Hong Kong’s restrictive regulatory regime for cryptocurrency exchanges is sending mixed signals after 11 exchanges were set to receive licenses, with some optimistic about the city’s “safety first” approach and others questioning the value proposition of operating in a relatively small market.
Hong Kong legislator Darren Chiu recently wrote in an opinion piece that the recent exit announcements from some of the world’s largest cryptocurrency exchanges, including mainland China-related services OKX, Bybit and Gate.io, have shaken industry players’ confidence in Hong Kong’s Web3 development. He noted that many of the rules introduced by Hong Kong last year were “too harsh.”
Platform operators recently received clear instructions from the Hong Kong Securities and Futures Commission (SFC) not to provide services to residents of mainland China and to ensure that related parties do the same. This, coupled with the high costs and technical and operational reforms required to comply with the regulations that come into effect in June 2023, has led to more than a quarter of the original 6 license applicants deciding to withdraw from the program, forcing them to shut down in Hong Kong.
“It is natural that they withdraw their application because the trade-off between the size of Hong Kong’s retail market and the high regulatory costs, as well as the impact on their global business, is not justifiable,” said Alessio Quaglini, co-founder and CEO of Hex Trust, a Hong Kong-based cryptocurrency custody provider.
“Hong Kong’s current framework is very restrictive and discourages multinational companies from establishing large-scale operations here,” he added. “If the goal is to position Hong Kong as a global hub, then the strategy makes sense, but execution needs to improve.”
The core principle of the Hong Kong Securities and Futures Commission's regulation of cryptocurrencies is "same activities, same risks, same regulation." Jonathan Crompton, partner at RPC Law Firm in Hong Kong, said that this emphasizes investor protection and requires virtual asset market participants to meet the same standards as traditional financial market participants.
Crompton said the fact that so many large exchanges had withdrawn their license applications showed that “the SFC will not push this process forward at all costs”.
Exchanges still seeking Hong Kong licenses see reason for optimism that they could have closer ties to the city. Many of the exchanges were founded in Hong Kong, including Crypto.com, the largest of 11 companies that were “deemed to have been licensed” last week, a prerequisite for continuing to operate in the city while awaiting full approval.
The next largest applicant for designation by volume is CoinDesk owner Bullish, which will bring its major cryptocurrency conference Consensus to Hong Kong next year. After receiving the designation this week, the company expressed confidence in the SFC’s approach.
“We have always believed that regulatory clarity brings confidence, allowing companies like Bullish and jurisdictions like Hong Kong to continue to progress and innovate,” said Michael Lau, Bullish’s global head of sales. He added that the company has never served mainland clients and is therefore not affected by regulations prohibiting such activities.
Hong Kong legislator Jason Ng, known for his support for cryptocurrencies, delivers his opening remarks at the Asia Bitcoin Conference on May 2024, 5. Photo: Matt Haldane
Sean Lawrence, Asia Pacific head of blockchain data analytics firm Kaiko, said the continued investment commitment and pursuit of a local license “can only be seen as a recognition of Hong Kong’s huge potential in virtual assets and a testament to the regime that the SFC has laid out to date.”
He added that some of the applicants who withdrew might also reapply in the future as technology and risks continue to evolve.
“From what I understand, some will try again,” said Wu Jiezhuang, a lawmaker. “They will handle the matter internally and try again.”