- Abrupt departure of Hong Kong exchanges underscores challenges of getting licenced.
- The development raises fresh questions about the city's plan to be a crypto hub.
- But the exodus may be good news.
A couple of days after my arrival in Hong Kong last June, I attended my first crypto event. It did not disappoint.
The party organised by OKX and the Hong Kong fan club for Manchester City, the top English football team and a corporate partner of the cryptocurrency exchange, was buzzing.
The room thronged with people in sky blue Erling Haaland shirts who oscillated between free food and drinks and half-listened to presentations from OKX executives.
OKX was clearly looking forward to a bright future in the rejuvenated Hong Kong market as it prepared to apply for its virtual asset trading platform licence.
Not long after the party, OKX managing director Lennix Lai told me how excited he was to cement the firm into the city where it maintained its base of operations.
Then last week, OKX abruptly withdrew its application for the Securities and Futures Commission licence.
Careful consideration
It gave its reason as “careful consideration” of its business strategy, while assuring Hong Kong users that their funds were safe. It will cease trading services by Friday.
At first glance, the departure of OKX would appear to be a blow for Hong Kong’s aspirations to become Asia’s go-to crypto hub.
With daily trading volume of $3 billion, the centralised exchange is the fourth ranked platform worldwide, according to CoinMarketCap.
Moreover, OKX is just one of seven companies that have withdrawn licensing applications since the deadline passed at the end of February.
Like OKX, all these firms — and any others serving Hong Kong clients that have not applied for a licence — will need to wind down their services to city residents by May 31.
In addition to OKX, subsidiaries of other international exchanges have withdrawn from Hong Kong in recent weeks, including Gate.io and HTX, formerly known as Huobi.
HKVAEX, which the SCMP reported in October last year was backed by Binance, also withdrew its application.
Investing heavily
Yet the departure of these firms may signal progress in regulators’ efforts to clean up Hong Kong’s freewheeling crypto scene.
Last year, Lai told me that getting the licence wasn’t an easy process.
Finding qualified people to conduct the required audits could be challenging.
OKX also had to invest heavily in hiring talent, innovation, technology, compliance and system security to prepare for the application. (A report from CoinDesk estimated the cost of applying for a licence was between $12 million and $20 million.)
The thing is, getting a licence is supposed to be hard. That’s the point. Given the level of fraud in Hong Kong’s crypto markets, the SFC wants crypto exchanges to comply with rigorous rules.
The number of companies withdrawing applications isn’t necessarily unusual.
When Singapore introduced licensing for cryptocurrency service providers in January 2021, over 100 of the 170 applicants withdrew or were rejected by the end of the year, according to Nikkei Asia.
In the UK, 71% of applications to the Financial Conduct Authority have also been withdrawn.
Angela Ang, a senior policy advisor at TRM Labs, told DL News it seems the trend in Hong Kong is par for the course.
“This could be a combination of higher regulatory expectations in wake of events like FTX, as well as the crypto industry being relatively new to regulation,” she said.
Time and money
Nevertheless, licence applications aren’t a trivial endeavour and require a significant amount of time and money.
“Nobody will pull out lightly after investing all that time and resources,” Ang added. “Those that pulled out probably did so only after it was clear that they would otherwise have their applications rejected.”
The timing of the withdrawals just ahead of the cut off date for shutting down may also be an effort by the SFC to weed out those that don’t make the cut for the deeming arrangement that will allow them to continue operating past June 1.
“It sends a very clear signal about the type of crypto hub Hong Kong wants to be: strict,” Ang said.
Callan Quinn is DL News’ Hong Kong-based Asia Correspondent. Get in touch at callan@dlnews.com.
