Can the "front store and back factory" model in Hong Kong and Shenzhen comply with regulations in Web3 entrepreneurship?

At present, the "front shop and back factory" model can still be used as a realistic choice, but the premise is that the team must truly achieve a clear separation of domestic and foreign resources and rights and responsibilities, and avoid turning domestic technology development into "invisible support" for overseas financial business. This article is from the article written by Mankiw blockchain Iris and Mao Jiehao, and is compiled and compiled by Panewslab. (Synopsis: Aptos Movemaker launches US$2 million grant program and dedicated co-creation space in Hong Kong to help builders) (Background added: Aptos EverMove launched in Hong Kong, with the first HackerHouse event offering a HK$4 million prize pool) When we talk about domestic Web3 entrepreneurship, we will always talk about the 924 file in 2021, and will emphasize that virtual currency financial services are illegal financial activities in China. will constitute a crime and be prosecuted for criminal responsibility according to law. However, we will also find that in recent years, there is such a model between Hong Kong and Shenzhen, called "front shop and back factory", that is, setting up projects/companies in Hong Kong for regulatory and overseas capital; In Shenzhen, we organize development and some operations, and enjoy strong technology research and development and low costs. This makes people wonder: Is this model really compliant? If I am compliant, does that mean I can set up a project in Hong Kong and then execute it in China? I have to say, it's an interesting and very practical question. Why does "front shop, back factory" exist? Some people may wonder why this model of "Hong Kong front store, Shenzhen back factory" has been active in the vision of many Web3 entrepreneurs in recent years, since the 2021 924 file has clearly pointed out that virtual currency-related financial activities in the mainland are illegal crimes? In 2023, Kong Jianping, director of Hong Kong Cyberport, also publicly stated in an interview with The Paper that the "front store, back factory" model between Shenzhen and Hong Kong will facilitate the development of Web3. Source: The Paper Mankiw believes that the reason behind the existence of this model is that the focus of supervision is not only on whether the project directly serves domestic users, but also on the location of the actual operation, core decision-making and fund management of the project, that is, the actual control and distribution of key resources. On the surface, the Web3 project party registers all legal entities and businesses in Hong Kong or other overseas jurisdictions; Through IP restrictions, KYC and other technical means, the provision of financial services is limited to Hong Kong and overseas users; At the same time, fund settlement, license application, market publicity and other links are also completed through overseas entities. In this way, both in terms of commercial operations and service objects, users in China are circumvented and cater to China's regulatory policies. From the perspective of underlying development, the choice to set up a technical team in Shenzhen is based on cost, efficiency and technical advantages. As an important part of the Guangdong-Hong Kong-Macao Greater Bay Area, Shenzhen has a mature technology research and development foundation and a large number of Web3 talent reserves, compared with the local development team in Hong Kong, Shenzhen has obvious advantages in employment costs, R&D cycle and technology accumulation. For many Web3 project parties, outsourcing the underlying R&D to Shenzhen is a normal business choice, which is not much different from the "overseas company + domestic outsourcing development" model in the traditional Internet industry. In short, the Hong Kong-Shenzhen "front shop, back factory" model seems to temporarily avoid the risk of direct regulatory intervention by clearly demarcating domestic and overseas operational functions. However, this model is still inherently highly compliant. Potential challenges of "front shop, back factory" On the surface, the "front shop, back factory" model seems to achieve a "clear division" of domestic and foreign business by registering a compliant entity in Hong Kong and retaining only technology R&D links in China, in order to circumvent regulatory red lines. But the problem is precisely that: the technical development, product iteration and business operation of the Web3 project itself are highly coupled, and in many cases, the domestic technical team may not only undertake the development work, but also inevitably intervene in token design, part of the operation, data processing and even user support, which buries the hidden danger of Web3 project compliance. Because regulators will not only look at whether the nominal structure is compliant, but will penetrate the actual control chain of the project - who is controlling the core operation of the project, the decision-making power of capital flow, and the management of user data. If the daily operation and management, key decision-making, and fund processing of the project are still concentrated in China, even if the project entity is registered in Hong Kong and the service target is limited to overseas users, it is easy for the regulator to determine that it is "substantial" to use domestic resources to provide illegal financial services in disguise. What is more noteworthy is that in order to save costs or for efficiency reasons, some projects choose to outsource part of marketing, community management and even customer service to the Shenzhen team, and even directly launch operation activities for global users from the domestic team. At this time, it is entirely possible that the regulatory authorities believe that the core operation chain of the project is not clearly cut and is suspected of circumventing the legal provisions. In addition, because the technical team is deeply involved in the design of product logic, even if on the surface, the project is a new product or new function launched overseas, and its development and launch process is likely to have already been completed in Shenzhen, which further blurs the boundary between domestic teams and financial services. In other words, the risk of "front shop and back factory" never lies in whether a compliance entity is set up on the surface, but on whether domestic and foreign resources have truly achieved functional isolation. As long as the domestic team is involved in the core links of capital decision-making, operation management or user service, the compliance risk of Web3 projects will suddenly increase, and it is very likely that the regulatory authorities will determine that they are "hanging sheep's heads and selling dog meat", and then pursue legal responsibility. Mankiw's advice As mentioned above, the "front shop and back factory" model ostensibly achieves a seemingly compliant structure by establishing Hong Kong compliance entities and restricting the participation of domestic users. However, at a time when regulators are paying more and more attention to "substance over form", if Web3 project parties want to truly reduce legal risks, it is far from enough to rely on formal division of functions. Mankiw lawyers suggest that Web3 startup teams must pay attention to the following points when adopting the "front shop, back factory" model: First, completely cut the core control chain at home and abroad. Whether it is the daily decision-making of the project, the flow of funds, the processing of user data, or the marketing and operation management, it is necessary to ensure that the overseas registered entity completes it independently, and do not outsource the relevant functions back to the domestic team. Technology development can be undertaken by the Shenzhen team according to the different projects, but it needs to be strictly limited to the "pure R&D" link, and cannot involve sensitive content such as fund management, user operations, and market activities after the project is launched, so as to prevent touching the regulatory red line. Second, avoid mixing technology research and development with product operation functions. Many projects are accustomed to letting them intervene in token design and user interaction at the same time because the technical team has a high grasp of product logic, which will actually lead to the blurring of domestic and foreign functions. The project party should clarify the scope of work of the technical team, strictly separate it from the compliance team and operation team of the Hong Kong entity, and ensure that the technology development only exists as a "back factory", and does not participate in the business operation of the "front store". In addition, establish a clear legal and compliance firewall. Web3 project parties should establish a clear isolation mechanism with domestic teams at the contract level, personnel structure level and capital flow chain with the assistance of professional legal personnel. Including but not limited to, the technology development contract explicitly prohibits domestic teams from participating in fund settlement, token distribution, and user management; At the same time, the establishment of overseas independence...