Web3 Entrepreneurship: Compliance Concerns of the Hong Kong-Shenzhen Model

In recent years, a Web3 entrepreneurial model known as "front store and back factory" has emerged between Hong Kong and Shenzhen. This model typically establishes projects or companies in Hong Kong, targeting overseas markets and capital; while organizing technology development and some operations in Shenzhen to benefit from strong R&D capabilities and lower costs. However, can this seemingly clever arrangement truly avoid compliance risks?

Reasons for the Existence of the Model

The reason this model can exist is primarily because regulatory agencies focus not only on whether the project directly serves domestic users, but also examine the actual operation, core decision-making, and the location of fund management of the project. On the surface, many Web3 projects register their legal entities and businesses in Hong Kong or other overseas regions, using technical means to restrict their services to overseas users, and completing fund settlements, license applications, and other processes abroad to comply with China’s regulatory policies.

Choosing to establish a technical team in Shenzhen is mainly based on cost-effectiveness and technological advantages. As an important part of the Guangdong-Hong Kong-Macao Greater Bay Area, Shenzhen has a mature technological foundation and a rich reserve of Web3 talent. For many projects, outsourcing underlying research and development to Shenzhen is no different in essence from the traditional internet industry's "overseas company + domestic outsourcing development" model.

Potential Compliance Challenges

Although the "front store and back factory" model superficially avoids direct regulatory risks by clearly dividing domestic and foreign functions, it still faces severe compliance challenges in practice. The technical development, product iteration, and business operations of Web3 projects are highly coupled, and domestic technical teams often inevitably participate in token design, certain operations, data processing, etc., which lays hidden compliance risks for the project.

Regulators will not only look at the surface structure, but will also conduct an in-depth review of the project's actual control chain. If the daily operations, key decisions, and fund handling of the project are still mainly carried out domestically, even if the registered location is in Hong Kong, it may still be deemed to be "substantially" utilizing domestic resources to provide illegal financial services.

What is even more concerning is that some projects, in order to save costs or improve efficiency, delegate part of their market promotion, community management, and even customer service to a team in Shenzhen. This may be seen as the core operational chain being unclear, potentially circumventing legal regulations. Furthermore, because the technical team is deeply involved in the product logic design, even if new products or features are superficially launched overseas, their development and launch processes have likely already been completed in Shenzhen, further blurring the lines between the domestic team and financial services.

Suggestions to Reduce Risk

To truly reduce legal risks, Web3 startup teams should pay attention to the following points when adopting the "front store and back factory" model:

1. Completely cut off the core control chain both domestically and overseas. Ensure that core aspects such as daily project decisions, capital flow, user data processing, market promotion, and operational management are independently handled by overseas registered entities, avoiding outsourcing relevant functions to domestic teams.

2. Avoid the mixing of technical research and development with product operation functions. Clearly define the scope of work for the technical team, strictly separating it from the compliance team and operation team of the Hong Kong entity, ensuring that technical development exists solely as a "back office."

3. Establish a clear legal and compliance firewall. With the assistance of professional legal personnel, set up a clear isolation mechanism with the domestic team in terms of contracts, personnel structure, and fund flows.

4. Prepare compliance filings in advance for each jurisdiction. If the project entity is registered in Hong Kong, apply for the relevant licenses as early as possible to ensure that all financial services directed at users operate within a compliance framework. At the same time, avoid any promotional marketing, community operations, payment settlements, and other activities in mainland China.

Although the "front store and back factory" model can still be considered as an option, it is essential to genuinely achieve a clear separation of domestic and foreign resources and responsibilities. However, under the current regulatory environment, this model is not a long-term solution. As regulations become increasingly strict, risks will also rise, and a slight misstep may lead to serious legal consequences.

Therefore, Chinese entrepreneurs should consider truly implementing the "going abroad" model, fully transferring technology research and development, corporate governance, and financial operations overseas, and accepting the compliance management of local regulatory authorities. This may be a more prudent long-term development strategy under the current circumstances.