Why has the Hong Kong Stock Exchange license become a hot potato?

Author: An Shouzheng Legal Services Limited

Multiple Platforms Withdraw Hong Kong License Applications

On May 26, according to Ming Pao, the licensing transition period for virtual asset service providers (VASP) in Hong Kong will end at the end of this month, and the Securities and Futures Commission (SFC) will decide whether existing service providers can continue operations. Recently, several platforms, including OKX and VAEX, have withdrawn their license applications (see the specific list in the image below), citing high compliance costs in Hong Kong and low local market attractiveness. Industry insiders believe that the liquidity and trading currencies of local platforms are inferior to those overseas, and stricter regulatory conditions are reasons for the withdrawal of license applications.

Currently, only two platforms have been licensed by the SFC, with 18 applications pending. Industry professionals suggest strengthening the tokenization of virtual assets in real-world applications to enhance market acceptance and practical use. Regardless of the backgrounds of the institutions that have withdrawn their applications, let’s take a look at the situations of those that have already obtained licenses.

1. OSL

OSL is the first platform in Hong Kong to obtain a license, backed by three major investors: BC Technology, Fidelity in the U.S., and GIC in Singapore.

Founded in 2018, OSL was established as a digital asset trading platform within the Hong Kong-listed company "Brand China." In 2019, the company was renamed "BC Technology (http://00863.HK)." In December 2020, OSL received the first securities trading license and the seventh automated trading license issued by the Hong Kong SFC, providing digital asset trading services to professional investors in the Asia-Pacific region. In the following years, OSL also successively obtained virtual asset licenses 4 & 9. Currently, its business includes SAAS, brokerage, exchange, and custody services, serving professional institutions and retail investors. On August 3, 2023, OSL's parent company, BC Technology, announced that its wholly-owned subsidiary OSL has been approved by the Hong Kong SFC to upgrade its existing license and will officially provide digital asset trading services for mainstream currencies such as Bitcoin and Ethereum to retail investors from that day forward.

2. Hashkey

The founder of Hashkey is Xiao Feng, who provided significant support when Ethereum entered China and is known as the leader of Ethereum in China. In recent years, its parent company, Wanxiang Group, has also gained considerable recognition domestically. CEO Deng Chao is an early member of Wanxiang, and COO Weng Xiaoqi previously served as the global CEO of Huobi during Li Lin's era. The business includes exchanges, brokerage, venture capital, Web3 infrastructure services, and technology services, serving institutions, family offices, funds, and professional qualified investors. Hashkey Exchange offers a "one-stop" service.

3. HKVAX

The three co-founders of HKVAX are CEO Wu Weiliang, COO Huo Zhaoliang, and CTO Liu Cheng. The first two are local practitioners in Hong Kong, while the CTO comes from the internet giant Ant Group. CEO Wu Weiliang and COO Huo Zhaoliang previously served as CEO and compliance officer of CoinSuper Premium, a crypto asset trading platform under the traditional financial group Pioneer Group in Hong Kong. Before CoinSuper, CEO Wu Weiliang collaborated with top financial institutions, including Morgan Stanley, JPMorgan, and Wanxiang Asset Management, and served as the managing director of CITIC Futures' international department. COO Huo Zhaoliang focused on compliance and leading license applications, having served as the anti-money laundering compliance head for HSBC's global private banking and private wealth solutions in Hong Kong and Asia. CTO Liu Cheng has extensive experience in financial product management and complex systems research and development, having previously worked at Alibaba and Ant Group, and graduated from the University of Electronic Science and Technology of China.

4. VDX

The full name is Victory Fintech Limited.

It is a subsidiary of Hong Kong-based Victory Securities, with VDX's main business being a virtual asset trading platform (VATP license application in progress), while Victory Securities' main business in the virtual asset industry is virtual asset brokerage, having obtained virtual asset license 1 for brokerage services.

5. HKbitEX

HKbitEX is one of the three major business segments of Tykhe Capital Group. According to official information, Tykhe Capital's business focuses on tokenized assets, including capital markets and wealth management, virtual asset exchanges, and Web3 SaaS and technology research and development, with related businesses regulated or compliant through the group's subsidiaries supported by Web3 infrastructure.

6. HK BGE

It is a wholly-owned subsidiary of the Hong Kong-listed company HKE Holdings (01726). HKE Holdings was listed on the Hong Kong Stock Exchange on April 18, 2018, with a current market value of HKD 2.289 billion. Its main business provides comprehensive design and construction services for hospitals and clinics in Singapore. Since May 2021, HKE Holdings has expanded its business to establish a comprehensive fintech service platform for various categories of assets (including but not limited to virtual assets, listed securities, listed bonds, and alternative assets).

From the list of licensed entities above, it is evident that there is a certain arrogance in Hong Kong's traditional finance. Regardless of how many users you have, how much influence you wield, or how large your platform is, the Hong Kong SFC only considers whether your connections are strong enough. Without connections, you won't receive a license. Even those exchanges that obtained licenses at the same time have little user base.

Hong Kong Securities Commission Speaks Out

On May 28, the Hong Kong SFC issued a statement regarding the end of the non-violation period for virtual asset trading platforms. The Hong Kong SFC hereby reminds the public that the non-violation period applicable to virtual asset trading platforms operating in Hong Kong under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) will end on June 1, 2024. All virtual asset trading platforms operating in Hong Kong must be licensed by the Hong Kong SFC under the Anti-Money Laundering Ordinance or be considered "applicants for licensing." Operating a virtual asset trading platform in Hong Kong in violation of the Anti-Money Laundering Ordinance is a criminal offense, and the Hong Kong SFC will take all appropriate actions against any illegal activities.

The Hong Kong SFC urges investors to only buy and sell virtual assets on virtual asset trading platforms licensed by the Hong Kong SFC and to verify whether the virtual asset trading platform they are using is officially licensed by checking the "Licensed Virtual Asset Trading Platform List" on the Hong Kong SFC's website.

Additionally, investors should note that applicants for virtual asset trading platforms considered as licensed have not been officially licensed by the Hong Kong SFC. These applicants have been operating in Hong Kong before the implementation of the new virtual asset trading platform licensing regime under the Anti-Money Laundering Ordinance. Although they have committed to strengthening their policies, procedures, systems, and monitoring measures to comply with the Hong Kong SFC's regulatory requirements, they still need to demonstrate the actual implementation and effectiveness of these measures to gain the Hong Kong SFC's trust.

For applicants for virtual asset trading platforms considered as licensed, the Hong Kong SFC reminds that these applicants (and their ultimate owners) must fully comply with all regulatory requirements and licensing conditions of the SFC. Until these applicants' policies, procedures, systems, and monitoring measures are trusted by the Hong Kong SFC and they are formally licensed, the SFC does not expect them to actively promote their services or establish business relationships with new retail customers.

The Hong Kong SFC also reminds all virtual asset trading platforms and their ultimate owners to comply with all applicable laws and regulations, including but not limited to preventing mainland Chinese residents from using any of their virtual asset-related services, and to take all necessary measures to ensure that the controlling entities and related parties of these virtual asset trading platforms comply with all applicable laws and regulations.

The licensing arrangement is intended to strike a balance between protecting investors and promoting market development. Therefore, this arrangement is only temporary, and if any violations of the key regulatory provisions regarding investor protection are found, the Hong Kong SFC will promptly reject the license applications of those considered as licensed applicants.

In the coming months, while applicants for virtual asset trading platforms considered as licensed continue their applications, the Hong Kong SFC will conduct on-site inspections to determine whether they comply with the SFC's regulatory requirements, with particular attention to their customer asset protection and know-your-customer procedures. This move by the Hong Kong SFC aims to protect investors' interests, and the results of the inspections will affect the licensing application process. Similarly, if any violations of the key regulatory provisions regarding investor protection are found during inspections, the Hong Kong SFC will promptly reject the relevant license applications and take other regulatory actions as necessary.

On May 29, according to a report by Hong Kong media Wen Wei Po, the Hong Kong government will maintain close communication with the SFC to expedite the processing of all platform applications, providing citizens and investors with more secure investment options. Looking ahead, Hong Kong will further improve its regulatory framework, including regulating virtual asset over-the-counter service providers, to build a robust ecosystem for the virtual asset industry and promote its responsible and sustainable development.

The Hong Kong SFC emphasizes that those virtual asset trading platforms considered as licensed, although they have committed to strengthening their policies, procedures, systems, and monitoring measures to comply with the SFC's regulatory requirements, still need to demonstrate the actual implementation and effectiveness of these measures to gain the Hong Kong SFC's trust. Furthermore, these platforms are not expected to actively promote their services or establish business relationships with new retail customers until they are formally licensed.

Where is the Future of Hong Kong's Crypto Market?

Strictly speaking, Hong Kong does not recognize exchanges owned by mainland Chinese bosses, which is actually the result of multiple parties' power struggles.

The Hong Kong government has its own considerations. The reason they have been slow to issue licenses to mainland exchanges is not due to size, safety, professionalism, etc., but rather from an uncontrollable perspective. For example, although the capital volume is large and there are Merkel trees and asset proofs, this capital is not under the Hong Kong government's supervision. The government cannot accept the existence of an exchange that holds its license but operates outside of its regulation, nor can it risk its credibility by endorsing such an exchange.

Although various exchanges have made certain concessions and shown strong sincerity in this regard, each boss knows very well: sincerity is sincerity, and the bottom line is the bottom line. If showing sincerity requires costs far exceeding the scale of the Hong Kong market, then this deal is clearly not worthwhile. Additionally, there is the issue of system black boxes. Although exchanges can disclose or even connect some data to the Hong Kong government, the government still sees the data of each exchange as a black box overall; the data the government can see is only what the exchanges want them to see, or even fabricated data.

Moreover, there are past compliance issues. Regardless of which mainstream exchange it is, all have issued platform tokens. Whether issuing platform tokens counts as issuing securities and whether there are compliance issues is still unknown. After granting licenses, will the government face similar compliance issues that lead to platform shutdowns in other regions, thereby affecting the Hong Kong side?

One critical point is actually in the U.S. Suppose the Hong Kong government grants these exchanges compliant licenses, but the U.S. later imposes sanctions, as in the case of CZ this year. Then the Hong Kong government would be in a very awkward position because the essence of Hong Kong finance is that it is a subsidiary of Wall Street.

Therefore, until there is a loosening of regulations from the U.S. side, it is also difficult for the Hong Kong government to make concessions on this matter. If concessions are to be made, they must be accompanied by sufficiently attractive conditions. For local exchanges in Hong Kong, there are no such external constraints. This is part of the reason why the current situation has arisen from the perspective of the Hong Kong government.

Has the Hong Kong License Become a Hot Potato?

The withdrawal of Chinese bosses has kicked the ball back to the Hong Kong government and local forces, but this ball is a bit hot to handle. For local forces, this is indeed a hot potato; they originally thought they could make a fortune with the license, but unexpectedly ended up shooting themselves in the foot.

Obtaining a Hong Kong license does not mean you can operate an exchange globally; it only means you can open to Hong Kong users. Although Hong Kong is part of China, you do not have the authority to open to mainland users—because the exchange business is not compliant in mainland China. And the entire Hong Kong market only has about 7.5 million people.

Thus, the only option for local forces seems to be to take action, while the Hong Kong government is in a more difficult position. When the government announced two years ago that it would regulate cryptocurrencies, market enthusiasm was extremely high. However, with the inability to lower its stance and some mysterious operations, it has now completely lost its heat and cannot stir up any waves. This matter seems significant, but in reality, the market is very small—because in the entire crypto market, the demand for Hong Kong licenses comes from only a few potential buyers.

The exchange business is not something just anyone can do; it must go through market trials and consensus before applying for a license. Only those who can emerge from the crowd with a certain business scale have the need to apply. Counting them, they can be counted on two hands. Yet now these entities are not only not continuing their applications but are actively withdrawing them. This puts the Hong Kong government in a difficult position.

Moreover, what’s more critical is that local forces have started to stab from behind. If any one of these six officially sells its license (accepting investment, selling shells, etc.), the others will inevitably follow suit because running an exchange is really difficult. If that happens, the licenses issued by the Hong Kong government will become tools to lift local forces, and the grand plan that has been held back for three years will end up in vain.

Originally a good hand, now played poorly (the above information references crypto intelligence sources).

It is utterly unexpected that in the crypto market, Chinese bosses, with the wisdom of socialism, have taught a lesson to decaying capitalism.