Written by: Techub News
On June 1st, on the occasion of the first anniversary of the implementation of the Virtual Asset Service Provider Licensing Regime (VASP Regime) by the Hong Kong Securities and Futures Commission (SFC), the SFC updated the list of virtual asset trading platforms. Among them, HKbitEX, PantherTrade, Accumulus, DFX Labs, Bixin.com, xWhale, YAX, Bullish, Crypto.com, WhaleFin, and Matrixport HK were identified as applicants who have been considered for licensing. On the other hand, BGE, HKVAX, VDX, bitV, HKX, and bitcoinworld were not considered as applicants for licensing.
With the release of this list, coupled with the previous news of platforms like OKX voluntarily withdrawing their VASP license applications, many investors were left confused. What does it mean to be considered as an applicant for licensing? Does this mean that Hong Kong is no longer attractive?
To gain a better understanding of Hong Kong’s actions, Techub News conducted interviews with industry insiders (interviewees requested anonymity). Here are the interview responses:
Techub News: Why did the SFC consider the 11 platforms as applicants for licensing on June 1st, but they are not fully licensed? What is the difference between the two?
Anonymous Insider: According to the SFC’s regulations, virtual asset trading platforms need to obtain a license to operate legally. In the past 12 months, the SFC provided a transition period for virtual asset trading platforms that were already operating in Hong Kong before June 1, 2023. The end date of this transition period is June 1, 2024. Ultimately, a total of 11 platforms were considered as applicants for licensing under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.
However, it is important to note that this does not mean that these platforms have fully obtained the license. In fact, these platforms still need to meet a series of policies, procedures, systems, and monitoring measures in order to obtain formal licensing in the future. Therefore, although they are included in the list of “applicants for licensing,” it does not mean that they fully comply with the SFC’s requirements.
This measure aims to help the public determine whether virtual asset trading platforms have applied for a license from the SFC and can continue to operate in Hong Kong after the end of the transition period. However, it does not mean that these platforms have obtained formal licensing, as the SFC may refuse or withdraw their license applications.
Techub News: What are the reasons why the other 6 platforms in the application list were not considered as applicants for licensing? How do they differ from the 11 platforms?
Anonymous Insider: The SFC did not specify the reasons and consequences for not considering the 6 platforms as applicants for licensing in their official announcement. However, in the SFC’s circular on the transitional arrangements for the new licensing regime for virtual asset trading platforms issued on May 31, 2023, it mentioned that “if the SFC considers that the virtual asset trading platform applicant does not meet any of the conditions for being considered as an applicant for licensing after reviewing the license application and all the information available to the SFC, the SFC may issue a notice (a notice of non-consideration as an applicant for licensing) to the relevant virtual asset trading platform, informing them that the arrangement for being considered as an applicant for licensing will not apply to the platform. Although the license application submitted under section 53ZRK of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance will be subject to the procedure for being considered as withdrawn, the virtual asset trading platform must still cease its business on or before May 31, 2024, or three months after the date of the notice, whichever is later, regardless of whether it has opposed the withdrawal of its license application” (paragraph 13).
Based on this, although the applications of the platforms not considered for licensing have not been explicitly withdrawn, they will not be able to engage in the provision of virtual asset services in Hong Kong from June 1, 2024.
Techub News: What are the backgrounds of the 11 platforms that have been considered as applicants for licensing, and what will the competition be like for future compliant licensed exchanges?
Anonymous Insider: According to publicly available information, the 11 platforms that have been considered as applicants for licensing have different backgrounds, including participants from the original cryptocurrency community, traditional securities firms, payment platforms, etc. However, they all aspire to operate compliantly in Hong Kong and become one of the licensed exchanges.
With global regulations on virtual assets becoming stricter, compliant licensed exchanges will become the mainstream in the future. These exchanges will need to meet strict regulatory requirements to protect investor interests and maintain market stability. Competition will focus on compliance, user experience, product innovation, asset diversity, and security. Licensed exchanges need to continuously improve the quality of their services to attract more users and maintain a competitive advantage.
The advantages of compliant exchanges include:
High level of security: They adopt advanced security measures to protect users’ assets and privacy.
Integration with traditional finance: For example, the SFC authorizes virtual asset ETFs to be traded and custodied by licensed exchanges. Compliant licensed exchanges will become the major driving force in the virtual asset market in the future, providing more secure and reliable high-quality services compared to non-licensed exchanges.
Techub News: Previously, OKX and others voluntarily withdrew their applications. Was it because their applications were rejected? Is this due to their past mistakes? If so, why were platforms like Crypto.com considered as applicants for licensing?
Anonymous Insider: The SFC’s approval process for virtual asset trading platforms is very strict, aiming to enhance investor protection and promote Hong Kong as a center for virtual assets. The reasons for a platform’s voluntary withdrawal are not clear. It may be due to encountering issues during the application process or other strategic considerations. The exit and licensing (including being considered as an applicant for licensing) of virtual asset trading platforms involve complex regulatory, technical, and strategic factors, and each platform’s situation is unique, making it difficult to generalize.
Techub News: There are reports that OKX and others withdrew their applications because the SFC required all applicants to sign a commitment letter stating that they cannot have mainland Chinese users in any region. This requirement made it impossible for traditional offshore exchanges to comply. OKX attempted to form an industry alliance to oppose this requirement but was unsuccessful. What are your thoughts on this news?
Anonymous Insider: I think this statement is a bit sensationalized. Global first-tier financial centers like New York, London, Tokyo, and Hong Kong have similar regulatory quality and requirements, known as “fit and proper.” In simple terms, it means determining whether a platform is suitable to provide a service that can potentially drain others’ hard-earned money.
One basic requirement of “fit and proper” is to comply with the laws of other regions. Mainland China has clearly stated that this activity is illegal, so compliant exchanges cannot provide services to them. This is not a mere “commitment,” but a basic requirement. You can’t engage in explicitly “illegal” activities and claim to be “fit and proper,” right? I actually think it should be a reflection on why major exchanges couldn’t comply.
Techub News: If there are new platforms that want to join, can they still apply?
Anonymous Insider: According to the SFC’s regulations, if new virtual asset trading platforms want to operate in Hong Kong, they need to apply for a license from the SFC. These new platforms need to meet a series of policies, procedures, systems, and monitoring measures in order to obtain formal licensing in the future.
However, before obtaining the SFC’s license, they are not allowed to engage in any virtual asset trading platform activities in Hong Kong or actively promote any virtual asset services to Hong Kong investors. Engaging in any unlicensed activities is a criminal offense (refer to paragraph 10 of the circular on the transitional arrangements for the new licensing regime for virtual asset trading platforms).
In summary, new platforms can apply for a license, but whether they can successfully obtain it will depend on whether they meet the SFC’s requirements.
Other Perspectives:
In response to this event, Hong Kong Legislative Council member Wu Chi-wai expressed his insights. Wu Chi-wai stated that “promoting innovation” and “balancing risks” are the key directions for Hong Kong to promote Web3 and virtual assets. From an implementation perspective, there are indeed areas for improvement, including the review time and communication mechanisms between departments and applicants. Wu Chi-wai believes that the Financial Services and the Treasury Bureau can consider allocating more resources to the licensing application process to expedite the review time.
Wu Chi-wai emphasized that “Hong Kong, as a leading Asian city in Web3 and virtual asset policies, has achieved rapid development in the past year and more. There will inevitably be difficulties and challenges in the implementation of policies, but with close communication between the government and the industry, platforms expressing their opinions, mutual understanding and empathy, the industry will undoubtedly progress gradually and accelerate its development. I will continue to play a bridging role, summarize experiences with the industry, share them with the government, and assist the government in telling the story of Hong Kong’s Web3.”
In addition, Hong Kong Legislative Council member Charles Mok also expressed his views in the Hong Kong Economic Journal.
Charles Mok stated that there are several concerns about the new licensing regime. Firstly, several policies and measures related to the development of the local virtual asset market (such as VATP, stablecoin issuance, off-exchange virtual asset trading, etc.) were designed by different departments without comprehensive strategic considerations for industry development. The implementation of these policies entered different consultation stages or legislative procedures at different times, resulting in a segmented completion of the Web3 layout, which took too long and could not keep up with the rapid pace of technological evolution.
Secondly, the SFC requires operators to meet standards in asset custody, conflict of interest avoidance, cybersecurity, accounting and auditing, risk management, anti-money laundering, and counter-terrorism financing, among others. Many of these approval conditions borrow from traditional financial operating concepts and conditions, which appear overly stringent when applied to Web3 finance. Some applicants have expressed to me that the authorities lack a forward-looking vision for the development of next-generation financial technology and lack flexibility in promoting Web3 “financial innovation.”
Thirdly, many industry insiders believe that the government and regulatory agencies lack an innovative DNA internally. Currently, the SFC requires the management of licensed operators to have years of experience in the virtual asset business. On the other hand, the board of directors and management of government officials and regulatory agencies lack personnel with practical experience in operating Web3 businesses. Both sides differ in terms of technical background, market experience, and innovative spirit, making communication difficult.
Charles Mok suggested that the SFC make decisions on license applications as soon as possible to give investors long-term confidence in virtual asset trading platforms. Secondly, the products provided by trading platforms must make breakthroughs and be able to balance the need to maintain a sound legal system, protect investors, and promote financial innovation. When approving new products in the future, the authorities must demonstrate a new mindset and determination to encourage Web3 finance.
