HashKey Livio: Where will Hong Kong go after the licensing controversy?

Author: FT Chinese Network

On June 1, Hong Kong's virtual asset regulation entered a new era. According to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO), any institution that has not been issued a "Virtual Asset Service Provider" license by the Hong Kong government will be prohibited from operating in Hong Kong.

In the days leading up to this, several major global cryptocurrency exchanges that had previously applied for a Hong Kong Virtual Asset Trading Platform (VASP) license announced the withdrawal of their applications, including OKX, Gate, Huobi, and others, which sparked strong reactions in the market. Meanwhile, Hashkey Exchange, one of the two institutions that had already obtained a Hong Kong VASP license, announced that it had received an AMLO license issued by the Hong Kong Securities and Futures Commission, becoming a fully licensed virtual asset exchange in Hong Kong. Regarding the "ice and fire" situation after the regulatory deadline and the development prospects of Hong Kong's virtual asset industry, Wang Feng, the editor-in-chief of FT Chinese Network, interviewed the company's CEO, Livio Weng, at Hashkey Exchange's Hong Kong headquarters. The following is the full text of the interview.

Wang Feng, Editor-in-Chief of FT Chinese Network: Thank you very much, Mr. Weng, for accepting our interview. First, I would like to ask you about Hong Kong's "May 31 regulatory deadline." As a fully licensed unicorn in Hong Kong's virtual asset space, what impact do you expect the regulatory deadline to have on the market?

Livio Weng: According to official disclosures from the Hong Kong Securities and Futures Commission, a total of 28 institutions had applied for exchange licenses, of which only two have officially been licensed, while 11 have received deemed-to-be-licensed status.

After Hong Kong released its virtual asset policy declaration in 2022, it was given high expectations. In the entire virtual asset industry, Eastern forces account for at least half of the market. From a global perspective, among the Top 20 exchanges, aside from a few like Coinbase that are "authorized to collect money" in regional markets due to compliance barriers (because of the U.S. long-arm jurisdiction and recent regulatory crackdowns preventing entry into the U.S. market), most global exchanges still have a significant relationship with Eastern forces. Many cryptocurrency platforms that have overflowed from mainland China see potential in Hong Kong's Web3 and have chosen to apply for licenses there. Another force behind the license applications comes from local traditional financial companies in Hong Kong, such as those engaged in securities and payments, which have a roughly equivalent number of applications.

In the allocation of the deemed-to-be-licensed status, it is evident that local institutions with no historical risk burdens, familiarity with Hong Kong's regulatory rules, and traditional financial experience and capabilities have received more preference, which has also sparked some controversy among the Native Web3 community that has migrated here. Over the weekend, I had informal discussions with several heads of license application institutions, and there was a general sense of disappointment. Some institutions that chose to come to Hong Kong due to the 2022 policy declaration may find themselves in a wait-and-see mode or even exiting the market.

The root of this situation, based on market observations and evaluations, is that the Securities and Futures Commission may not be adequately staffed to conduct comprehensive reviews of all Native Web3 institutions. Given that many institutions have a long development history, it is challenging to substantively verify how to avoid incidents similar to FTX and ensure there are no clients from sensitive regions—issues that the Commission is concerned about. If choices are made hastily, it could lay hidden risks for the future. If one part is selected and another part is abandoned, it becomes difficult to form clear standards.

Because risks are unclear, there will be resistance to them. However, all new tracks and opportunities come with risks; seeking risk-free innovation is unrealistic and undesirable. This is a very complex game and trade-off between risk and opportunity.

From another perspective, regardless of what choices the regulators make regarding the license application institutions, there will be certain controversies:

Choosing all Native Web3 institutions will leave local companies dissatisfied;

Choosing some Native Web3 institutions will lead to questioning from those that were not selected;

Selecting all will cause dissatisfaction among already licensed institutions and raise concerns among all applicants about "too many monks and too little porridge";

Choosing none will result in criticism from everyone.

Different choices merely shift dissatisfaction and debate among different groups.

Conversely, I personally have a different expectation for Hong Kong's subsequent development: Hong Kong has at least clearly embraced a development path, which is better than the previous stage of cautiously feeling one's way forward. The Hong Kong regulatory authorities have finally taken a key step out of the dilemma of "whether to do" and "how to do," shifting their focus to "who to let do"—allowing trusted financial institutions to take the lead and pursuing a path of integration between traditional finance and new tracks. Whether this decision is correct will be left for time to validate.

Optimistically, after delineating the risk control levels, regulation will enter a new phase. Now, the "prudent development" phase of "prudent period" has come to an end, entering a development phase. After all, development is the hard truth; if Hong Kong does not develop Web3, the future of the entire city will require more people to seek direction.

Next, Hong Kong is expected to attempt breakthroughs at a relatively fast pace:

Launching more mainstream cryptocurrencies to break the awkward situation where retail investors can only invest in BTC and ETH;

Promoting low-risk derivatives for BTC and ETH, such as low-leverage contracts, to meet reasonable trading needs for hedging and arbitrage rather than speculation;

Market rumors suggest that there may be a launch of a spot ETF for Ethereum that supports staking;

Significantly lowering the entry barriers for traditional financial companies, accelerating the licensing upgrade speed for licenses 1, 4, and 9, allowing local financial giants and mainstream traffic to enter more quickly;

Accelerating the entry of RWA/STO, leveraging the advantages of deemed-to-be-licensed institutions to speed up the integration of traditional finance and Web3 in assets.

Wang Feng: What is the current situation of Hashkey's user base? How is the regional distribution?

Livio Weng: Currently, we have the largest user base and market share among licensed exchanges in Hong Kong. Our main user groups are still two parts: one part comes from local customers in Hong Kong, and the other part consists of global overseas Chinese customers.

After "5.31," customers of unlicensed platforms in Hong Kong will gradually be phased out, with most entering licensed institutions. Overall, "5.31" will be beneficial for the currently licensed exchanges.

In the first round of license applications, the two licensed exchanges incurred significant costs, first building compliant structures and investing substantial human and financial resources in the application process regarding materials and procedures. Emerging from a state of chaos, they have staked their future and hope. Those who came after can learn from the experiences of their predecessors, making the process much more certain, although completing the process still requires advancing through many steps.

Wang Feng: Many institutions applying for licenses complain that the waiting time is too long.

Livio Weng: HashKey's waiting time during our application was possibly even longer. We started applying in 2019, received AIP (in-principle approval) in April 2022, and only officially received the license and completed the upgrade for retail investors in 2023. Whether it was for the SFO or now the AMLO license, including the process of trial operation and formal business launch, we have also explored and navigated many paths from 0 to 1 alongside the regulators. In comparison, institutions applying for licenses later may actually be faster. However, the anxiety about whether they can obtain licenses and realize commercial value is something we deeply empathize with.

Essentially, everyone is looking forward to Hong Kong's future from different dimensions and forms.

Wang Feng: There are rumors in the market that if all application costs are accounted for, it amounts to tens of millions of dollars?

Livio Weng: Tens of millions of dollars may not be the case, but definitely tens of millions of Hong Kong dollars. The costs associated with preparing application materials differ from those during the operational phase. For HashKey, which is already operational, our total investment in the exchange segment is indeed in the tens of millions of dollars, but platforms still in the application phase are not expected to incur that much.

Wang Feng: After 5.31, what do you expect the next market structure to be? When do you think the next wave of licenses might be issued?

Livio Weng: Before 5.31, the actual situation in the Hong Kong market was still dominated by unlicensed exchanges, although we hold the largest market share among licensed exchanges. Globally, our CoinGecko ranking has stabilized in the TOP 10 (ranked 7th on June 2), but to be frank, the actual scale is still dominated by unlicensed exchanges. However, this also means that the market still has potential.

Especially with this round of clearing for unlicensed institutions, those that are unlicensed or did not obtain licenses this time, or those that have given up their licenses, will have to choose to phase out their Hong Kong customers. Trading must stop by June 1, and all customer assets must be cleared by August 31, so the period from June to August will be a clearing period, which means that licensed exchanges will benefit by accepting these customers. We have seen a significant change in our recent data; the number of activated customers this week has increased by over 267% compared to last week, and the number of newly activated customers has more than doubled.

We have also prepared a genuine "safe harbor" activity for users, where new users trading on HashKey Exchange can receive VIP experiences, HSK, BTC, and other rewards, showing our sincerity.

Currently, HashKey Exchange's customer assets have exceeded 500 million USD and are growing rapidly. Since officially operating in August last year, we have completed transactions totaling 440 billion Hong Kong dollars. We are also currently the only licensed exchange in Hong Kong that can conduct order trading, achieving full licensing and full functionality.

So, while there may be some turbulence in the short term, in the long run, it means that Hong Kong has officially entered a fully licensed phase, providing greater assurance for potential customers who have not yet entered the market. The recent policy advocacy of "5.31" is also a broad education for the entire market, laying the foundation for the long-term development of Hong Kong's Web3.

Currently, among the 11 institutions on the deemed-to-be-licensed list, none have formally obtained licenses, and it is possible that some may eventually exit, while the remaining may obtain formal licenses. The specific situation will need to be observed based on the subsequent decisions of the Securities and Futures Commission.

One key factor is that historically, exchanges often experience significant growth during bull markets. Licensed exchanges are clearly positioned to catch this bull market, while it is uncertain for unlicensed ones; there is a certain probability that they may miss out. The final number of licensed institutions will also need to match the potential of the Hong Kong market; issuing too many licenses is not necessarily a good thing. After all, in the traditional securities market, Hong Kong has also experienced chaotic situations like the "Nine Sons Contending for the Throne," which ultimately led to the merger into the Hong Kong Stock Exchange, gradually standardizing the market.

Wang Feng: What is your judgment on this round of the cryptocurrency bull market?

Livio Weng: This bull market is a typical institutional bull. From the perspective of traditional finance, Hong Kong is not a retail market but an institutional one. The issuance of ETFs in the U.S. this year has brought a massive influx of new capital into the market. Although the first wave of ETFs launched in Hong Kong did not see the expected enthusiasm due to many internal and external factors, being at the table is very important.

If the market continues to break through, it is also predictable that new institutions, including those from Hong Kong and the entire Eastern market, will enter on a large scale. Recently, we have invested a lot of our business energy in educating traditional finance and large family offices about the industry, as a large number of Eastern capital is intensively researching how to enter, at what scale, potential risks, and prospects.

From the perspective of the Web3 industry, it seems that Chinese institutions have been a bit slow to enter, but compared to their past behavior patterns, they are already moving quickly. Previously, Hong Kong issued the world's first spot ETF for Ethereum in major financial markets, supporting physical redemption, which can better integrate traditional "old money" with "new money." Therefore, from these perspectives, it is already much faster than traditional finance. In the second half of this year, as the market further breaks through, this acceleration trend will become increasingly significant.