Web3 Entrepreneurship: A Compliance Discussion on the "Front Store and Back Factory" Model in Hong Kong and Shenzhen

In recent years, a new emerging model has appeared in the Web3 entrepreneurial field, which involves setting up projects or companies in Hong Kong to target overseas markets and capital, while organizing technical development and some operational processes in Shenzhen. This model is known as "front store and back factory," sparking much discussion about its Compliance.

Reasons for the Existence of the Model

The existence of this model is primarily due to the fact that regulatory authorities not only focus on whether the project directly serves domestic users, but also consider the actual operations, core decision-making, and the location of fund management. On the surface, Web3 projects register their legal entities and business in Hong Kong or other overseas regions, using technical means to limit their services to users in Hong Kong and abroad, while completing aspects such as fund settlement, license applications, and market promotion overseas.

Choosing to establish a technical team in Shenzhen is based on considerations of cost, efficiency, and technological advantages. As an important part of the Guangdong-Hong Kong-Macau Greater Bay Area, Shenzhen has a mature technological research and development foundation and a rich reserve of Web3 talent. For many Web3 projects, outsourcing underlying research and development to Shenzhen is a normal business choice, similar to the "overseas company + domestic outsourcing development" model in the traditional internet industry.

Potential Challenges

Although the "front store and back factory" model seems to achieve a clear division of domestic and foreign businesses, there are still compliance risks in practice. The technical development, product iteration, and business operations of Web3 projects are highly coupled, and domestic technical teams may inevitably be involved in token design, certain operations, data processing, and even user support, which lays hidden compliance risks.

Regulatory agencies will focus on the actual control chain of the project, including the holders of core operational rights, decision-making rights for fund flows, 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's entity is registered in Hong Kong, it may still be deemed to "substantially" use domestic resources to provide illegal financial services in disguise.

In addition, some projects may outsource part of their marketing, community management, or even customer service to teams in Shenzhen in order to save costs or improve efficiency, which further blurs the boundaries between domestic teams and financial services.

Suggestions for Reducing Legal Risks

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

1. Completely sever the core control chain both domestically and abroad. Ensure that the core aspects such as daily decision-making, fund circulation, and user data processing of the project are independently completed by overseas registered entities, avoiding outsourcing related functions back 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 only as a "back office".

3. Establish a clear legal and Compliance firewall. With the assistance of professional legal personnel, set up explicit isolation mechanisms at the contractual level, personnel structure level, and capital flow chain with the domestic team.

4. Prepare compliance filings in advance for each jurisdiction. If the project entity is registered in Hong Kong, it is advisable to 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 engaging in any promotional marketing, community operations, payment settlement, or other activities in mainland China.

Conclusion

The "front store and back factory" model can be a practical choice, but the premise is that the team must truly achieve a clear separation of domestic and foreign resources and responsibilities. However, under the current regulatory policies, this model is not the best long-term solution. As regulations become increasingly strict, risks are inevitably on the rise.

Therefore, it is recommended that Chinese entrepreneurs strive to achieve a true "going abroad" model, integrating technology research and development, corporate governance, and financial operations overseas, while complying with the compliance management of foreign regulatory agencies. This can not only reduce legal risks but also benefit the long-term development of the project.