As the U.S. government continues to rein in the crypto industry with a spate of regulations, other places are emerging as new hubs for the virtual asset industry. On Monday, Hong Kong proposed rules that would let retail investors trade certain “large-cap tokens” on licensed exchanges, a stark contrast to mainland China across its border where crypto-related transactions are outright banned.

The city’s Securities and Futures Commission did not specify which large tokens would be allowed, though a spokesperson from the regulatory body said they would likely be Bitcoin and Ether, two of the biggest digital assets by market value.

Since China’s crackdown on crypto trading, the country’s web3 startups have largely given up on their home market and shifted focus abroad. Some of the more resourceful ones have opted to set up new bases in friendlier locations such as Singapore and Dubai, though they normally continue to keep developers in China to tap the country’s large pool of affordable tech talent.

With Hong Kong’s introduction of a more relaxed regulatory environment for cryptocurrencies, some of these Chinese-founded web3 companies in exile might return and be closer to home.

China’s clampdown on crypto trading to protect individual investors from speculative activity seems prescient now, given the flurry of bankruptcies and layoffs that has roiled the global crypto industry. But money and talent continue pouring into web3 despite the burst of the crypto bubble. It’s hard to imagine Beijing sitting still while the rest of the world works on the building blocks that some argue would spark a new wave of innovation as big as the current internet itself.

Hong Kong, historically a financial hub, can potentially be a laboratory for China’s policymakers to test out blockchain’s potential with some buffer for the nation’s one billion netizens.

The proposal laid out by Hong Kong stipulates that all centralized virtual currency exchanges operating in the city or marketing services to the territory’s investors must obtain licenses from the securities and futures authority. The requirements “cover key areas such as safe custody of assets, know-your-client, conflicts of interest, cybersecurity, accounting and auditing, risk management, anti-money laundering/counter-financing of terrorism and prevention of market misconduct,” the announcement reads.

“In addition to ensuring suitability in onboarding clients and token admission, the other key proposals relate to token due diligence, governance and disclosures.”

In other words, centralized crypto exchanges have to ban Hong Kong IP addresses until they obtain the relevant permits to operate there.

The regulatory requirements are open for consultation through March 31 and the new licensing regime will take effect on June 1.

“Hong Kong’s extended support for virtual assets since October is further enhanced with the new licensing regime and consultation,” Jupiter Zheng, research director at HashKey Capital, says in a written comment. Hong Kong previously introduced a voluntary licensing regime that restricted crypto platforms to clients with portfolios of at least HK$8 million, and HashKey is one of the two with the permit.

“This will help more start-up companies and talents establish businesses in Hong Kong, resulting in a more prosperous local virtual asset / web3 ecosystem,” Zheng adds. “This news has not only caused widespread positive responses in the Asia-Pacific region, but also in the global Web3 community. It can be assumed that the Western market and participants will also pay more attention to the development of the Eastern Web3 market this year.”

Updated with added investor comment on February 21, 2023.