One Year Review: Major Events in Hong Kong's Web3 Regulatory Policy
In the past year, the Hong Kong Web3 market has experienced more events than in any previous year, and the development has been much faster than before.Author: Lawyer Wu Wenqian, Mulana Investment Management
June 1 is an important day set by the Hong Kong Securities and Futures Commission.
Before June 1 last year, exchanges operating in Hong Kong could enjoy transitional arrangements, meaning they could operate without a license until May 31 of this year. After today, June 1, all exchanges must obtain a license or permission from the Securities and Futures Commission before they can operate.
In the past year, the developments in the Hong Kong Web3 market have been more numerous and faster than in previous years.
Let's review the policy and regulatory developments of Hong Kong Web3 from June 1 last year to May 31 this year.
Before June 1, 2023, various exchanges or institutions intending to apply for exchange licenses were busy building the simplest exchanges to attract users quickly and increase trading volume. The goal was to qualify for transitional arrangements to continue operating until May 31 of this year while submitting license applications.
By the deadline for license applications on February 29 of this year, there were a total of 24 applicants. Among them were several leading exchanges, including Binance, Huobi, OK, Kucoin, Gate, Bybit, and others.
Basically, all leading exchanges withdrew their applications. The most shocking news, of course, was OK's decision to withdraw its application a few days ago. After all, it is well known that OK has invested a significant amount of resources in applying for a license.
Regarding the withdrawal of applications by leading exchanges, I believe the following interpretations can be made:
They all voluntarily withdrew their applications, rather than having their applications rejected by the Securities and Futures Commission. There is a clear distinction between the two. A voluntary withdrawal may indicate that the exchanges assessed factors such as costs, future business development, and the number of competitors, and found a significant gap between costs and future development, leading to their decision to give up.
The Hong Kong market is small, and exchanges are only allowed to accept remote registrations from clients in 18 countries (mainly Western countries). There are already two licensed exchanges in Hong Kong, and two others have received principle approval but have not yet opened the domestic market. The competition among exchanges can be said to be quite intense. Given the high operating costs, the market believes that exchanges will not be profitable for at least a few years.
If everyone pays attention to Coinbase's policy towards Hong Kong, they will notice that in February last year, Coinbase announced a suspension of services for Hong Kong users. However, at the beginning of this year, it was discovered that Hong Kong users could register on Coinbase again. This means that overseas exchanges may not operate in Hong Kong, not promote in Hong Kong, and still allow Hong Kong users to proactively register on their platforms.
Various leading exchanges have some non-compliance issues, such as previously offering contracts or derivative products to Hong Kong users. The Securities and Futures Commission clearly stated in 2018 that any contract products fall under the category of securities and require a license to issue. It may be challenging for exchanges to explain past non-compliance issues, thus increasing the difficulty of obtaining a license.
Based on the above reasons, I believe that voluntarily withdrawing applications is a rational choice. It is a correct decision for the long-term development, sustainability, and cost-effectiveness of the entire exchange.
By the way, reviewing the strategies of various exchanges, Bitget's acquisition of OSL is a very smart move. No wonder Bitget is one of the fastest-growing exchanges in recent years.
Although exchanges are very important, they are only a part of the entire cryptocurrency ecosystem. The Hong Kong government has recently been actively promoting tokenized securities and RWA. The underlying assets of RWA are mostly traditional securities products, which the Hong Kong regulatory authorities and investors are more familiar with.
It is worth noting that Guangfa Securities and NV Technology jointly issued tokenized short-term financing notes at the beginning of the year. Both institutions have connections to Chinese capital or are friendly with Chinese institutions. As a pioneer, Guangfa Securities has the opportunity to encourage more Chinese financial institutions to boldly promote virtual currency-related products in the future.
The application scenarios for RWA are broad, and if combined with a Hong Kong dollar stablecoin in the future, the potential for horizontal development is even greater. To give a wild example, if RWA products can be used as collateral to borrow Hong Kong dollar stablecoins, and the stablecoins can be integrated into decentralized product staking, then it could merge the traditional market with the cryptocurrency market.
Another point of interest is Hong Kong's promotion of spot ETFs.
Investors in spot ETFs can purchase them through traditional securities investment accounts without the need to set up additional virtual asset wallets and trading accounts. Unlike ETFs in the United States, investors can also redeem physical virtual currencies, and it is open to retail investors. Hong Kong's ETFs are certainly making history.
In addition, the investment in the virtual asset fund market seems to have become active again recently. It is also noteworthy that this year's newly launched investment immigration program does not include virtual assets among the recognized products. However, limited partnership funds (LPF) or open-ended fund companies (OFC) established by licensed asset management companies can count as one of the ten million investment amounts in the investment immigration program, and there are no restrictions on the assets or products that these two types of funds can invest in. This means that both LPF and OFC can invest in virtual currencies. Therefore, if one chooses to invest in virtual currencies, it is advisable to cooperate with companies that have been approved by the Securities and Futures Commission to upgrade to 100% virtual asset management for better compliance.
Regarding licenses, in addition to exchange licenses, the Hong Kong government is also actively promoting stablecoin sandboxes and OTC licenses this year. It is understood that the Monetary Authority places special emphasis on the application scenarios for stablecoin licenses and believes that stablecoins should not only be used as trading pairs on exchanges. The application scenarios should be broader and have more uses than pure trading.
The three licenses for exchanges, OTC, and stablecoins are regulated by three different government departments, but are coordinated by the Financial Services and the Treasury Bureau. This arrangement helps the government establish a robust and transparent regulatory environment, maintain policy continuity, and allow Web3 to develop sustainably.
In summary, compared to last year's overwhelming publicity and grand events, this year, stakeholders in various industries are clearly focused on practical work, preparing for a bull market, and contributing to the development of Web3 in Hong Kong. Nevertheless, I believe that the actual developments and opportunities this year are more abundant than last year.
List of applicants whose license applications have been withdrawn, rejected, or declined:
