Eleven cryptocurrency exchanges in Hong Kong, which initially received provisional approvals, are now under heightened regulatory examination. The Securities and Futures Commission (SFC) of Hong Kong conducted on-site inspections of these “deemed-to-be-licensed” platforms. These inspections uncovered several practices that did not meet regulatory standards, according to sources cited by Bloomberg.
Concerns Over Asset Custody Practices
The inspections revealed that certain crypto firms depend heavily on a few executives for the custody of client assets. This reliance raises concerns about the firms’ ability to manage these responsibilities effectively.
Cybersecurity Measures Lacking in Some Exchanges
Some exchanges also lack robust cybersecurity measures. The SFC has not yet disclosed which specific firms fell short of the required standards, as the inspections continue. The possibility of further findings remains.
The review includes well-known global players like Crypto.com and Bullish, along with local platforms such as HKbitEX, PantherTrade, and Matrixport HK. The SFC aims to ensure applicants adhere to strict requirements, particularly in safeguarding client assets and following know-your-client (KYC) processes.
Consequences for Non-Compliance
The SFC warned that platforms failing to address critical deficiencies could lose their “deemed-to-be-licensed” status. Some may even have their license applications rejected.
Challenges to Hong Kong’s Crypto Ambitions
Hong Kong’s effort to become a global leader in digital assets is encountering challenges. Inspections of the 11 exchanges with initial approval revealed operational gaps, adding uncertainty to the city’s Web3 goals.
Licensing crypto exchanges is a key part of Hong Kong’s broader Web3 strategy, outlined in 2022. The initiative aims to restore the city’s reputation as a major international financial center after years of political unrest. However, the cautious approach of regulators has not yet brought significant changes in personnel or capital inflows, raising doubts about the strategy’s effectiveness.
Limited Success in Full Licensing
Only two crypto platforms, OSL and HashKey, have obtained full licenses in Hong Kong. The SFC expects to issue full licenses to successful applicants by the end of 2024. Meanwhile, 12 companies, including Huobi HK and OKX, have already withdrawn their applications. Notably, HKVAEX, suspected of links to Binance, withdrew its application on March 28, 2024. IBTCEX, QuanXLab, and Huobi HK followed on May 14, Gate.HK on May 22, and Bybit (Spark Fintech Limited) on May 31.
Legislative Concerns Over Licensing Requirements
A Hong Kong Legislative Council member recently criticized the cryptocurrency licensing system, pointing out its impact on market confidence. The lawmaker noted that the SFC’s requirement for applicants to exclude mainland Chinese users has led to several withdrawals. This requirement poses a significant challenge for traditional offshore exchanges.
OKX attempted to form an industry alliance to oppose this requirement but did not succeed. Industry insiders suggest that the entities that withdrew their applications might update their legal frameworks or entities and reapply in the future.
New Developments in Crypto ETFs
Hong Kong has launched its first batch of ETFs focused on cryptocurrencies, marking potential competition for popular Bitcoin products in the United States.
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