Eleven cryptocurrency exchanges in Hong Kong, initially granted provisional approvals, are now facing increased scrutiny from regulators, putting their future operations in question. The city’s Securities and Futures Commission (SFC) has conducted on-site inspections of these “deemed-to-be-licensed” platforms and uncovered several practices that fall short of regulatory standards, according to sources cited by Bloomberg.
Regulatory Inspections Uncover Compliance Issues
The inspections revealed that some crypto firms are overly reliant on a limited number of executives for the custody of client assets, raising concerns about their ability to manage these responsibilities effectively. Additionally, the SFC found that some exchanges lack robust measures to protect against cybercrime, further compounding the concerns.
Although the SFC has not publicly disclosed which specific firms have failed to meet the required standards, the ongoing inspections suggest that more findings could emerge. Among the exchanges under review are prominent global players like Crypto.com and Bullish, as well as local platforms such as HKbitEX, PantherTrade, and Matrixport HK.
Regulatory Warning: Licenses at Risk
The SFC has emphasized that these inspections are part of a broader effort to ensure that applicants adhere to stringent regulatory requirements, particularly in safeguarding client assets and maintaining effective know-your-client (KYC) processes. The commission has warned that platforms unable to address the critical deficiencies identified during the inspections could face severe consequences, including the removal of their “deemed-to-be-licensed” status or outright rejection of their license applications.
Challenges for Hong Kong’s Web3 Strategy
Licensing cryptocurrency exchanges is a central element of Hong Kong’s broader Web3 strategy, which was introduced in 2022 as part of an effort to restore the city’s standing as a major international financial hub following years of political turmoil. However, the cautious approach taken by regulators has yet to produce significant changes in terms of personnel shifts or capital inflows, raising questions about the strategy’s overall effectiveness.
As of now, only two crypto platforms, OSL and HashKey, hold full licenses in Hong Kong. The SFC anticipates issuing full licenses to successful applicants by the end of 2024. In the meantime, several companies, including Huobi HK and OKX, have already withdrawn their applications. Notably, HKVAEX, suspected to be affiliated with Binance, withdrew its license application on March 28, 2024. This was followed by withdrawals from IBTCEX, QuanXLab, and Huobi HK in May, as well as Gate.HK and Bybit (operating as Spark Fintech Limited).
Legislative Criticism and Market Implications
Recently, a member of Hong Kong’s Legislative Council criticized the city’s cryptocurrency licensing system, arguing that it has negatively impacted market confidence. The lawmaker pointed to a specific requirement imposed by the SFC, which mandates that applicants for virtual asset trading platform licenses commit to not having mainland Chinese users in any region. This stipulation has proven challenging for traditional offshore exchanges, making compliance difficult.
OKX attempted to form an industry alliance to challenge this requirement but was ultimately unsuccessful. Industry insiders have suggested that entities that have withdrawn their applications may consider updating their legal frameworks or entities and reapplying in the future.
Amid these regulatory challenges, Hong Kong has introduced its first batch of ETFs focused on cryptocurrencies, potentially setting the stage for competition with popular Bitcoin products in the United States. However, the ongoing regulatory scrutiny casts a shadow over the future of crypto exchanges in the region, leaving the industry in a state of uncertainty.
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