A crypto entrepreneur whose business in China was upended by a regulatory crackdown considers his experience to be a cautionary tale for companies attracted by Hong Kong’s push to create a digital-asset hub.

Crypto may not stay a long-term priority for Hong Kong even though for now it’s focused on rolling out fresh rules for the sector, according to Bobby Lee, who set up China’s first Bitcoin exchange and then shuttered the mainland trading platform after a clampdown by Beijing. He later founded US-based crypto storage provider Ballet Global Inc.

Hong Kong is set to issue licenses for crypto exchanges under a rulebook that takes effect on June 1, but Lee said in an interview that “the bigger picture is what happens in three years, five years — I wouldn’t be surprised if Hong Kong did a reversal and put a red light in front of everyone.”

Officials want to woo crypto firms while protecting investors amid an effort to restore Hong Kong’s image as a financial center. The pivot has Beijing’s quiet backing, yet digital-asset trading remains banned on the mainland and mired in controversy courtesy of a global rout that exposed risky practices — leading to questions about whether Hong Kong will stay the course.

The legislative framework encoding crypto rules will bring transparency and clarity, Hong Kong Monetary Authority Chief Executive Eddie Yue said in an interview earlier this month. He was responding to a query about lingering concerns that officials could yet sour on their crypto pivot.

‘Drop in the Bucket’

China’s ban on crypto trading in 2021 dulled Hong Kong’s allure as a conduit for mainland cash.

“Hong Kong itself is a drop in the bucket,” said Lee, who sold his international crypto trading platform BTCC to an investment fund in the city in 2018. “The fantasy for exchanges is thinking that if officials let us get a license, then maybe they’ll start a sort of crypto-connect trading link with mainland China.”

The new licensing regime for crypto exchanges from Hong Kong’s Securities & Futures Commission includes a provision that allows retail investors to trade bigger tokens like Bitcoin and Ether.

Industry executives said there are many unanswered questions, including the treatment of crypto derivatives, decentralized finance, staking, nonfungible tokens and utility coins — such as those used for play-to-earn gaming.

Gray Areas

“Hong Kong is clear in terms of the direction but there’s still room to provide more details around what can be done, as we want to do things that are allowed and supported in an explicit way,” said Henry Zhang, founder of DigiFT Tech, a Singapore-based digital-asset exchange.

The gray areas may force crypto firms to assess whether some products involve securities. That’s a complex task and the SFC has indicated decisions will be made on a case-by-case basis.

Hong Kong used to be a digital-asset hub in earlier years. It then took a skeptical position before becoming more pro-crypto seven months ago. The evolution of its stance points to the regulatory challenges posed by digital assets. The US, for instance, has turned up the heat on the industry.

“It’s difficult for businesses to have a five-year regulatory road map,” said Lucy Gazmararian, founder of web3 venture fund Token Bay Capital. “Have it in the back of your mind, but really plan for one to two years ahead — because look what happened in the US with the crackdown on the sector.”