Challenges Faced by Major Crypto Exchanges in Hong Kong
Wu Blockchain, a well-known source of cryptocurrency news, has highlighted significant criticism of Hong Kong's cryptocurrency licensing system. The system's inflexibility has led to a loss of market confidence, as emphasized by a Hong Kong legislator. Big exchanges such as Binance and OKX have encountered difficulties in obtaining licenses, and even those that have managed to secure them struggle to generate profits.
The Hong Kong Securities and Futures Commission (SFC) released a circular on May 31, 2023, outlining transitional arrangements for the VATP (Virtual Asset Trading Platforms) licensing system, effective from June 1, 2023. A one-year transition period was established, concluding on June 1, 2024, by which all virtual asset trading platforms in Hong Kong must either obtain a license or cease operations.
By the end of May 2024, several exchanges had retracted their license applications. Notably, HKVAEX, allegedly associated with Binance, withdrew its application on March 28, 2024. Subsequent withdrawals followed suit: IBTCEX, QuanXLab, and Huobi HK on May 14; Gate HK on May 22; OKX HK on May 24; and Bybit (Spark Fintech Limited) on May 31. As of May 31, eleven companies had either withdrawn or returned their applications, leaving seventeen still in the application process.
A pivotal issue lies in the SFC's stipulation that applicants must confirm the absence of mainland Chinese users in any region, rendering it unattainable for conventional offshore exchanges. OKX's attempt to construct an industry coalition against this requirement ended in failure.
The newly implemented licensing framework, designed to supervise virtual asset trading platforms, commenced on June 1, 2023. The transition period allowed operators to apply for licenses before February 29, 2024, and adhere to new regulations from June 1, 2024. Nevertheless, as the deadline approached, numerous operators opted to exit the Hong Kong market.
The stringent conditions have deterred prominent exchanges like Coinbase from seeking licenses. Significant withdrawals since February include Gate and Huobi, with the situation deteriorating in May. OKX, one of the top three in global trading volume, also withdrew. The remaining applicants are mostly smaller in scale, some lacking industry expertise or having limited involvement in the Web3 domain.
OKX's departure has ignited discussions within the industry, questioning Hong Kong's dedication to Web3 expansion. Critics contend that the authorities' cautious stance and conventional financial outlook undermine the competitiveness and adaptability of the licenses. Despite substantial investments, some operators decided to retract their applications at the final stage.
Industry insiders express concerns that the new licensing system could repeat past regulatory missteps, akin to the 'food truck incident' or the promotion of virtual banks, resulting in much ado about nothing. They fear that, even with licenses, operators will face challenges in developing profitable business models.
The SFC's licensing conditions demand stringent standards in asset custody, conflict of interest mitigation, network security, accounting, risk management, and anti-money laundering. These quantitative measures, adopted from traditional finance, are deemed excessively stringent for Web3 finance. Critics argue that the authorities lack the foresight and adaptability required to nurture Web3 financial innovation.
Additionally, governmental bodies and regulatory agencies are criticized for their lack of innovation, mandating that licensed operators' management possess years of virtual asset business experience. Regulators are depicted as lacking expertise in Web3 business, resulting in communication obstacles due to differing technical backgrounds and market exposure.
The withdrawal of licenses has adversely affected market confidence in Hong Kong's Web3 advancement. To restore trust, the SFC must make prompt licensing determinations to offer investors long-term assurance. Trading platforms must deliver pioneering products that harmonize legal compliance, investor safeguarding, and financial innovation. Authorities must embrace fresh perspectives and resolve to stimulate Web3 finance development.
