Hong Kong 531 New Policy: Is the Market Changing? Top Exchanges and Hong Kong Financial Groups Compete for "Compliance Meal," An Overview of 24 License Application Institutions

Author: Luna WANG

Recently, stimulated by the inflow of funds from the US spot ETF and institutional buying, Bitcoin broke through $69,000 on the evening of March 5, reaching a new all-time high. Coinbase's market capitalization has reached $54 billion, even surpassing that of the Hong Kong Stock Exchange.

It can be said that the compliant track has led to the opening of this bull market and its short-term climax. In addition to the continuous actions in the West, the advancement of the compliant track in Hong Kong is also very rapid. At the end of last month, the final application deadline for public virtual asset trading platforms (VATP) in Hong Kong has ended. This is a clearly defined cleanup action; in the future, to provide virtual asset trading services in Hong Kong, one must operate with a license, and institutions that have not applied for a license will be cleared out.

Now, the final application list has been settled. In addition to the two licensed virtual asset trading platforms, Hashkey and OSL, a total of 24 companies have submitted applications, including well-known companies such as Hong Kong Digital Asset Trading Group, Hong Kong Virtual Asset Exchange, Victory Digital, and Cheetah Trading (Hong Kong).

This article will take a look at the 24 institutions to review the compliant players in the East.

1. Native Web3 Institutions: Over Half of Top Exchanges Onboard

According to statistics, more than half of the top 12 cryptocurrency exchanges ranked on CoinMarketCap have submitted applications for operating licenses, but well-known exchanges such as Binance, Coinbase, and Kraken are not among the applicants.

Exchanges that have applied for licenses include Bybit, OKX, Gate.io, Kucoin, HTX, Bitge, Bullish, Crypto.com, and HKVAEX.

In addition to the above Web exchanges, Matrixport, a crypto financial services company founded by Bitmain's founder Wu Jihan, submitted an application on February 26 to provide digital asset management, trading, and custody services.

DFX Labs is also on the list, with COO Simon Au Yeung being a graduate of the Wharton School. Previously, he served as CEO of Blockchain Finance and BGE. After leaving BGE, he co-founded IEEE and joined DFX Labs in September 2023.

Additionally, Bixin.com, founded and led by Wu Gang, has also applied. Its entity, NewBX Limited, is registered in Hong Kong and is a wholly-owned subsidiary of Bixin Group. Bixin.com originated from HaoBTC, established in 2014, and has developed into a well-known brand in the crypto community. Its product Onekey is a best-selling hardware wallet in the market.

These players have mature experience and can provide users with a wide range of digital assets and innovative trading features, but under Hong Kong's compliant policies, the tradable cryptocurrencies are relatively limited, and teams are required to operate for 3 years before being allowed to conduct business. Additionally, the Hong Kong Securities and Futures Commission's RO mechanism has relevant thresholds, which is expected to pose a significant operational burden for relatively smaller companies. How to promote business localization is also one of the issues that exchanges need to consider.

2. Hong Kong Traditional Finance: Hong Kong Stock Exchange Regulars and Consortiums Entering the Market

On the other hand, traditional financial institutions in Hong Kong have also laid out licensing plans, and the following platforms are worth noting:

• HKVAX: This institution received a principle approval notice from the Hong Kong Securities and Futures Commission last August, allowing it to conduct regulated activities of Type 1 and Type 7, becoming Hong Kong's third licensed virtual asset trading platform. HKVAX's CEO, Wu Weiliang, was previously the CEO of CoinSuper Premium, a crypto asset trading platform under the traditional financial group Pioneer Group in Hong Kong. Prior to that, he collaborated with several top financial institutions, including Morgan Stanley, JPMorgan, and Wan Fang Asset Management. CTO Liu Cheng has extensive experience in financial product management and complex systems R&D at Alibaba and Ant Financial. According to official disclosures, HKVAX has undergone multiple rounds of financing since 2020. Insiders have revealed that HKVAX's shareholders may be associated with a mining group in Southwest China and capital with an entertainment background.
• VDX is backed by the well-known local brokerage Victory Securities, with an average monthly turnover of $10 million, and its virtual asset business has achieved profitability. VDX's co-founder and Chief Business Officer, Zhou Lele, introduced that the team has been formed since August 2021 and has been operating for over two years, positioning its core strategy as a trading platform focused solely on B2B business, aiming for 20% of Victory Securities' revenue to come from digital assets within three years.
• BGE is a wholly-owned subsidiary of the Hong Kong-listed company HKE Holdings. Its chairman, Lian Haomin, is the founder of Monmonkey Group Holdings Limited and holds Type 1, 4, and 9 licenses in Hong Kong. It has been reported that Lian Haomin has invested tens of millions of dollars in blockchain-related projects over the past three years. After completing the acquisition of HKE Holdings in 2021, its virtual asset exchange team has exceeded 120 people, and BGE is expected to officially obtain the Securities and Futures Commission's virtual asset trading platform license in the first quarter of this year, planning to expand its business to Southeast Asia.
• HKbitEX was established by a team from the Hong Kong Stock Exchange and is one of the four major business segments of Taiji Capital Group. Founder and CEO Gao Han previously worked at the Hong Kong Stock Exchange, participating in projects such as Stock Connect and Bond Connect, and the platform has attracted many former Hong Kong Stock Exchange employees. Last year, Taiji Capital launched Hong Kong's first real estate STO PRINCE token aimed at "professional investors," marking the first fund tokenization fundraising model approved by the Hong Kong Securities and Futures Commission.
• Meex: The Meex team combines seasoned professionals from the native cryptocurrency industry and local Hong Kong talent, supported by a Hong Kong consortium. CEO Jason FENG was previously the acting CEO of Kaisa Group, and CTO Lu Zhichao was the technical director at Bybit. The operations head, Vince Lam, previously served as the operations head at HKbitEX, which is also applying for a license.

These institutions have long established a good reputation by providing stable and reliable financial services, earning the trust of clients. This trust is particularly important in the relatively new market of virtual assets. Furthermore, traditional financial institutions have a broad customer network, providing a natural advantage for the promotion and adoption of virtual asset services.

However, compared to emerging companies focused on virtual assets or blockchain technology, traditional financial institutions may be at a disadvantage in terms of technological adaptability and innovation speed. The technological architecture and business processes of these traditional institutions are often complex and rigid, and the speed of adjustment and innovation may not be as fast as that of pure cryptocurrency companies. Similarly, developing and maintaining a secure and compliant virtual asset trading platform requires significant initial investment and ongoing operational costs, including technology development, security assurance, compliance monitoring, and customer service. For traditional financial institutions, these costs may pressure the cost-effectiveness of their overall business.

3. Mainland Enterprises: Internet Brokerages Embrace Compliance

In addition to the above two categories, internet brokerages from the mainland have also chosen to go overseas at this moment and embrace compliance in Hong Kong:

• BitV began operations in May 2023, with its team applying to become a licensed VASP composed of the local management team from Gold Digger Securities and a global top-tier virtual asset exchange compliance business line team. The core members of the management team come from senior executives of Hong Kong securities firms, leading members with licenses 1, 2, 4, 5, and 9, as well as compliance officers with license 7. These core members include executives who graduated from the Economics Department of Cambridge University and worked at Lehman Brothers and the Royal Bank of Canada, as well as experts with PhDs from the Engineering Department of Chinese University of Hong Kong who have held senior positions at BOC International and E Fund Management.
• Accumulus, a subsidiary of Cloud Account Technology (Tianjin) Co., Ltd., which is among China's top 500 enterprises, has registered Cloud Account Greater Bay Area Technology (Hong Kong) Co., Ltd. in Hong Kong and has been approved for an offshore investment quota of over HKD 1.1 billion. On December 6, 2023, the company officially submitted an application for a virtual asset trading platform license to the Hong Kong Securities and Futures Commission. With 7 years of experience providing flexible employment services, Cloud Account has become one of China's largest online human resources service companies, serving 82 million freelancers in 120 countries and regions, with revenue exceeding HKD 110 billion in 2022. Chairman Yang Hui is a member of the National Committee of the Chinese People's Political Consultative Conference. Accumulus is seen as one of the representatives of mainland enterprises entering the Hong Kong web3 market.
• Tiger Brokers received an upgrade from the Hong Kong Securities and Futures Commission (SFC) to its Type 1 license conditions in January this year, allowing professional investors to trade virtual assets on its flagship trading platform, Tiger Trade. Tiger Brokers' CFO John Fei Zeng has stated that the company currently has 865,500 funding accounts, managing assets totaling $18.9 billion. Another major internet brokerage giant, Futu Securities, submitted an application for a virtual asset trading platform through its subsidiary PantherTrade on November 15 last year. Its directors come from JD Securities, Huobi Asset Management, and others.
• xWhale is a joint venture between Sina's internet brokerage Huasheng Securities and BusyWhale. Huasheng Securities has around 2 million registered users in Hong Kong, with daily active users peaking at about 600,000. It aims to create a professional-grade on-exchange and off-exchange trading system, featuring two independently developed trading systems: OrderBook and RFQ and negotiation protocol, to meet various trading needs of institutional and individual investors.

Such internet companies have a large user base in the mainland, are more adept at user experience design, integrate traditional and digital asset trading platforms, and provide educational resources to help retail investors decode the crypto space.

In addition to the companies listed above, there is also limited information available about IBTCEX Yonghao Asia Technology Co., Ltd. (English name: Willows Asia Technology Company Limited), which has no public information. Additionally, HKX, with the Hong Kong entity hi5 (Hong Kong) Limited, and QuanXLab, with the entity name Quan Yi Technology Co., Ltd., submitted applications just before the deadline on February 29, with limited public information. Applications from companies such as Greenland Hong Kong, Kaisa Group, and Coin Wind Hong Kong have also been withdrawn.

Conclusion: The Complex Compliance Framework and Long Application Process, First-Mover Advantage is Key

With the popularity of cryptocurrencies in Hong Kong, the market has shown a mixed situation.

The cryptocurrency crime rate in Hong Kong has doubled over the past three years, with recorded cryptocurrency cases in 2023 involving nearly 4.4 billion RMB (approximately $611 million). The Hong Kong Securities and Futures Commission (SFC) recorded 1,397 and 2,336 cryptocurrency crime cases in 2021 and 2022, respectively. This number rose to 3,415 in 2023.

The road to compliance is long. In last year's highly publicized JPEX incident, investors lost $180 million, making it one of the largest financial fraud cases in Hong Kong's history. Currently, most investors have not recovered their funds.

From the perspective of regulatory authorities and the industry, the urgent task is how to make licensed compliant exchanges more competitive in the market, forming a virtuous development of the compliant industry ecosystem and avoiding the phenomenon of bad money driving out good. Possible directions for discussion include further incentivizing compliance innovation, strengthening inter-departmental collaboration to accelerate the improvement of the regulatory system, and continuously reducing the experiential and resource costs of compliance to promote the sustainable development of the industry.

Currently, virtual asset trading platforms that have not submitted license applications must cease operations in Hong Kong by May 31 or earlier. Virtual asset trading platforms need to obtain the necessary licenses from the SFC to resume business activities in Hong Kong or promote virtual asset services to Hong Kong investors, and any unlicensed activities are criminal offenses.

It can be seen that the 24 companies applying have different business focuses, which can be described as "gods fighting." While the Hong Kong government has a welcoming attitude towards Web3, the preparation and operation of compliant exchanges require significant investment, including establishing legal compliance teams, investing in security and technical resources, implementing fund segregation and risk management mechanisms, establishing auditing and reporting systems, and conducting compliance training and education. Achieving long-term standardized development is not easy; it requires preparation for a protracted battle, strategic determination, and ensuring a long-term healthy cash flow.

As Bitcoin has surpassed the new high of $69,000, from a timing perspective, platforms that obtain licenses may not catch up to achieve performance breakthroughs in this bull market and will need to prepare for the next bull market cycle.

At the same time, it is necessary to observe the number and pace of license approvals to see if they align with the current capacity of the Hong Kong market.

In the hot market, investors looking to purchase virtual assets can pay attention to Hashkey Exchange, which has already obtained a license and has been officially operating for more than half a year.

Since its inception in 2018, Hashkey Exchange foresaw that the compliance of the industry was an unstoppable trend, so it initially laid out a global compliance strategy, applying for relevant licenses in Hong Kong, Singapore, Japan, and other places. As of now, Hashkey Exchange has obtained a virtual asset service license from Japan's Financial Services Agency (FSA) and a digital asset investment license in Singapore. Hashkey Exchange CEO Livio Weng recently revealed in an interview with Foresight that they have obtained another very important license globally, which will be disclosed within two months.

Having gained a first-mover advantage, Hashkey Exchange's weekly trading volume has exceeded HKD 15 billion, making it the largest licensed virtual asset trading platform in Hong Kong.

Especially in terms of retail service capabilities, Hashkey Exchange has already achieved a leading position in the market. As a pioneer of compliant exchanges, the following operational aspects demonstrate its solid foundation.

In terms of asset diversity, Hashkey Exchange currently offers nearly 20 tokens to professional investors (PI) and has applied to the SFC for 8-10 tokens to be opened for trading by retail investors, maintaining close communication with the SFC.

In terms of security, Hashkey Exchange's system has experienced 0 downtime and 0 incidents, and the user experience is very smooth, with account opening times nearly reaching the extreme of compliant exchanges. Additionally, Hashkey Exchange has developed a unique fiat currency deposit and withdrawal feature. In the past, a pain point in this industry was that deposits and withdrawals were easily frozen and susceptible to dirty coins. To address this industry pain point, Hashkey Exchange has launched a unique HKD trading pair, allowing users to deposit and withdraw smoothly without worrying about receiving dirty coins.

During the bull market, fiat currency deposits and withdrawals can avoid fluctuations in exchange rates, eliminating the exaggerated premiums of traditional exchanges' USDT/USDC trading pairs. Trading through Hashkey Exchange has become the most cost-effective way for users to invest in BTC.

While already achieving a leading position in retail customer service, Hashkey Exchange has also maintained a steady pace in promoting institutional partnerships. Regarding the Hong Kong BTC spot ETF, Hashkey Exchange is primarily acting as a licensed custodian and is closely collaborating with over 10 leading brokerages to participate in the preparation of the spot ETF. Specifically, Hashkey provides underlying infrastructure support for funds applying for ETFs in Hong Kong, covering trading, custody, SSA, and other aspects. Hashkey Exchange's custody business has been operating stably for over a year, with a custody asset scale exceeding HKD 1.5 billion, becoming the most pragmatic custodian option for fund institutions to develop virtual asset spot ETFs.

As a new compliance model for virtual asset trading in East Asia and even globally, the future direction of Hong Kong's regulatory system deserves continuous attention.