Hong Kong’s ambition to become a leading digital asset hub is facing hurdles as 11 crypto exchanges struggle to meet full licensing requirements, raising concerns about the city’s regulatory landscape.
Introduction Hong Kong’s aspirations to establish itself as a premier digital asset hub are encountering significant challenges, as doubts emerge over the ability of 11 crypto exchanges to secure full licenses. These exchanges, which had previously received initial approvals, are now under intense scrutiny by the city’s Securities and Futures Commission (SFC) for failing to meet key regulatory standards.
Inspections Reveal Compliance Issues According to sources familiar with the matter, the SFC uncovered several unsatisfactory practices during on-site inspections of these “deemed-to-be-licensed” platforms. Conducted since their initial approvals in June, these inspections revealed that some exchanges are overly dependent on a small group of executives for managing client asset custody, while others have not implemented adequate measures to protect against cybercrime risks. The sources, who requested anonymity due to the sensitive nature of the information, did not disclose which firms were found lacking.
A spokesperson for the SFC stated, “While the agency does not comment on specific cases, the inspections were carried out to ascertain whether applicants adhered to its requirements, with a particular focus on their safeguarding of client assets and know-your-client processes.”
Risk of Losing Licenses The findings from these inspections pose a significant challenge to Hong Kong’s efforts to foster a thriving crypto sector. The SFC has warned that platforms unable to address the “critical deficiencies identified during on-site inspections” could face the removal of their deemed-to-be-licensed status or outright rejection of their license applications. This situation leaves the future of these exchanges, which include global players such as Crypto.com and Bullish, as well as local firms like HKBITEX and Panthertrade, hanging in the balance.
Investor Protection Takes Center Stage The scrutiny of these exchanges comes against the backdrop of a recent scandal involving JPEX, an unlicensed crypto platform. The alleged scam, which reportedly defrauded 2,636 victims of a total of HK$1.6 billion (S$268 million), has intensified the focus on investor protection within Hong Kong’s crypto regulatory framework. In response, the SFC has taken a cautious approach to licensing, which is integral to Hong Kong’s broader Web3 agenda—an initiative aimed at restoring the city’s reputation as a leading international financial hub following recent political unrest.
Exchanges Struggle to Secure Full Licenses Currently, only two crypto platforms, OSL and Hashkey, hold full licenses in Hong Kong. Meanwhile, 12 other companies, including prominent names like Huobi HK, OKX, Bybit, and VAEX, have withdrawn their applications. The 11 exchanges currently under scrutiny have been prohibited from onboarding new clients until they secure full licenses. Should their applications be rejected, they would be required to restart the entire submission process from scratch, further complicating their operations and raising questions about the viability of Hong Kong’s digital asset ambitions.
Conclusion As Hong Kong navigates the complexities of crypto regulation, the outcome of these licensing challenges will play a critical role in determining the city’s future as a digital asset hub. The current situation underscores the delicate balance between fostering innovation and ensuring robust regulatory oversight—an equation that Hong Kong must solve if it is to succeed in its Web3 aspirations.
