Hong Kong gets ready to shut down all unlicensed crypto exchanges

As an analyst with a background in financial regulation and experience living in Asia, I believe that the departure of several crypto exchanges from Hong Kong may not be enough to derail the region’s aspirations to become an international crypto hub. Instead, this regulatory shift could represent a necessary step towards creating a more stable and compliant market for digital assets.

As a crypto market analyst, I’ve noticed that several cryptocurrency exchanges have recently announced their intention to leave Hong Kong. This development raises concerns about the impact on the region’s ambitions to establish itself as a global crypto hub. The departure of these key players could potentially weaken Hong Kong’s position in the competitive landscape of crypto markets, making it more challenging for the region to attract new exchanges and investors.

Hong Kong regulators have announced that any cryptocurrency platforms that haven’t obtained a license from the Securities and Futures Commission (SFC) must halt their operations in the territory straightaway.

At the start of the year, the Securities and Futures Commission (SFC) made it clear that cryptocurrency exchanges had until February 29 to apply for a license, or else they would be required to cease their operations in the region within the following three months.

Approximately 22 cryptocurrency exchanges submitted applications for necessary licenses to legally operate in Hong Kong as of the given SFC deadline. Yet, a few of these applicants later retracted their submissions prior to the deadline’s completion.

As a crypto investor, I’ve noticed some significant developments in the Hong Kong market lately. Last month, six major global platforms, including OKX, Gate.HK, and Huobi HK, announced their departure from the Hong Kong market. Among them, Gate.HK was the only one to disclose the reason for their decision – an “urgent need” for a comprehensive overhaul of their trading platform in order to meet the regulatory requirements set by Hong Kong authorities.

Industry experts express concern that the new licensing system could mirror the “food truck fiasco” or represent an empty attempt by the government to support virtual banks.
Colin Wu, blockchain journalist

Compulsory license

Starting from June 1, it is mandatory for virtual asset trading platforms (VATPs) based in Hong Kong to hold a license under the Anti-Money Laundering and Anti-Terrorism Financing Order (AMLO) in order to operate legally.

Under this new regulation, VATPs must obtain a license from the Financial Services Council or meet the criteria to be considered “deemed licensed.” Failing to comply with these requirements could result in criminal penalties, as authorities have vowed to take firm action against non-compliance.

“This list showcases the names of virtual asset trading platform operators whose license applications by the SFC (Note 1) have not been granted, and also comprises those who will be considered licensed as of 1st June 2024.”
SFC statement

As a researcher studying financial regulations, I’d express it this way: If a platform fails to meet the standards set by the Securities and Futures Commission (SFC) in Hong Kong, they risk having their license application denied, which could potentially lead to the suspension of their operations in the region. The SFC emphasizes that these conditions are temporary measures aimed at fostering market growth while ensuring investor protection.

Who can get a license?

Based on Bloomberg’s report, the Securities and Futures Commission (SFC) revealed in early June that certain cryptocurrency trading platforms had advanced in the licensing process.

As an analyst, I’ve reviewed the list of applicants for our program, which consists of various companies such as HKbitEX, VDX, HKVAX, PantherTrade, Accumulus, DFX Labs, Bixin.com, xWhale, bitV, YAX, Bullish, Crypto.com, WhaleFin, Matrixport HK, and bitcoinworld. These companies have all expressed interest in participating in our initiative.

Simultaneously, major trading platforms such as OKX have halted their permit application processes. Notably, Binance, the biggest exchange globally, along with Coinbase and Kraken, have chosen not to submit applications.

Prohibition on servicing clients from China

Since July 1997, Hong Kong has been recognized as a Special Administrative Region (SAR) within China, operating under the “one country, two systems” framework. Concurrently, the approaches of Hong Kong and mainland China regarding cryptocurrencies present significant differences.

As a crypto investor, I’ve noticed that despite China’s strict prohibition on cryptocurrency trading since last September, the appeal of Bitcoin (BTC) in this region has only grown. Amazingly, the underground market for cryptocurrencies in China still boasts substantial trading volumes. On the other hand, Hong Kong, known for its openness to digital assets, is currently grappling with an economic downturn. Consequently, investors in this territory are increasingly turning to digital currencies as a potential hedge against economic instability.

Colin Wu disclosed information about the process of acquiring necessary approvals. Some candidates shared with him that the Securities and Futures Commission (SFC) demanded that applicants for licenses ensure that their cryptocurrency exchanges would not provide services to users from mainland China in any part of the world.

As a researcher studying the regulatory landscape of cryptocurrency exchanges, I’ve come across intriguing information. Several applicants have shared with me that the Hong Kong Securities and Futures Commission (SFC) demanded they pledge not to serve Chinese users in any part of the world as a condition for obtaining a license. Consequently, Binance, OKX, HTX Gate, among others, decided to withdraw their applications due to this requirement.
— Wu Blockchain (@WuBlockchain) June 1, 2024

According to the report, it is suggested that this situation might be driving some cryptocurrency trading platforms out of Hong Kong.

Hong Kong heads to web3

Unlike mainland China, Hong Kong has been actively developing blockchain in the last few years.

Beginning in October 2022, the government made it lawful for retail transactions using cryptocurrency. In early December 2022, Hong Kong’s Legislative Council passed legislation, effective June 1, 2023, which introduced the notion of virtual assets and mandated licensing for crypto service providers.

Six Exchange-Traded Funds (ETFs) focused on Bitcoin and Ethereum (ETH) spot markets became available for trading in Hong Kong last April. The following four companies were given the green light to introduce these new financial instruments: China Asset Management, Harvest Global Investments, Bosera, and HashKey.

International investors, in addition to Hong Kong citizens, are eligible to invest in the new Exchange-Traded Funds (ETFs), provided they comply with local requirements. A crucial step is undergoing the Know Your Customer (KYC) process. By extending the investor pool, the Hong Kong ETF market can broaden its client base and enhance both liquidity and stability.

Will the new rules ruin Hong Kong’s efforts?

In Hong Kong’s approach, there is a strong focus on safeguarding investors and preventing money laundering activities. This emphasis might deter individuals seeking more lenient regulations. Nevertheless, although cryptocurrency trading is prohibited in Hong Kong, it serves as a possible gateway to accessing China’s vast wealth.

Regulatory bodies are conducting multiple trials to evaluate the advantages of cryptocurrencies and discover potential use cases. Notably, Hong Kong has taken a supportive stance towards cryptography, making it the most prepared nation in this regard.

Through enforced crypto exchange licensing, Hong Kong is poised to reinforce its status as a global cryptocurrency hub of significance.

2024-06-04 13:30