Hong Kong crypto exchange licence applicants with ties to mainland China withdraw from city

Stringent regulatory requirements and an inability to serve mainland investors is pushing global cryptocurrency exchanges out of Hong Kong, with several major firms having withdrawn their licence applications a year after scrambling to set up shop ahead of new regulations meant to transform the city into a virtual asset hub.

The local affiliates of major mainland China-linked crypto exchanges - including OKX, Gate.io, KuCoin, Binance and HTX, formerly Huobi - have all withdrawn their applications for a virtual asset trading platform (VATP) licence in Hong Kong that were submitted over the past several months, according to the Securities and Futures Commission (SFC) website.

These firms, which started in China but now have sprawling global operations, are among the largest crypto industry players to have shown interest in Hong Kong's new virtual asset regulatory regime that started last June, which requires exchanges to be licensed in the city. Those with a pre-existing presence were granted a one-year grace period, but those that have withdrawn their applications must now shut down their Hong Kong operations.

Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.

Exacting demands from the SFC appear to have contributed to the drop-outs, which now comprise seven of the original 24 applicants. However, an inability to serve mainland customers may have been another major contributor.

In a notice reminding exchange operators that they must be "deemed to be licensed" by June 1 to continue operating in Hong Kong, the SFC said VATPs must "comply with all applicable laws and regulations, including ... preventing mainland Chinese residents from accessing any of their virtual asset-related services".

The rule regarding mainland investors was included in a list of requirements issued directly to applicants, dampening enthusiasm for operating in Hong Kong, according to an industry insider familiar with the matter, who declined to be named because the discussions were private.

In 2021, the People's Bank of China warned that offering cryptocurrency services to people in mainland China would be a violation of the law. Chinese crypto investors who have managed to find workarounds remain important for many exchanges that have moved offshore.

Other licence applicants might have been directly instructed by the SFC to withdraw, said Angela Ang, senior policy adviser at blockchain research firm TRM Labs.

"Businesses do not invest time and money into a licensing process only to withdraw," Ang said. "For those that are already operating, the stakes are especially high, as withdrawal means they need to shut down."

"They will typically only withdraw if it's clear they will not meet the bar for approval, perhaps as clear as being directly told by the regulator," she added.

The SFC declined to comment on the withdrawals.

Some of the exchanges that have withdrawn include local operations affiliated with overseas crypto firms, including HKVAEX, a Binance affiliate, and Huobi HK, which uses the former name of HTX. Both Binance and HTX have said those exchanges operate independently.

Only HashKey Exchange and OSL have been approved to serve retail investors in Hong Kong. There are now 18 VATP applicants left on the SFC's official list, with Crypto.com, Bullish and Bybit, another exchange founded on the mainland, among the largest.

This month, the SFC saw a new licence applicant for a platform called bitcoinworld, which used HTX's logo as its own according to Google search results and the website's source code. HTX said the company is neither a "subsidiary nor related company".

"We will investigate the issue and reserve the legal right [to take action] for the misuse of HTX's logo," a company representative said.

With the upcoming deadline for a decision on who can continue operating exchanges in the city, the number of applicants left is being taken by some as a demonstration of Hong Kong's progress in becoming a virtual asset hub.

"These withdrawals should be seen as a barometer of the SFC's regulatory expectations, and the type of crypto hub they want to be," Ang said.

Additional reporting by Matt Haldane.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2024. South China Morning Post Publishers Ltd. All rights reserved.