Can the "front store and back factory" model in Hong Kong + Shenzhen be compliant for Web3 entrepreneurship?

CN
20 hours ago

The current "front store, back factory" model can still be a realistic choice, but the premise is that the team must truly achieve a clear separation of resources and responsibilities between domestic and overseas.

Written by: Iris, Mao Jiehao

When we talk about domestic Web3 entrepreneurship, we always mention the 924 document from 2021, emphasizing that conducting virtual currency financial services domestically is illegal financial activity, which constitutes a crime and will be prosecuted under the law.

However, we also find that in recent years, there has been a model between Hong Kong and Shenzhen called "front store, back factory," which involves setting up projects/companies in Hong Kong to face regulation and overseas capital, while organizing development and some operational aspects in Shenzhen to enjoy strong technological research and development and low costs.

This naturally raises questions: Is this model really compliant? If it is compliant, does it mean I can set up a project in Hong Kong and then operate domestically?

It must be said that this is a very interesting and practical question.

Why does the "front store, back factory" model exist?

Some may wonder, since the 924 document from 2021 has clearly stated that conducting virtual currency-related financial activities domestically is illegal, why has this "Hong Kong front store, Shenzhen back factory" model become active in the eyes of many Web3 entrepreneurs in recent years?

In 2023, Kong Jianping, the director of Hong Kong Cyberport, publicly stated in an interview with The Paper Technology that the "front store, back factory" model between Shenzhen and Hong Kong will facilitate the development of Web3.

* Image source: The Paper

Mankun Lawyers believe that the reason this model can exist is that regulatory focus is not solely on whether the project directly serves domestic users, but also on the actual location of project operations, core decision-making, and fund management, which is to say, the distribution of actual control and key resources.

On the surface, Web3 project parties register all legal entities and business in Hong Kong or other overseas jurisdictions; through technical means such as IP restrictions and KYC, they limit the provision of financial services to users in Hong Kong and overseas; at the same time, fund settlement, license applications, market promotion, and other aspects are also completed through overseas entities.

In this way, both from a business operation perspective and from the service target perspective, they avoid domestic users and align with China's regulatory policies.

From a development perspective, choosing to build a technical team in Shenzhen is based on considerations of cost, efficiency, and technological advantages. As an important part of the Guangdong-Hong Kong-Macao Greater Bay Area, Shenzhen has a mature technological research and development foundation and a large reserve of Web3 talent. Compared to local development teams in Hong Kong, Shenzhen has obvious advantages in terms of labor costs, development cycles, and technological accumulation. For many Web3 project parties, purely outsourcing underlying research and development to Shenzhen is a normal business choice, not much different from the "overseas company + domestic outsourcing development" model in the traditional internet industry.

In short, the Hong Kong - Shenzhen "front store, back factory" model seems to temporarily avoid the risk of direct regulatory intervention by clearly delineating domestic and overseas operational functions. However, this model still has a strong sensitivity to compliance.

Potential challenges of the "front store, back factory" model

On the surface, the "front store, back factory" model seems to have achieved a "clear separation" of domestic and overseas business by registering compliant entities in Hong Kong and retaining only the technical research and development aspects domestically, in order to avoid regulatory red lines. But the problem lies precisely in the fact that the technical development, product iteration, and business operations of Web3 projects are highly coupled. Many times, domestic technical teams may not only undertake development work but also inevitably get involved in token design, some operations, data processing, and even user support, which poses compliance risks for Web3 projects.

This is because regulatory agencies do not only look at whether the nominal structure complies with regulations but will penetrate to focus on the actual control chain of the project—who holds the core operational rights, fund flow decision-making rights, and user data management rights. If the daily operational management, key decision-making, and fund handling of the project are still concentrated domestically, even if the project entity is registered in Hong Kong and the service targets are limited to overseas users, it can easily be deemed by regulators as "substantively" utilizing domestic resources to provide illegal financial services.

Moreover, it is worth noting that some projects, in order to save costs or for efficiency reasons, choose to outsource some market promotion, community management, or even customer service to Shenzhen teams, or even directly initiate global user-facing operational activities from domestic teams. At this point, regulatory authorities may completely believe that the core operational chain of the project has not been clearly cut, potentially violating legal provisions.

Additionally, since the technical team is deeply involved in product logic design, even if it appears that the project is launching new products or features overseas, the development and launch processes may have already been completed in Shenzhen, further blurring the lines between the domestic team and financial services.

In other words, the risk of the "front store, back factory" model never lies in whether compliant entities are established on the surface, but in whether the functional separation of domestic and overseas resources is truly realized. As long as the domestic team gets involved in core aspects such as fund decision-making, operational management, or user services, the compliance risk of the Web3 project will suddenly increase, and it is highly likely to be deemed by regulatory authorities as "hanging a sheep's head while selling dog meat," leading to legal accountability.

Mankun Lawyers' Recommendations

As mentioned above, the "front store, back factory" model superficially achieves a seemingly compliant structure by establishing compliant entities in Hong Kong and restricting domestic user participation. However, as regulatory agencies increasingly focus on "substance over form," if Web3 project parties want to truly reduce legal risks, relying solely on formal functional separation is far from sufficient.

Mankun Lawyers recommend that Web3 entrepreneurial teams, when adopting the "front store, back factory" model, must pay attention to the following points:

First, completely sever the core control chain between domestic and overseas. Whether it is daily decision-making, fund flow, user data processing, or market promotion and operational management, it must be ensured that these are independently completed by overseas registered entities, and it is crucial to avoid outsourcing related functions back to domestic teams. Technical development can be undertaken by the Shenzhen team depending on the project's needs, but it must be strictly limited to the "pure research and development" phase, without involving sensitive content such as fund management, user operations, or market activities after the project goes live, to prevent crossing regulatory red lines.

Second, avoid mixing technical research and product operational functions. Many projects, due to the technical team's high understanding of product logic, tend to let them simultaneously get involved in token design and user interaction, which actually leads to a blurring of domestic and overseas functions. Project parties should clearly define the scope of work for the technical team, strictly separate it from the compliance team and operational team of the Hong Kong entity, ensuring that technical development exists solely as the "back factory" and does not participate in the "front store" business operations.

Additionally, establish a clear legal and compliance firewall. Web3 project parties should, with the assistance of professional legal personnel, establish clear isolation mechanisms with domestic teams at the contractual level, personnel structure level, and fund flow chain level. This includes but is not limited to explicitly prohibiting domestic teams from engaging in fund settlement, token distribution, and user management in technical development contracts; simultaneously establishing independent overseas legal entities or foundations to hold project IP, assets, and brand rights, preventing domestic entities from being held accountable as de facto partners or co-operators due to nominal "technical services."

Finally, prepare compliance filings in advance for each jurisdiction. If the Web3 project entity is registered in Hong Kong, it is advisable to apply for relevant licenses as early as possible, either independently or by hiring professional legal advisors, to ensure that all financial service activities directed at users operate within a compliant framework. At the same time, avoid conducting any promotional marketing, community operations, or payment settlements in mainland China to reduce the risk of being deemed to be "indirectly providing services to domestic residents."

Ultimately, the current "front store, back factory" model can still serve as a realistic choice, but the premise is that the team must truly achieve a clear separation of resources and responsibilities between domestic and overseas, avoiding turning domestic technical development into an "invisible support" for overseas financial operations. However, under the existing regulatory policies, this model is not the best long-term solution. As regulations become increasingly strict, risks will inevitably rise, and a slight misstep could lead to criminal penalties, undoing all previous efforts.

Therefore, Mankun Lawyers still advise Chinese entrepreneurs to strive to truly realize an "overseas" model, fully implementing technological research and development, corporate governance, and financial operations abroad, and accepting compliance management from overseas regulatory agencies.

免责声明:本文章仅代表作者个人观点,不代表本平台的立场和观点。本文章仅供信息分享,不构成对任何人的任何投资建议。用户与作者之间的任何争议,与本平台无关。如网页中刊载的文章或图片涉及侵权,请提供相关的权利证明和身份证明发送邮件到support@aicoin.com,本平台相关工作人员将会进行核查。

Share To
APP

X

Telegram

Facebook

Reddit

CopyLink