Crypto exchanges are leaving Hong Kong. Will this undermine the region’s aspirations to become an international crypto hub?

Compulsory License

Starting June 1, virtual asset trading platforms (VATPs) operating in Hong Kong must be licensed under the Anti-Money Laundering and Anti-Terrorism Financing Order (AMLO) to continue their operations legally. This regulatory change mandates that VATPs be licensed by the Financial Services Council or qualify as “deemed to be licensed” applicants. Non-compliance is considered a criminal offense, and strict actions are promised against violations.

“This list sets out the names of virtual asset trading platform operator applicants (VATP applicants) whose license applications have yet to be approved by the SFC and includes those which are deemed-to-be-licensed VATP applicants as of 1 June 2024.”

Failure to meet the standards set by the Securities and Futures Commission (SFC) will result in the license being refused, potentially forcing platforms to cease operations in Hong Kong. The SFC highlights the temporary nature of these conditions to foster market development and ensure investor safety.

Who Can Get a License?

According to recent announcements, several cryptocurrency exchanges are a step closer to obtaining licenses. Some of the applicants include HKbitEX, VDX, HKVAX, PantherTrade, Accumulus, DFX Labs, Bixin.com, xWhale, bitV, YAX, Bullish, Crypto.com, WhaleFin, Matrixport HK, HKX, and bitcoinworld.

However, major platforms like OKX have withdrawn their permit applications. Notably, Binance, the world’s largest exchange, along with Coinbase and Kraken, did not apply for licenses.

Prohibition on Servicing Clients from China

Hong Kong operates under the principle of “one country, two systems” since July 1997. While China has banned cryptocurrency trading since September 2021, interest in Bitcoin (BTC) and other digital assets continues to grow. Despite the ban, the underground cryptocurrency market in China remains active with significant trading volumes.

Hong Kong, on the other hand, is open to digital assets and is experiencing an economic slowdown, pushing investors toward cryptocurrencies. The SFC has required license applicants to guarantee that exchanges will not serve users from mainland China in any region globally. This condition has led to some exchanges, including Binance, OKX, and Gate, withdrawing their applications.

Hong Kong Heads to Web3

Unlike mainland China, Hong Kong has been actively developing blockchain technology. In October 2022, the government announced the legalization of retail transactions with cryptocurrency. By December 2022, the Legislative Council adopted legislation to introduce the concept of virtual assets and establish mandatory licensing for crypto service providers starting June 1, 2023.

In April, six Bitcoin and Ethereum (ETH) spot ETFs were launched for trading in Hong Kong. Companies like China Asset Management, Harvest Global Investments, Bosera, and HashKey received approval to launch these new tools. International investors who meet local standards, including the Know Your Customer (KYC) procedure, will also have access to these ETFs, potentially expanding the client base and improving market liquidity and stability.

Will the New Rules Ruin Hong Kong’s Efforts?

Hong Kong’s approach focuses on investor protection and anti-money laundering measures, which could deter those seeking less stringent compliance conditions. Despite a ban on crypto trading in mainland China, Hong Kong offers a potential gateway to China’s wealth. The city is running several pilot projects to assess the benefits of cryptocurrencies and explore related applications.

With mandatory licensing of crypto exchanges, Hong Kong aims to solidify its position as a leading global cryptocurrency hub. The region’s pro-crypto stance and regulatory framework may attract more investors and foster a robust digital asset ecosystem.

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