Hong Kong’s New Crypto Trading Guidelines: The “China Narrative”

The Hong Kong Securities and Futures Commission (SFC) has proposed a regulatory framework for cryptocurrency exchanges. The proposed rules would require exchanges to obtain a license from the SFC to operate in Hong Kong and comply with AML and KYC requirements. These clear guidelines are designed to promote investor protection in the crypto market. However, the proposed guidelines would only allow individual investors to trade large-cap coins on exchanges licensed by the SFC, but the SFC did not detail which tokens they plan to make available to retail investors.

According to Bloomberg, the only specifications the SFC gave are that coins should be included in at least two acceptable, investible indexes from independent providers, one of which should have experience in the traditional finance sector. These guidelines have not yet been finalized, as the SFC allowed a feedback period on the proposed rules, which ended on March 31, 2023. The official guidelines will be implemented on June 1, 2023.

Coins that fit the Hong Kong Narrative According to Twitter

Which Coins will the SFC Approve?

This report will cover projects that both have connections with China from the more speculative standpoint Crypto Twitter is taking while also considering the current guidelines related to market capitalization and their presence in crypto indices presented in the SFC’s current proposal. Large market cap projects covered by this report and likely to be legalized for retail market participants in Hong Kong include Filecoin and ImmutableX.

Filecoin (FIL)

Market Cap: $2.3bn | Fully Diluted Valuation: $11.3bn

Circulating Supply: 410,486,749 FIL | Max Supply: 1,964,621,057 FIL

Developer: Protocol Labs

Headquarters: San Francisco, California

Protocol Description

Filecoin is a decentralized storage network that enables users to store digital information using blockchain technology. Filecoin also launched the Filecoin Virtual Machine (FVM) on March 14, 2023, to bring programmability to Filecoin, enabling the development and execution of smart contracts on the Filecoin blockchain, upgrading Filecoin to a Layer-1 smart contract platform that has EVM compatibility.

FIL

FIL is Filecoin’s native asset and is used to pay for transaction fees on the Filecoin network, pay for storage on the Filecoin network, pay for data retrieval, participate in governance, and incentivize network providers who validate and add new blocks to the Filecoin blockchain. FIL also is used as collateral for miners and is proportional to storage space provided by miners.

20% of the supply is circulating currently; Emissions will significantly reduce to approximately 4% per year in August 2023.

How does Filecoin Fit the Hong Kong Narrative?

Although a US-based company, Protocol Labs, develops Filecoin, Filecoin has a history of being considered a Chinese project as it was primarily mined by miners based in China. Filecoin has established this reputation for several reasons, including servicing XingChi Media, a China-based post-production company that backs up its data using Filecoin, according to CoinDesk.

In 2022 Italy’s University of Pisa conducted a study on Filecoin. Their study indicated the centralization of Filecoin’s mining power among Chinese miners, which comprise most of Filecoin’s top 10 miners. However, the Chinese crypto mining ban has forced Filecoin mining firms to relocate, as evidenced by RRMine Global’s, a Filecoin mining firm, relocation to Singapore in September 2022.

Finally, Filecoin’s market capitalization of $2.3bn makes it the 30th largest cryptocurrency by market capitalization as of May 31, 2023. Bitpanda, an Austrian cryptocurrency exchange, offers several crypto indices, including the BCI 25, which maintains exposure to FIL. Grayscale also offers a Filecoin Trust product. These products may help FIL meet the SFCs requirements for retail traders in Hong Kong.

FIL Chart

FIL reclaimed key support back in January and proceeded to see a surge of buy pressure, as can be seen in the circled volume candles. It has since settled into the reload zone, offering a clean entry location.

ImmutableX ($IMX)

Market Cap: $1.0bn | Fully Diluted Valuation: $2.24bn

Circulating Supply: 914,163,545 IMX | Max Supply: 2,000,000,000 IMX

Developer: Immutable

Headquarters: Australia

Protocol Description

ImmutableX is an Ethereum zero-knowledge-proof layer-2 blockchain that uses StarkWare’s StarkEx technology and is designed for NFT gaming. Projects currently building on ImmutableX include Gods Unchained, Guild of Guardians, Ember Sword, ESL Gaming, GreenPark Sports, Illuvium, Vee Friends, TikTok, and more.

IMX

The IMX token is currently undergoing tokenomic upgrades. These upgrades will be revealed periodically, with the next upgrades scheduled to be announced in mid-April and mid-May 2023. The first two upgrades announced included fee utility, where 20% of fees on the platform must be paid for in IMX, and the establishment of IMX as a gas token on the Immutable zkEVM. In addition, IMX can also be staked to earn a share of the network fees and participate in governance.

How does ImmutableX Fit the Hong Kong Narrative?

ImmutableX may be developed by Australian company Immutable, but it has received significant backing from Hong Kong-based venture capital firm Animoca Brands and Tencent, the multinational conglomerate headquartered in Shenzhen, China, both of which participated in Immutable’s $200mm Series C financing at a $2.5bn valuation announced on March 7, 2023. These investors and Chinese-owned social media platform TikTok’s development on ImmutableX have caused many to associate ImmutableX with China.

IMX also has a market capitalization of $1.0bn, making it the 55th largest cryptocurrency by the metric. IMX is not included in any of the Bitpanda or Bitwise indices but is included in Index Coop’s Metaverse Index. However, Index Coop may not be established enough to be considered an acceptable crypto index provider by the SFC.

IMX Chart

Speculative “China Narrative” Projects

Nervos Network, Litentry, and Highstreet are less likely to be made available by the SFC due to their relatively smaller market caps and lack of inclusion in major crypto indices. However, these projects all have Chinese connections and may benefit from speculation on the “China Narrative.”

Nervos Network (CKB)

Market Cap: $156.9m | Fully Diluted Valuation:

Circulating Supply: 33,340,636,263 CKB | Max Supply: ∞ CKB

Developer: Jan Xie

Headquarters: Shanghai

Protocol Description

Nervos Network is an open-source, public blockchain ecosystem that enables enterprises and individuals to securely store, transfer, and use digital assets. It uses a unique two-layer architecture consisting of the Common Knowledge Base (CKB) and the Nervos AppChain (sidechains) to provide flexibility, scalability, and interoperability. Nervos Network runs on a Proof-of-Work(PoW)/Proof-of-Stake(PoS) hybrid consensus mechanism. PoW is used to secure the chain and generate new blocks, while PoS is used for block validation.

CKB

Nervos Network’s native token, CKB, serves as a means of exchange, a store of value, and a utility token within the ecosystem. Ecosystem utility includes governance voting, validator staking, transaction fee payment, and storage payment for deploying dApps. The initial distribution of CKB is shown below.

CKB block rewards are currently 1562.5 tokens/block but are subject to halving every four years. The first-ever halving is scheduled for November 19 this year. With this date just around the corner, investors will likely speculate higher token value in the near future. Much like a BTC halving, this speculation would probably occur before the event itself. With current block times at about 5b CKB are emitted yearly, which is an inflation rate of about 15% of the current supply. This suggests that even though the max supply is technically infinite, inflation shouldn’t weigh down the token’s value too significantly, especially with the rate dropping to 7.5% later this year.

How does Nervos Network Fit the Hong Kong Narrative?

Nervos Network’s headquarters are in Shanghai, and as a result, it is often considered one of China’s blockchains. The token’s market cap is not large enough to be listed in any major crypto indices and will therefore fail to meet Hong Kong’s legalization requirements. One can only speculate that CKB will still benefit from a Chinese echo pump despite no direct buy pressure due to Hong Kong’s crypto legalization act.

CKB Chart

CKB showed strength in Jan 2023 with increased volume and reclaimed the $0.0034 support in late Jan after losing it in Nov 2022. However, it failed twice to retake the $0.0053 resistance level. Low-risk high-reward trade opportunities exist at $0.0034 or above $0.0053.

Litentry ($LIT)

Market Cap: $41.4m | Fully Diluted Valuation: $104.4m

Circulating Supply: 39,619,382 LIT | 100,000,000 LIT

Developer: Hanwen Cheng

Headquarters: Berlin

Protocol Description

Litentry is a cross-chain identity aggregator that allows users to move from fragmented, individual identities to aggregated identities. An aggregated identity creates a more comprehensive identity profile by creating an identity graph of the account relationships of the identity owner. This aggregated identity follows W3C DID standards and can potentially solve the problem of isolated ID registry systems that many tech companies face.

This permits the use of trust systems in DeFi. While trustless systems are great, they have their limitations: loans must be overcollateralized to guarantee the lender their money back. TradFi allows users to apply for undercollateralized loans based on their trustworthiness. Litentry makes this possible without compromising the blockchain privacy users know and love (your information is still encrypted and private).

Other use cases include:

• Sybil protection for things like airdrops
• Determining how decentralized a network or protocol really is
• Soulbound token and NFT ownership
• Anonymous job markets

LIT

LIT’s token utility is very similar to ETH; it is used to pay gas and can also be staked to validate transactions on the Proof of Stake chain (note that transactions, in this case, come in the form of matching staked identity data from users). Additionally, it serves as a governance token.

40% of the supply is circulating currently; 55% will be circulating in two years as the vesting is completed. The rest will be distributed in block rewards at a rate of 4% per year.

How does Litentry Fit the Hong Kong Narrative?

Hong Kong is set to legalize purchasing and trading of large-cap cryptocurrencies on June 1st. They are releasing more details on March 31st. I believe LIT can catch this narrative for a few reasons:

• It was found on the investment list of a Chinese fund, LD Capital, which invested in major china coins such as NEO, VET, and QTUM.
• The Litentry website lists that one of their three origins is Hangzhou.
• The LIT docs are available only in English and Mandarin.
• Note that Hong Kong may not be legalizing trading of LIT, so there is no fundamental catalyst for the token, only the potential hype cycle that “China coins” could see.

LIT Chart

LIT spent the better part of a year in an accumulation range with strong buy volume throughout. It has recently broken out of this range and settled in a reload zone. As it stands, a daily close above $1.13 would confirm a daily W and make for a strong bullish setup.

Highstreet ($HIGH)

Market Cap: $73.8mm | Fully Diluted Valuation: $215.8mm

Circulating Supply: 34,222,655 HIGH | Max Supply: 100,000,000 HIGH

Developer: Highstreet

Headquarters: Vancouver, British Columbia, Canada

Protocol Description

Highstreet is a play-to-earn metaverse and MMORPG that aims to bring commerce and entertainment to the metaverse. Highstreet recognizes that brands are not equipped to build and develop full-scale games and metaverse ecosystems. Instead, Highstreet aims to provide its metaverse as the layer that brands can integrate to establish virtual storefronts and digital products. Highstreet is designed to be a VR experience, but many aspects of the project are currently under development.

HIGH

HIGH is the governance and utility token of Highstreet with the following use cases:

• In-game access: HIGH tokens are required in various areas for game progression or access to special events.
• In-game currency for specialty items: HIGH tokens can be used to purchase special items such as digital real estate or limited edition products in the Highstreet Marketplace.
• Governance: High Token holders will be able to create and vote on on-chain governance proposals to determine the direction of the ongoing development of Highstreet.

The HIGH distribution is included below.

34% of the max supply of HIGH is circulating currently; HIGH will inflate at a rate of 47% over the next year.

STREET

STREET is the secondary token of Highstreet. It is the primary in-game currency and aims to ensure all users get an opportunity to participate in Highstreet without hyperinflation while still rewarding participants. STREET is scheduled to launch in Q3 2023. STREET’s use cases are included below.

• In-game currency: Used as the primary currency for in-game transactions
• Play-to-Earn: STREET can be earned by hunting, completing quests, and playing the game.

How does Highstreet Fit the Hong Kong Narrative?

Highstreet’s visual design draws inspiration from Asian cultures. Highstreet has also received significant backing from Hong Kong-based venture capital firm Animoca Brands, Hong Kong-based incubator and investor PANONY, and Binance Labs, which has ties to Hong Kong. The design of the platform and these investors give Highstreet its connection to China.

HIGH’s market capitalization of $73.8mm makes it the 334th largest cryptocurrency by that metric and the smallest of the projects presented in this report. HIGH has not been included in any of the Bitpanda or Bitwise indices, but it is included in Index Coop’s Metaverse Index. However, Index Coop may not be established enough to be considered an acceptable crypto index provider by the SFC.

HIGH Chart

HIGH had an impulsive move off the lows and is down in the reload zone of that move. A close above $2.16 would mark a daily W and a good long setup.

Risks

China has always been fickle around crypto and is known to strong-arm the industry with sudden sweeping regulations banning crypto assets and mining. The prospect of defined guidelines by the Hong Kong SFC is a promising development. Still, it does not render the region immune from broader geopolitical actions that could impact the industry on a whim. Additionally, the SFCs guidelines, in their current form, are quite vague and could be interpreted much differently than intended resulting in increased uncertainty around the actual assets that will be allowed by regulatory authorities.

Closing Thoughts

Filecoin, ImmutableX, Nervos Network, Litentry, and Highstreet should benefit from either the excitement around clear crypto guidelines or listing these assets on exchanges for retail traders in Hong Kong. The “China Narrative” was already perpetuated on crypto Twitter and should resurface as the launch of crypto trading for retail clients in Hong Kong launches. Based on the guidelines released by the SFC, we expect the assets listed for retail clients in Hong Kong will consist primarily of large-cap cryptocurrencies making Filecoin and ImmutableX strong contenders for listing combined with positive fundamental developments with the Filecoin FVM and the ImmutableX tokenomic upgrades in addition to their Chinese associations.

Nervos Network, Litentry, and Highstreet are more speculative than Filecoin and ImmutableX as their market capitalizations as of April 3, 2023, are $154.7mm, $41.7mm, and $69.2mm, respectively, and may not meet the SFCs criteria for “larger coins” nor included in notable crypto indexes. However, these projects have strong ties to China and are anecdotally considered “Chinese projects” due to their founders, backers, and design. At the very least, these projects should experience an echo rally fueled by speculation on Chinese projects with the potential to be listed in Hong Kong should the SFC surprise investors with a loose definition of “larger coins.”

Authors: 0xBoomz & SmeetyBoop