Crypto exchanges sticking it out in Hong Kong see value in regulator’s ‘safety first’ approach

Despite recent withdrawals, recently ‘deemed to be licensed’ exchanges spur some optimism about the future of Hong Kong’s virtual asset market

Reading Time:2 minutes

Published: 9:30pm, 5 Jun 2024

Hong Kong’s restrictive regulatory regime for cryptocurrency exchanges is sending mixed signals after 11 firms moved closer to obtaining a licence, with some optimistic about the city’s “safety first” approach while others question the value proposition of operating in a relatively small market.

A recent wave of exits announced by some of the largest global crypto exchanges – including mainland China-linked services OKX, Bybit and Gate.io – has shaken the confidence of industry participants in Hong Kong’s Web3 development, Legislative Council member Duncan Chiu recently wrote in an opinion piece, referring to many of the city’s rules introduced last year as “overly harsh”.

Platform operators recently received explicit instructions from the Securities and Futures Commission (SFC) to not serve mainland Chinese residents, and to ensure related parties do the same. That, combined with high costs and technical and operational overhauls needed to comply with the regulations that took effect in June 2023, have contributed to the decisions of more than a quarter of the initial 24 licence applicants to withdraw from the scheme, forcing them to shut down in Hong Kong.

Alessio Quaglini, co-founder and chief executive of virtual-asset custodian Hex Trust. Photo: Handout

“It’s natural that they would withdraw their applications, as the trade-off between the size of the retail market in Hong Kong and the high regulatory costs, along with the impact on their global operations, isn’t justified,” said Alessio Quaglini, co-founder and chief executive of Hong Kong-based cryptocurrency custody provider Hex Trust.

“The current framework in Hong Kong is very restrictive, which deters global companies from establishing substantial operations here,” he added. “If the aim is to position Hong Kong as a global hub, the strategy is sound but the execution should be improved.”

At the centre of the SFC’s approach to regulating crypto is a principle it describes as “same activity, same risks, same regulation”. This puts the emphasis on investor protection, requiring virtual asset market participants to meet the same standards as traditional finance market participants, according to Jonathan Crompton, a partner at the law firm RPC in Hong Kong.

That so many major exchanges have withdrawn their licence applications demonstrates that “the SFC is not driving forward at any cost”, Crompton said.