Crowds at ApeFest, a three-day event for NFT and cryptocurrency enthusiasts hosted by Bored Ape Yacht Club in Hong Kong in early November.Yuga Labs/The New York Times News Service
On a night in early November, hundreds of revellers packed into a cruise terminal on Hong Kong’s Victoria Harbour to watch a DJ wearing a monkey mask perform on a stage bedecked in neon purple, blue and green lights, under the yellow skull logo of the Bored Ape Yacht Club.
Endorsed by celebrities such as Jimmy Fallon and Paris Hilton, Bored Ape was the buzziest of the various non-fungible token (NFT) schemes that popped up in 2020 and 2021, part of a speculative bubble that saw hundreds of millions of dollars spent on digital certificates purporting to claim ownership of artworks, sports highlights, memes and nearly anything else that could be minted and monetized before the market crashed this year.
With the value of Bored Apes – essentially cartoon simian profile pictures – dropping through the floor, ApeFest attendees could be forgiven for partying extra hard. But the next morning, many woke up to something far worse than a hangover. On social media and in numerous reports that followed, dozens of people complained of burning eyes, vision problems and raw, painful skin, which they blamed on the bright lights at the event.
Online, the mockery poured in. Here was the cryptocurrency equivalent of Fyre Festival, the perfect cap to a year that had seen the collapse of the world’s then leading crypto exchange, FTX, and a guilty verdict against its founder, Sam Bankman-Fried, along with separate charges filed against his one-time mentor turned rival, Canadian billionaire and Binance chief executive officer Changpeng Zhao, who has pleaded guilty.
Across town, regulators were not sharing in the schadenfreude, nor appreciative of headlines tying Hong Kong to the ApeFest scandal just as they were trying to promote the Chinese territory as an antidote to the type of dangerous speculation NFTs had come to represent. Because even after crypto’s annus horribilis, Hong Kong is going all in on the industry, promoting a new regulatory scheme as it races other jurisdictions to be the home of safe and sensible digital asset trading, and attempts to diversify an economy long reliant on traditional finance and property.
“The government in Hong Kong is taking a very logical and pragmatic approach to the whole thing, and they’re moving quite fast relative to some other territories,” said Duncan Fitzgerald, an expert on compliance and corporate governance at PwC Hong Kong. There is room for Hong Kong to further expand into “legitimate and robust digital products,” he said, including tokenized real world assets (such as shares of classical artworks), non-algorithmic stable coins (those backed by hard-currency savings) and central bank digital currencies.
So far, just two companies have received a virtual asset trading platform licence, according to Hong Kong’s Securities and Futures Commission, with another nine applications in the works, including one from OKX, among the world’s top-five largest cryptocurrency exchanges by trading volume.
Getting such a licence can be costly – upward of $10-million according to local media – and requires companies to hire specialist compliance officers to liaise with the SFC, as well as introduce extra auditing and security measures to guard against money laundering and market manipulation.
In a statement, OKX chief commercial officer Lennix Lai said his company was “proud to be among the first batch of licence applicants,” adding OKX “has always been an advocate for progressive regulation” and was “committed to doing our part to nurture this industry’s growth in this direction.”
The endorsement has been a major boost to the Hong Kong scheme, which had appeared to be floundering after it was put forward in the middle of last year. Proponents hope it could be the first of many exchanges setting up shop in the territory, as formerly regulatory-averse companies seek a way to reassure retail investors they are a safe place to do business after FTX executives, who had presented themselves as the industry’s grown-ups, were found to have looted customer funds to make risky bets.
“Of course, crypto aficionados that want to be under the radar and avoid all regulation will steer clear,” Mr. Fitzgerald said. “But for normal customers wanting to get into this space, there’s a value in the branding that comes with being regulated by somewhere like Hong Kong.”
The administrative region has played a pivotal role in crypto history. Mr. Bankman-Fried founded FTX in the city in 2019, and other major homegrown players include Block.one, which raised US$4-billion in a record-breaking initial coin offering (ICO), and Tether, still the world’s most dominant stablecoin, a type of cryptocurrency that is pegged to a real world equivalent, in this case the U.S. dollar.
But as China cracked down on crypto amid fears that digital currencies were being used to bypass the country’s ultrastrict currency controls, Hong Kong began to make noises about restricting trading to professional investors and implementing tougher licensing requirements for exchanges. Coming at the height of the crypto bubble, the mere hint of regulation sent many firms fleeing, including FTX, which relocated to the Bahamas in 2021; others moved to Hong Kong’s Asian rival, Singapore.
Hong Kong also suffered a wider brain drain across the financial sector during the pandemic, when tough COVID-19 rules and mandatory 21-day quarantine resulted in the departure of thousands of expats. Since the Chinese territory fully reopened this year, officials have been on a major drive to attract talent, something doubling down on crypto could help, said Sterett Seckman, founder of Typhoon Trading, a Hong Kong-based cryptocurrency trading firm.
“Having regulated entities in Hong Kong, those companies will need to hire programmers, data scientists, infrastructure teams, financial engineers, a lot of people who are desirable to have around,” he added.
The city’s renewed enthusiasm for crypto took a blow in September, when police accused local exchange JPEX of defrauding roughly 2,500 customers of upward of $260-million. Dozens of Hong Kongers have also been tricked into working for call centres in Southeast Asia, where they are held in brutal conditions and forced to manipulate other victims into sending money through Tether or other cryptocurrencies, as journalist Zeke Faux documents in his book Number Go Up: Inside Crypto’s Wild Rise and Staggering Fall.
But while Mr. Faux and other critics point to such scams as evidence that the main innovations from 15 years of crypto have been criminal, industry boosters see the shift toward greater regulation post-FTX fallout as making way for crypto to finally clean up its act: less speculative bubbles, more digital assets pegged to clear sources of value.
Hong Kong authorities appear to be in the latter camp. Speaking amid the JPEX scandal, Financial Secretary Paul Chan said, “as far as the government is concerned, we are of the view that the blockchain technology is here to stay,” adding, “financial innovation is something that we have to embrace.”
Mr. Seckman, the trader, said “the more intelligent regulation Hong Kong puts in place, the more attractive it will be for professional players and the more difficult it becomes for regulation-averse companies.”
“Some people might shy away from doing anything around crypto post-FTX, but I think by doing this you at least move in the direction of keeping those who play by the rules.”