Web3 Entrepreneurship: Compliance Discussion of the Hong Kong + Shenzhen Model

In recent years, the "front shop and back factory" model has gained significant attention between Hong Kong and Shenzhen. This model involves setting up projects or companies in Hong Kong, targeting overseas markets and capital, while organizing development and partial operations in Shenzhen to leverage the local strong technological research and development capabilities and relatively low costs. This arrangement raises a crucial question: Is this model truly Compliance?

The Reason for the Existence of the Model

The reason this model can exist is mainly because regulatory agencies not only focus on whether projects directly serve domestic users, but also examine the actual operations, core decision-making, and the location of fund management of the projects. 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 Hong Kong and overseas users, and complete fund settlement, license applications, and market promotion abroad.

The decision 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 R&D foundation and a rich reserve of Web3 talent. For many projects, outsourcing underlying R&D to Shenzhen is a reasonable business choice, similar to the model of "overseas companies + domestic outsourcing development" in the traditional internet industry.

Potential Challenges

Despite appearing on the surface that the "front store and back factory" model avoids direct regulatory risks by clearly dividing domestic and foreign operational functions, there are still significant compliance risks. The technical development, product iteration, and business operations of Web3 projects are highly interconnected, leading to domestic technical teams potentially being involved not only in development work but also in aspects such as token design, partial operations, data processing, and even user support.

Regulators not only pay attention to the superficial structure but also conduct in-depth reviews of the actual control chain of the project, including the holders of core operational rights, decision-making rights for the flow of funds, and user data management rights. If the daily management, key decisions, and fund handling of the project are still concentrated domestically, it may be deemed as a disguised provision of illegal financial services, even if the registered location is in Hong Kong.

In addition, some projects may outsource part of their marketing, community management, or even customer service to the Shenzhen team, or directly initiate global operations from within the country. This practice may be viewed by regulatory authorities as failing to clearly delineate the core operational chain and could be suspected of evading legal regulations.

Suggestions for Reducing Risk

For Web3 startup teams adopting the "front shop and back factory" model, here are a few suggestions:

1. Completely separate the core control chain between domestic and foreign entities. Ensure that daily project decisions, fund flows, user data processing, and other core aspects are independently completed by foreign registered entities, avoiding outsourcing these functions to domestic teams.

2. Strictly distinguish between the functions of technology research and development and product operation. Clearly define the scope of work for the technology team, ensuring that they only undertake development tasks and do not participate in token design, user interaction, and other operational aspects.

3. Establish clear legal and compliance firewalls. Set up clear isolation mechanisms in contracts, personnel structure, and funds flow with the domestic team to prevent being held accountable due to nominal "technical services."

4. Complete compliance filings in various jurisdictions in advance. Apply for relevant licenses in a timely manner to ensure that all user-facing financial services are legal and compliant. At the same time, avoid conducting any promotional marketing, community operations, or payment settlement activities in mainland China.

Conclusion

The "front shop, back factory" model can be considered as a current option, but the premise is that there must be a clear separation of domestic and foreign resources and responsibilities. However, under the existing regulatory environment, this model is not the best long-term solution. As regulations become increasingly stringent, related risks will also increase.

Therefore, for Chinese entrepreneurs, a safer choice is to adopt a true "going overseas" model, fully transferring technology research and development, corporate governance, and financial operations abroad, and complying with the local regulatory authorities' compliance management. Although this approach may increase short-term costs, it can better ensure the legality and sustainable development of the project in the long run.