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

Hong Kong authorities said that all cryptocurrency exchanges that have not applied for an operating license with the Securities and Futures Commission (SFC) of Hong Kong are required by law to cease operating in the region immediately.

Thus, at the beginning of the year, the SFC explicitly requested cryptocurrency exchanges to either submit an application for a license by Feb. 29 or stop operating in the region within three months.

At least 22 crypto exchanges applied for licenses required to operate in Hong Kong at the time specified by the SFC. However, some of them withdrew their applications shortly before the deadline.

Thus, journalist Colin Wu writes that last month, six global platforms, including OKX, Gate.HK and Huobi HK left the Hong Kong market. Moreover, many of them needed to indicate the reasons for their unexpected decision. Only Gate.HK cited the need for an “overhaul” of its trading platform before it could comply with Hong Kong regulatory requirements.

“Many industry insiders are worried that the new licensing system will turn into a replica of the “food truck incident” or even become a case of the government’s promotion of virtual banks, with much ado about nothing.”

Colin Wu, blockchain journalist

Compulsory license

Effective 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 be legal.

This regulatory change requires VATPs to be licensed by the Financial Services Council or to qualify as applicants “deemed to be licensed.” Acting without following the rules is a criminal offense, and strict action has been promised against violations.

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

SFC statement

Failure to comply with SFC standards will result in the license being refused, and platforms may be forced to cease operations in Hong Kong. The SFC emphasizes the temporary nature of the conditions, which are intended to encourage market development and ensure investor safety.

Who can get a license?

According to Bloomberg, in early June, the SFC announced that some cryptocurrency exchanges were one step closer to obtaining licenses.

The total number of applicants includes companies such as HKbitEX, VDX, HKVAX, PantherTrade, Accumulus, DFX Labs, Bixin.com, xWhale, bitV, YAX, Bullish, Crypto.com, WhaleFin, Matrixport HK, HKX, and bitcoinworld.

At the same time, large platforms like OKX have withdrawn permit applications. Binance, the world’s largest exchange, did not apply, as did Coinbase and Kraken.

Prohibition on servicing clients from China

Hong Kong has been designated as a Special Administrative Region of China under the principle of “one country, two systems” since July 1997. At the same time, the attitude of the two regions towards cryptocurrencies is fundamentally different.

China has strictly banned cryptocurrency trading since September 2021, but interest in Bitcoin (BTC) is growing. Despite the ban, the underground cryptocurrency market in China still has huge trading volumes. Hong Kong is open to digital assets and faces an economic slowdown that is pushing investors toward digital assets.

Colin Wu revealed some details of obtaining official permission. Several applicants told him that the SFC required license applicants to guarantee that the exchanges would not serve users from mainland China in any world region.

The source claims that this condition could be the reason some cryptocurrency exchanges have left Hong Kong.

Hong Kong heads to web3

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

In October 2022, the government announced the legalization of retail transactions with cryptocurrency. At the beginning of December 2022, the Legislative Council of Hong Kong adopted legislation that introduced the concept of virtual assets and established mandatory licensing of crypto service providers from June 1, 2023.

In April, six Bitcoin and Ethereum (ETH) spot ETFs were launched for trading in Hong Kong. Four companies received approval to launch the new tool: China Asset Management, Harvest Global Investments, Bosera, and HashKey.

In addition to Hong Kong citizens, international investors who meet all local standards will also have access to the new ETFs. In particular, they must go through the Know Your Customer (KYC) procedure. This inclusive approach could expand the client base and improve the liquidity and stability of the Hong Kong ETF market.

Will the new rules ruin Hong Kong’s efforts?

Hong Kong’s approach emphasizes investor protection and anti-money laundering measures, which could discourage those demanding stricter compliance conditions. However, despite a ban on crypto trading there, the city offers a potential window to mainland China’s wealth.

Regulators are running several pilot projects to assess cryptos’ potential benefits and explore related applications. In addition, Hong Kong has gradually confirmed its pro-cryptographic position, becoming the most crypto-ready country.

One way or another, with mandatory licensing of crypto exchanges, Hong Kong will further strengthen its position as the world’s leading cryptocurrency hub.