Regulatory Scrutiny Threatens Hong Kong’s Crypto Ambitions

Hong Kong’s efforts to establish itself as a leading digital asset hub are encountering significant challenges as uncertainty looms over whether 11 crypto exchanges will secure full licenses.

According to a report by Kiuyan Wong for Bloomberg, these exchanges previously received initial approvals but are now under scrutiny by the city’s Securities and Futures Commission (SFC).

Bloomberg reports that the SFC’s on-site inspections of these “deemed-to-be-licensed” platforms have uncovered unsatisfactory practices, with some exchanges overly dependent on a few executives for managing client assets. Additionally, Bloomberg notes that certain platforms are not adequately protecting against cybercrime risks, raising further concerns.

The specific exchanges that fell short of the SFC’s standards remain unidentified. Bloomberg indicates that the inspections are ongoing and subject to change. This adds to Hong Kong’s challenges as it aims to cultivate a thriving crypto center amid an already cautious regulatory approach.

The exchanges under scrutiny include well-known global players such as Crypto.com and Bullish, along with others like HKbitEX, PantherTrade, and Matrixport HK, per Bloomberg report. While Crypto.com did not comment on the inspections, the other exchanges did not respond to Bloomberg’s inquiries.

A spokesperson for the SFC told Bloomberg that the inspections aim to ensure that applicants adhere to regulatory requirements, especially in safeguarding client assets and implementing know-your-client processes. Bloomberg further reports that the SFC may revoke the deemed-to-be-licensed status of platforms that cannot remedy critical deficiencies or may reject their license applications altogether.

The licensing of crypto exchanges is a crucial part of Hong Kong’s broader web3 agenda, first introduced in 2022, Bloomberg explains. This agenda is part of a broader effort to revive the city’s appeal as an international financial hub following a political crackdown. However, Bloomberg notes that the cautious approach taken by authorities has so far struggled to attract significant personnel shifts or capital inflows.

Adding to the regulatory challenges, Bloomberg highlights a major scandal involving JPEX, an unlicensed crypto platform that resulted in 2,636 victims losing a total of HK$1.6 billion ($205 million). This incident has pushed Hong Kong officials to prioritize investor protection, according to Bloomberg.

The exchanges under SFC’s scrutiny have been barred from onboarding new clients until they secure full licenses. If these exchanges fail to meet the requirements, Bloomberg points out that they would need to restart the submission process from scratch. Bloomberg also notes that full licenses are expected to be issued by the end of 2024 for those firms that satisfy all regulatory requirements.

Currently, only two crypto platforms—OSL and HashKey—are fully licensed in Hong Kong. The licensing process has already seen 12 companies, including Huobi HK and OKX, withdraw their applications.

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