Hong Kong’s Crypto Exchanges Struggle to Meet Regulatory Demands

Hong Kong's effort to establish itself as a digital asset hub is encountering hurdles as the fate of 11 cryptocurrency exchanges remains uncertain regarding their ability to secure full licenses. These exchanges had initially received provisional approvals earlier this year.

The Hong Kong Securities and Futures Commission (SFC) has been conducting inspections of these “deemed-to-be-licensed” platforms since June, revealing various concerns. According to sources with knowledge of the matter, some exchanges heavily depend on a limited number of executives to manage client asset custody, while others have been criticized for inadequate measures against cybercrime. These sources requested anonymity due to the sensitive nature of the information.

While the specific platforms that failed to meet the SFC's standards were not disclosed, it was noted that the situation remains fluid, with inspections still ongoing. If platforms are unable to rectify critical deficiencies identified during these inspections, the SFC may revoke their provisional licenses or reject their applications for full licenses.

At present, the exchanges under review are barred from onboarding new clients until they secure full licenses. Should their applications be rejected, they would be required to restart the entire submission process. Full licenses are anticipated to be issued by the end of 2024 to those firms that meet all regulatory requirements, as stated by SFC Chief Executive Officer Julia Leung. To date, only two crypto platforms, OSL and HashKey, have obtained full licenses in Hong Kong.

The inspections primarily focused on the safeguarding of client assets and the implementation of know-your-client (KYC) processes, according to an SFC spokesperson. While the commission does not comment on individual cases, the spokesperson emphasized that the inspections are crucial to ensuring compliance with regulatory standards.

Among the 11 platforms currently holding provisional status are international entities such as Crypto.com and Bullish, as well as Hong Kong-based exchanges including HKbitEX, PantherTrade, Accumulus, DFX Labs, Bixin.com, EX.IO, YAX, WhaleFin, and Matrixport HK. Crypto.com declined to comment on the inspections, while other exchanges did not respond to inquiries from Bloomberg News.

Exchanges that were operational before the licensing regime's implementation were allowed to continue operating while their applications were processed. However, those that did not apply for a license were required to exit the market by the end of May.

So far, 12 companies have withdrawn their applications from the licensing process. This group includes prominent names like Huobi HK, OKX, Bybit, and VAEX.