China's ICO Crackdown Boosts Hong Kong's Hopes Of Becoming Blockchain Hub

China’s decision to shutter digital-currency exchanges based on the mainland, a strategy meant to extinguish the rampant fraud and abuse associated with initial coin offerings, or ICOs, is brightening Hong Kong's hopes of asserting itself as a hub for blockchain technology.

As Bloomberg reports, while China has at least nominally embraced blockchain technology - even building a prototype digital yuan – Hong Kong’s city government has gone a step further by encouraging blockchain startups to set up shop in the city. One firm run by Johnson Leung, who has found success in finance and shipping, and now runs a blockchain startup, is focusing on applications for container ship operators.
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The city’s embrace of blockchain is its latest attempt to nurture a domestic technology industry that could compliment the city’s dominance in banking and shipping. But as Bloomberg notes, betting on blockchain, a technology that has generated a ludicrous amount of hype, much of it undeserved, could be a risky proposition. Despite Hong Kong’s status as a financial hub, the city, one of the most expensive in the world for average working families, has zero “unicorns” – a term for startups valued at over $1 billion.

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.”

As Bloomberg explains, the city’s government has been throwing resources at the technology, developing its own digital currency and testing different blockchain use-cases.

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.

To be sure, the city is, like China, imposing restrictions on some of the shadier aspects of the blockchain ecosystem – namely ICOs, a new financing trend that involves selling a digital token that’s tied to a given platform or product. In theory, these tokens should get more valuable as the underlying product becomes more widely used. Some ICOs have raised millions of dollars, all without a working prototype – only a white paper that sketches out the company’s idea.

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.

In its battle to lure blockchain companies, Hong Kong is competing directly with its longtime rival, Singapore, which has also taken many steps to explore uses for blockchain technology while also encouraging the creation of a thriving startup community. As Bloomberg points out, 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 because of the extremely high cost of living.

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.

One official with InvestHK, the portion of the city government responsible for luring foreign investment, said that the city is keenly aware of the hype surrounding blockchain but has decided to move ahead anyway.

“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.”

So far at least, blockchain has been closely associated with fintech, or financial technology, which city officials believe should give Hong Kong an edge in attracting companies, given its large financial sector. Many of the city’s early startups include financially focused firms like 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.
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However, with the technology still largely unable to scale, the question of whether these companies will be able to survive long enough to achieve profitability before their backers throw in the towel. Not every function – especially not in the world of finance – is suitable for automation and decentralization. What works with blockchain, and what doesn’t, has yet to be thoroughly explored.

Which is, of course, one of the reasons why the industry is so interesting: The risks are large, but the payoffs, in terms of job creation and the attendant tax-revenue and growth bump, is potentially huge.

Sources:

https://www.bloomberg.com/news/articles/2017-09-24/crypto-mania-grips-hong-kong-as-city-looks-for-life-beyond-banks

http://www.zerohedge.com/news/2017-09-24/chinas-ico-crackdown-boosts-hong-kongs-hopes-becoming-blockchain-hub