Crypto-Mania Grips Hong Kong as City Looks Beyond Banking

(Bloomberg) -- In the mid-1990s, Johnson Leung embarked on a career in shipping. In the early 2000s, he moved to finance. And now, he runs a Hong Kong startup that aims to improve how container ships are booked using blockchain technology.

Many in Hong Kong hope the city can make a similar leap. The shipping and banking hub, which has struggled for years to nurture a domestic technology industry, is embracing the blockchain revolution as it looks for new sources of growth.

Skeptics say it's a risky bet on an unproven technology -- one with more than its fair share of hype and, in some cases, fraud. But a growing number of Hong Kong entrepreneurs and policy makers are convinced the online ledger system that underlies cryptocurrencies like bitcoin will eventually reshape everything from financial services to supply chains. They say the city's laissez faire approach toward regulation, along with its expertise in finance and logistics, make it a natural hub for blockchain startups.

“I don't see why Hong Kong can't be a leader of blockchain technology,” said Leung, who co-founded 300cubits.tech after more than a decade in the financial industry that included stints as a research analyst at JPMorgan Chase & Co. and Jefferies Group LLC. “It's so new that it's not like any country has a huge advantage compared to us.”

Read more: A Blockchain explainer

Hong Kong's government has been throwing resources at the technology. The city's monetary authority is developing its own digital currency and is testing blockchains for trade finance, mortgage applications and e-check tracking. Hong Kong's securities regulator has joined R3, a global consortium that develops blockchain technology for financial transactions, while a government-backed research institute has worked on a blockchain-based system for tracking property valuations, among other initiatives. Hong Kong Exchanges & Clearing Ltd., the city's publicly-traded exchange monopoly, plans to start a blockchain platform for early-stage companies and their investors next year.

“Blockchain is a very high priority for us,” said Charles d'Haussy, head of fintech at InvestHK, a government economic development agency.

That doesn't mean Hong Kong is giving the industry carte blanche. This month, the city's Securities and Futures Commission told investors to be on the lookout for fraud in initial coin offerings -- a form of cryptocurrency fundraising -- and warned ICO issuers that they may be subject to local securities laws.

“We have to be very careful with this because on the one hand, we encourage innovation and free markets, but on the other hand, we do have to look after our small investors,” Paul Chan, Hong Kong's financial secretary, said in a Sept. 11 interview.

Still, the city is taking a softer approach toward regulation than China, which banned ICOs this month and called for a halt in trading on domestic cryptocurrency exchanges.

Read more: A QuickTake Q&A on initial coin offerings

The crackdown should reinforce the case for a hub in Hong Kong, which is under Chinese rule but operates its own legal and regulatory systems, according to Aurelien Menant, the chief executive officer of Gatecoin, a Hong Kong-based cryptocurrency exchange. Just last week, a blockchain conference organized by Bitkan, a Chinese cryptocurrency trading company, was moved to Hong Kong from Beijing in response to the ICO ban.

“Traditionally, Hong Kong has been a beacon of economic freedom in the world, and I would love for that to continue to be the case for bitcoin and cryptocurrencies and ICOs,” Roger Ver, chief executive officer of Bitcoin.com, said in an interview with Bloomberg Television at the Bitkan conference.

Building a sustainable blockchain hub in Hong Kong won't be easy. Many applications for the technology, including Leung's proposal to create digital tokens for the shipping industry, are still largely theoretical. (Leung says his tokens could be used in conjunction with so-called smart contracts to reduce the risk of default on shipping agreements.)

At the same time, competition to lure the most promising blockchain firms is fierce. Singapore, Hong Kong's biggest regional rival, is pouring resources into its local fintech industry, as are other financial hubs including Dubai.

Read more on the fintech rivalry between Hong Kong and Singapore here

What's more, Hong Kong doesn't have a great track record when it comes to tech startups. Its Cyberport business incubator has been criticized as a housing development in disguise, while many local workers are reluctant to leave their steady jobs for riskier ventures. The city has zero unicorns, or startups valued at $1 billion or more, according to CBInsights.

Optimists say the blockchain industry's overlap with finance plays to Hong Kong's strengths. Some of the city's early startups illustrate that point: they include BitMEX, a bitcoin derivatives exchange; Bitspark, a remittance platform; and Kenetic Capital, a blockchain investment firm.

While Hong Kong doesn't publish statistics on the growth of the local blockchain industry, InvestHK's d'Haussy said anywhere from 10 to 20 companies are expected to raise funds via ICOs in the city over the next six months.

“There is hype, and there is the fast grab of money with ICOs in some cases,” d'Haussy said. “But what we are looking at building here in Hong Kong is an infrastructure for new businesses and existing businesses, to make sure the technology and innovations remain a key enabler for financial sector growth.”

--With assistance from Yue Qiu and Stephen Engle

To contact the reporter on this story: Justina Lee in Hong Kong at jlee1489@bloomberg.net.

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Michael Patterson, Sarah McDonald