On July 3, Christopher Hui, the Secretary for Financial Services and the Treasury of Hong Kong, announced that Hong Kong regulators would closely monitor market developments following the withdrawal of license applications by several global crypto exchanges.
License Withdrawals Prompt Policy Review
Hui elaborated on the regulatory stance on cryptocurrencies amidst recent events, revealing that Hong Kong’s regulatory bodies, including the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC), would keep a close watch on market trends concerning virtual assets (VAs). This statement came in response to lawmakers’ inquiries about potential revisions to crypto licensing requirements after major global exchanges withdrew their applications.
Hui clarified that licensed corporations and registered institutions could distribute crypto-related products without changing their licensing conditions, provided they inform Hong Kong regulators.
New Capital Investment Entrant Scheme (New CIES)
The context of Hui’s comments is rooted in the implementation of the New Capital Investment Entrant Scheme (New CIES), launched on March 1 to attract foreign investments and talent to Hong Kong. Since its inception, the New CIES has received over 300 applications, with approvals granted for net asset assessments and investment requirements.
To qualify for the New CIES, applicants must have had at least HK$30 million in net assets or equity for the two years before applying. This stringent requirement may have contributed to the recent withdrawal of applications by several global exchanges.
For instance, HTX withdrew its Hong Kong crypto trading license application for the second time, and on May 23, Gate.io abandoned its trading license application, planning to delist tokens by August 28. Similarly, OKX withdrew its Virtual Asset Service Provider (VASP) license application on May 31 and ceased trading services for local residents. While the exact reasons for these actions are unclear, the stringent asset requirement might have played a role.
Legislative Concerns and Market Confidence
These withdrawals sparked criticism and scrutiny from Hong Kong’s Legislative Council members. Wu Shuo, among others, expressed concerns about the crypto licensing system, emphasizing its impact on market confidence and the direction of Hong Kong’s virtual asset market development.
Protecting Investors from Scams
One of the primary goals of the New CIES crypto regulation is to protect local investors from bad actors. The regulation mandates that companies conduct crypto knowledge tests for customers and inform them about the risks involved in trading crypto assets. This measure is crucial as the incidence of crypto scams continues to rise in Hong Kong.
For instance, in March, a 46-year-old housewife reported losing HK$7.1 million ($908,000) after investing in a fraudulent crypto platform. The fraud began in July 2022 when a scammer contacted her via Instagram, urging her to invest in cryptocurrencies through a fraudulent trading platform. Another scammer, posing as a customer service representative, tricked her into transferring over $900,000 into 15 bank accounts from August 19, 2022, to March 4, 2023.
Hong Kong police have noted a surge in crypto investment scams as digital assets gain popularity in the region. Financial losses from these frauds jumped 42.6% to HK$3.26 billion last year, up from HK$926 million in 2022. The number of reported cases also rose significantly, from 1,884 in 2022 to 5,105 in 2023.
Conclusion
The recent withdrawals of license applications by major crypto exchanges have prompted Hong Kong regulators to review and possibly revise their crypto licensing requirements. The stringent asset requirements under the New CIES may have contributed to these withdrawals, raising concerns among lawmakers about the crypto licensing system’s impact on market confidence. Meanwhile, the ongoing rise in crypto scams underscores the importance of protective regulations to safeguard local investors.
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