Article: Techub News
On June 1st, the first anniversary of the official implementation of the Virtual Asset Service Provider (VASP) system by the Securities and Futures Commission of Hong Kong, the commission updated the list of virtual asset trading platforms. The list includes 11 platforms, such as HKbitEX, PantherTrade, Accumulus, DFX Labs, Bixin.com, xWhale, YAX, Bullish, Crypto.com, WhaleFin, and Matrixport HK, which were considered as applicants for licensing. On the other hand, 6 platforms, including BGE, HKVAX, VDX, bitV, HKX, and bitcoinworld, were not considered as applicants for licensing.
With the release of the list and the news of major platforms like OKX withdrawing their VASP license applications, many investors are puzzled. What does it mean to be considered as an applicant for licensing? Is "Hong Kong not so attractive anymore"?
To better understand the recent actions in Hong Kong, Techub News conducted interviews with industry practitioners (interviewees requested anonymity). The following is the content of the interviews:
Techub News: Why did the Securities and Futures Commission of Hong Kong consider 11 platforms as applicants for licensing on June 1st, and yet they are not fully licensed? What is the difference between the two?
Anonymous Source: According to the regulations of the Securities and Futures Commission of Hong Kong, virtual asset trading platforms need to obtain a license to operate legally. In the past 12 months, the commission provided a transition period for virtual asset trading platforms that were already operating in Hong Kong before June 1, 2023. June 1, 2024, marks the end of the transition period. Ultimately, a total of 11 platforms were listed as "applicants considered as being licensed" based on 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 the formal license in the future. Therefore, although they are listed as "applicants considered as being licensed," it does not mean that they fully comply with the requirements of the commission.
This measure aims to help the public determine whether virtual asset trading platforms have applied for a license with the commission and can continue to operate in Hong Kong after the end of the transition period. However, being listed as "applicants considered as being licensed" does not mean that these platforms have obtained the formal license, as the commission may refuse or withdraw their license applications.
Techub News: What are the reasons for the other 6 platforms not being considered as applicants for licensing? How do they differ from the other 11 platforms?
Anonymous Source: The Securities and Futures Commission did not specify the reasons and consequences for the platforms not being considered as applicants for licensing on the relevant webpage. However, in the commission's circular on the transitional arrangements for the new licensing regime for virtual asset trading platforms issued on May 31, 2023, it is mentioned that "existing virtual asset trading platforms that meet the following conditions as applicants considered as being licensed may be eligible to participate in the arrangements under the Anti-Money Laundering Ordinance and engage in providing virtual asset services from June 1, 2024, until a final decision is made on their license application."
"After reviewing the license application and all the data available to the commission, if the commission considers that the applicant for the virtual asset trading platform does not meet any of the conditions as applicants considered as being licensed, the commission may issue a notice to the relevant virtual asset trading platform (a notice of not being considered as being licensed), informing the latter that the arrangements as applicants considered as being licensed will not apply to the platform. Although the license application submitted under section 53 ZRK of the Anti-Money Laundering Ordinance will be subject to the arrangements for withdrawal, the virtual asset trading platform concerned must cease its business by May 31, 2024, or within three months from the date of the notice, whichever is later, regardless of whether it has opposed the arrangements for withdrawal of its license application."
Based on this, although the applications of the platforms not considered as applicants for licensing have not been shown as withdrawn, they will not be able to engage in providing 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 Source: According to publicly available information, the backgrounds of the 11 platforms considered as applicants for licensing are diverse, including participants from the original coin circle, traditional securities firms, payment platforms, and others. However, they all aim to operate compliantly in Hong Kong and become one of the licensed exchanges.
With global tightening of regulations on virtual assets, compliant licensed exchanges will be the future trend. These exchanges need to meet strict regulatory requirements to protect the interests of investors 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 security: Adopting advanced security measures to protect users' assets and privacy.
- Integration with traditional finance: For example, virtual asset ETFs authorized by the commission must use a licensed exchange as the custodian and trading venue. Compliant licensed exchanges will become a major force in the virtual asset market in the future, providing more secure and reliable high-quality services than non-licensed exchanges.
Techub News: Previously, OKX and others voluntarily withdrew their applications. Was it because they were rejected or their applications did not pass? If so, why can platforms like Crypto.com be considered as applicants for licensing?
Anonymous Source: The commission's approval of virtual asset trading platforms is very strict, aiming to strengthen investor protection and promote Hong Kong as a center for virtual assets. The reasons for a platform's voluntary withdrawal are not yet clear. It may be due to encountering problems during the application process or for other strategic considerations. The withdrawal of virtual asset trading platforms and the licensing process (including being considered as applicants for licensing) involve complex regulatory, technical, and strategic factors, and each platform's situation is different, making it difficult to generalize.
Techub News: There are reports that OKX and others withdrew their applications because the Securities and Futures Commission of Hong Kong required all applicants to sign a commitment stating that they cannot have users from mainland China 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 ultimately failed. What is your view on this report?
Anonymous Source: I think this statement is a bit sensationalized. The quality and requirements of regulation in first-tier global financial centers like New York, London, Tokyo, and Hong Kong are similar, based on the "fit and proper" principle. In simple terms, it assesses whether a platform is suitable to provide a service that can potentially exploit others' hard-earned money.
One of the basic requirements 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 so much a "commitment" as it is a basic requirement. You cannot engage in explicitly "illegal" activities while claiming to be "fit and proper," can you? I think there should be reflection on why major exchanges cannot comply.
Techub News: Can new platforms still apply for licensing in the future?
Anonymous Source: According to the regulations of the Securities and Futures Commission of Hong Kong, if new virtual asset trading platforms wish to operate in Hong Kong, they need to apply for a license from the commission. New platforms need to meet a series of policies, procedures, systems, and monitoring measures in order to obtain the formal license in the future.
However, before obtaining the commission's license, they must not engage in any virtual asset trading platform business activities in Hong Kong or actively promote any virtual asset services to Hong Kong investors. Engaging in any unlicensed activities constitutes a criminal offense (refer to the 10th paragraph 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 requirements of the commission.
Other Opinions
In response to the recent events, Hong Kong Legislative Council member Wu Chi-wai has expressed his views. Wu stated that "promoting innovation" and "balancing risks" are the key directions for Hong Kong to promote Web3 and virtual assets. In terms of execution details, there are indeed areas for improvement within the relevant departments, including the review time and communication mechanisms between departments and applicant organizations. Wu believes that the Financial Services and the Treasury Bureau should consider allocating more resources to expedite the review process for license applications.
Wu emphasized that "Hong Kong, as a leading Asian city in Web3 and virtual asset policies, has achieved rapid development over the past year. There will certainly be difficulties and challenges in the implementation of policies, but with the government and the industry maintaining close contact, platforms expressing their opinions, mutual understanding, and empathy, the industry will definitely make progress in accelerating development step by step. I will continue to play the role of a bridge, summarize experiences with the industry to share with the government, and also assist the government in telling the story of Hong Kong's Web3."
In addition, Hong Kong Legislative Council member Dennis Kwok also expressed his views in the Hong Kong Economic Journal yesterday.
Kwok stated that there are several concerns regarding the new licensing system. Firstly, several policies and measures related to the development of the local virtual asset market (such as VATP, stablecoin issuance, and over-the-counter trading of virtual assets) are designed by different departments, lacking a comprehensive strategic consideration for industry development. The implementation of these policies enters the consultation stage or legislative process at different times, resulting in segmented completion of the Web3 layout, consuming too much time and failing to keep up with the rapid pace of technological evolution.
Secondly, the Securities and Futures Commission requires operators to meet standards in asset custody, conflict of interest avoidance, network security, accounting and auditing, risk management, and anti-money laundering and counter-terrorist financing. Many of the approval conditions borrow from the operational concepts and conditions of traditional finance, which appear overly stringent when applied to Web3 finance. Some applicants have expressed to me that the authorities lack a forward-looking vision for developing next-generation financial technology and are lacking flexibility in promoting "financial innovation" in Web3 with traditional financial thinking.
Thirdly, many industry professionals believe that there is a lack of innovation DNA within the government and regulatory agencies. Currently, the authorities require the management of licensed operators to have years of experience in the virtual asset business. On the other hand, officials and the boards and management of regulatory agencies lack personnel with practical experience in operating Web3 businesses, leading to a mismatch in technical background, market experience, and innovative spirit, making communication difficult.
Kwok suggested that the Securities and Futures Commission make decisions on license applications as soon as possible to instill long-term confidence in virtual asset trading platforms among investors. Furthermore, the products offered by trading platforms must make breakthroughs, balancing the need to maintain a sound legal system, protect investors, and meet the needs of financial innovation. When approving new products in the future, the authorities must demonstrate encouragement for new thinking and determination in promoting Web3 finance.
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