Hong Kong authorities have issued a directive that all cryptocurrency exchanges operating in the region must obtain a license from the Securities and Futures Commission (SFC) of Hong Kong. Any exchanges that have not applied for this license are required by law to cease operations in the region immediately.
Earlier this year, the SFC explicitly requested that cryptocurrency exchanges either submit an application for a license by February 29th or stop operating in the region within three months. In response, at least 22 crypto exchanges applied for the required licenses within the specified timeframe.
However, it appears that some of these exchanges withdrew their applications shortly before the deadline. This suggests that not all of the 22 exchanges that initially applied will ultimately receive the necessary approval to continue operating in Hong Kong.
The SFC’s actions demonstrate the regulatory scrutiny that the cryptocurrency industry is facing, even in regions that have been relatively friendly to digital assets in the past. Exchanges that fail to comply with the new licensing requirements risk facing legal consequences for continuing to operate in Hong Kong.
In recent developments, several global cryptocurrency platforms have left the Hong Kong market, including OKX, Gate.HK, and Huobi HK. These platforms were required to provide reasons for their unexpected departure, with Gate.HK citing the need for an “overhaul” of its trading platform to 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
The regulatory landscape in Hong Kong has changed significantly, with virtual asset trading platforms (VATPs) now required to be licensed under the Anti-Money Laundering and Anti-Terrorism Financing Order (AMLO) to be legal. This new requirement came into effect on June 1.
Under the new regulations, VATPs must either be licensed by the Financial Services Council or qualify as applicants “deemed to be licensed.” Failure to comply with these regulations is considered a criminal offense, and strict action has been promised against any 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
The Securities and Futures Commission (SFC) of Hong Kong has set strict standards for cryptocurrency exchanges operating in the region. Failure to comply with these standards will result in the license being refused, potentially forcing platforms to cease operations in Hong Kong. The SFC emphasizes that these conditions are temporary and intended to promote market development while ensuring investor safety.
Who can get a license?
Recent updates suggest that some cryptocurrency exchanges are nearing the completion of their licensing applications. Bloomberg reported in early June that several exchanges were one step closer to obtaining licenses.
The list of applicants includes a range of companies, including HKbitEX, VDX, HKVAX, PantherTrade, Accumulus, DFX Labs, Bixin.com, xWhale, bitV, YAX, Bullish, Crypto.com, WhaleFin, Matrixport HK, HKX, and bitcoinworld.
However, not all major platforms have been successful in their applications. OKX withdrew its permit application, and prominent exchanges like Binance, Coinbase, and Kraken did not apply for licenses.
Prohibition on servicing clients from China
Hong Kong has a unique status as a Special Administrative Region of China, operating under the principle of “one country, two systems” since 1997. This distinction is reflected in the fundamentally different attitudes towards cryptocurrencies between the two regions.
China has taken a strict stance, banning cryptocurrency trading since September 2021. However, despite the ban, the underground cryptocurrency market in China continues to see significant trading volumes, indicating a growing interest in Bitcoin (BTC) and other digital assets.
In contrast, Hong Kong has remained open to digital assets, even as the region faces an economic slowdown that is pushing more investors towards these emerging markets. This divergence in approach highlights the distinct regulatory environments between Hong Kong and mainland China.
According to journalist Colin Wu, the Securities and Futures Commission (SFC) of Hong Kong has imposed additional requirements on license applicants. Several applicants have revealed that the SFC mandated they guarantee their exchanges would not serve users from mainland China, regardless of their location worldwide.
This restriction underscores the SFC’s efforts to maintain a clear separation between Hong Kong’s cryptocurrency regulations and China’s outright ban on the industry. The contrasting policies highlight the unique challenges and opportunities facing the digital asset landscape in these interconnected, yet distinct, regions.
Hong Kong heads to web3
The source suggests that the requirement for exchanges to guarantee they would not serve users from mainland China could be the reason some cryptocurrency exchanges have left Hong Kong.
Hong Kong, unlike mainland China, has been actively developing the blockchain sector in recent years. This development has led to significant advancements in the region’s digital asset landscape.
In October 2022, the government announced the legalization of retail transactions involving cryptocurrency. Additionally, the Legislative Council of Hong Kong passed legislation in early December 2022 that introduced the concept of virtual assets and established mandatory licensing for crypto service providers, effective from June 1, 2023.
These regulatory changes demonstrate Hong Kong’s commitment to fostering a supportive environment for the growth of blockchain and digital assets, setting it apart from mainland China’s strict ban on the industry.
In April, Hong Kong witnessed the launch of six Bitcoin and Ethereum (ETH) spot ETFs for trading. Four companies, including China Asset Management, Harvest Global Investments, Bosera, and HashKey, received regulatory approval to introduce these new financial tools.
The new ETFs are not limited to Hong Kong citizens alone. International investors who meet the local standards will also have access to these products. To participate, they must complete the Know Your Customer (KYC) procedure, ensuring a secure and transparent trading environment.
Will the new rules ruin Hong Kong’s efforts?
This inclusive approach is expected to broaden the client base and enhance the liquidity and stability of the Hong Kong ETF market. By welcoming international investors, the region aims to further establish itself as a hub for digital asset trading and investment.
Hong Kong’s approach to cryptocurrency regulation emphasizes investor protection and anti-money laundering measures, which could discourage those seeking more lenient compliance conditions. However, despite the ban on crypto trading in mainland China, Hong Kong offers a potential window for accessing the wealth of the Chinese market.
Regulators in Hong Kong are actively engaged in several pilot projects aimed at evaluating the benefits of cryptocurrencies and investigating related applications. Additionally, the region has gradually confirmed its pro-crypto stance, positioning itself as one of the most crypto-ready countries globally.
One way or another, the mandatory licensing of cryptocurrency exchanges in Hong Kong will further strengthen the region’s position as a leading global hub for digital assets. By striking a balance between regulatory oversight and fostering innovation, Hong Kong aims to attract and retain cryptocurrency businesses while prioritizing investor safety and financial stability.
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