan to apply for Bitcoin spot ETFs. Weng Xiaoqi previously told Caixin that about ten fund companies are preparing to launch Bitcoin spot ETFs. Foresight News has learned that institutions currently planning to launch Bitcoin spot ETFs include Harvest Fund, Huari Fund, and Southern Eastern.

In addition to ETFs, RWA (Real World Asset tokenization) is another large track that only compliant cryptocurrency exchanges can deeply participate in.

Weng Xiaoqi believes, "The foundation for issuing RWA is legal security tokens; without a license, it would be illegal securities issuance, which is a criminal offense in various countries and regions. This means RWA is inherently a story for licensed exchanges."

Lennix, Global Chief Business Officer of OKX, told Foresight News, "It is expected that in the third quarter of 2024, the legislation for RWA and stablecoins in Hong Kong will be introduced." "The SFC and other relevant regulatory agencies have already begun consulting the public for related opinions."

If the main utility of ETFs is to direct funds from traditional finance into Bitcoin, increasing Bitcoin's overall market value, then RWA aims to tokenize all valuable financial investment products such as U.S. Treasury bonds, stocks, houses, and gold, thereby retaining some of the funds from these investment products in the cryptocurrency market. This way, ordinary investors can conveniently purchase $1 worth of U.S. Treasury bonds, $1 worth of gold, and $1 worth of Tesla stocks. This will further release traditional financial assets into the cryptocurrency industry.

Currently, financial institutions in the U.S. and Singapore are leading in the RWA field. Henry, founder of Singapore's compliant RWA exchange DigiFT, revealed to me that DigiFT has already issued five tokenized financial products, including U.S. Treasury bonds, U.S. Treasury bond funds, and bank bonds. Hong Kong is also expected to introduce legal regulations for RWA this year. Foresight News has learned that cryptocurrency exchanges like HashKey and OSL are placing significant emphasis on this business and have dedicated teams advancing RWA work.

Weng Xiaoqi disclosed that they have already started cooperation with Huaxia Fund on RWA, with plans to enter the market in the near future.

Several practitioners from cryptocurrency exchanges told Foresight News that a core competitiveness of Hong Kong's cryptocurrency exchanges comes from B2B2C business. Like ETFs and RWAs, B2B2C business involves selling cryptocurrencies through traditional brokers. If we broaden the definition of B2B2C, it also includes providing SaaS services for cryptocurrency exchanges and financial institutions.

Compared to non-compliant cryptocurrency exchanges, this is the "differentiated advantage" of licensed cryptocurrency exchanges.

Adam Zhou stated, "Among the 300 active brokers in Hong Kong, 100 brokers sell a single stock, which means the entire market is worth tens of billions of dollars. This is also where the opportunity for the crypto industry lies."

Foresight News has counted that over 20 brokers are starting to sell cryptocurrencies, and a business leader from a cryptocurrency exchange revealed that more than half of the active brokers are planning to enter the cryptocurrency business, including Futu Securities, Interactive Brokers, Tiger Brokers, and Victory Securities.

The Hong Kong financial industry and the cryptocurrency industry have already taken substantial steps towards integration.

Compared to Binance (taking the world's largest cryptocurrency exchange as an example), Hong Kong's cryptocurrency exchanges will be at a disadvantage in many areas in a short time: cumbersome account opening procedures, poor app product experience, limited types of listed tokens, slow introduction of new tokens, and inability to offer derivatives… The existing mature systems are not the true competitive strength of Hong Kong's licensed cryptocurrency exchanges.

However, these three long slopes and thick snow tracks are tailored opportunities for licensed cryptocurrency exchanges, which can not only bring incremental growth to the crypto industry but also serve as important competitive advantages for future business growth.

"The crypto industry has long been shaped and dominated by crypto-native companies, but with the conclusion of investigations by U.S. regulatory agencies into companies like Binance, a new era is dawning, where regulated cryptocurrency companies will become the standard and mainstream," said Pan Zhiyong.

In Conclusion

An interesting phenomenon is that in the U.S. capital market, Coinbase and Nasdaq's market values have become "comparable."

As of January 30, the total market value of Coinbase listed on Nasdaq was $31.3 billion, while Nasdaq's total market value was $33.7 billion. For three years, the total market values of these two exchanges have shown a "chase" pattern. In the Nasdaq market, investors believe Coinbase has the potential to become the next Nasdaq.

Meanwhile, the total market value of a leading cryptocurrency exchange in Hong Kong (HKD 3.8 billion) is far from that of the Hong Kong Stock Exchange (HKD 298.7 billion). The reason for this disparity is also due to the fact that the entire Hong Kong cryptocurrency industry is still in its early stages, and it remains uncertain which of the 16 cryptocurrency exchanges will become a unicorn.

HashKey Exchange recently launched its app, and its user count has exceeded 150,000; OSL was recently strategically invested by BGX for $90 million, revitalizing its team and adding a "retail gene" to its existing system; the core team of VDX gathered expertise in cryptocurrency, the Hong Kong SFC, and Hong Kong financial institutions from the outset; OKX is a leader in native cryptocurrency exchanges, with mature products and deep industry accumulation in China and Asia; PantherTrade is a subsidiary of Futu, China's largest internet brokerage, inherently possessing the gene for internet financial products… They will provide a clear answer in the next five years.

This is an industry and track with long slopes and thick snow, and it has only just begun.