The struggle between regulation and innovation has always been the main theme of the game in the wave of emerging technologies.
For Hong Kong, 2022 is undoubtedly a turning point. After the new Hong Kong government took office, it reorganized its policies and took great strides to compete with cities such as Singapore, London, and New York for the status of a global crypto-financial center and a virtual asset center. In particular, the "Virtual Asset Trading Platform Licensing Manual" issued on June 1, 2023, provided clear and explicit guidance on the regulatory requirements for licensed virtual asset exchanges in a world-leading manner.
OSL has also launched a series of articles titled "Approaching Hong Kong Web3", and will first focus on the theme of "Licensed vs. Unlicensed Exchanges", trying to explore the differences from different dimensions, such as the struggle between regulation and innovation, the application process and feelings of licensed platforms, and the development of specific businesses of regulated exchanges. At the same time, we will also conduct in-depth research on the development of specific businesses of licensed exchanges, analyze how they innovate services and expand markets under strict supervision, and how to strike a balance between compliance and innovation.
Definition and advantages of “licensed exchange”
Since 2017, from ICO, STO to digital asset trading, from tokenized bonds, digital Hong Kong dollars, central bank digital currencies (CBDCs) to stablecoins, Hong Kong's regulatory framework centered on licensing has gradually taken shape.
So for the current Hong Kong digital asset market, what kind of trading platform is qualified to be called a “regulated exchange”?
According to the official website of the China Securities Regulatory Commission, in terms of compliance operations, digital asset trading platforms must apply for three licenses:
Provision of virtual asset services (operating a virtual asset exchange) under the Anti-Money Laundering Ordinance; and
Type 1 and Type 7 regulated activities licenses under the Securities and Futures Ordinance
These three have become the most basic entry barriers for entering compliant virtual asset businesses in Hong Kong. Only by collecting the AMLO license, Type 1 and Type 7 regulated activity licenses can it be considered a "licensed exchange" in the Hong Kong digital asset field.
According to the SFC, there are currently only two licensed digital asset trading platforms in Hong Kong, one of which is OSL. There are also other applicants for virtual asset trading platforms that are considered to be licensed, but none of them have obtained formal permission as of the time of writing this article.
The advantages of compliant exchanges like OSL are also obvious, including:
High security: Protecting users’ assets under a comprehensive regulatory system will theoretically provide safer, more reliable and higher-quality services than non-compliant exchanges;
Scalability of other digital asset businesses: For example, the CSRC authorizes virtual asset ETFs to use CSRC-licensed exchanges as custodians and trading venues. Compliant licensed exchanges will become the main force in the virtual asset market in the future.
In general, the application process for a compliance license is complex and rigorous. The entire preparation and operation process involves establishing a legal compliance team, investing security and technical resources, implementing fund isolation and risk management mechanisms, establishing audit and reporting systems, and conducting compliance training and education.
Application fees and operating costs
The license application fees provided by the SFC's official website are several thousand Hong Kong dollars each, but the cumulative cost of meeting the above-mentioned compliant capital operations is as high as tens of millions of US dollars. What kind of protection can the high cost of compliant operations provide for investors?
First of all, licensed exchanges need to comply with KYC/AML/CFT and other policies required by anti-money laundering laws, and all transfer transactions must be reviewed. Such a complex review process can protect investors' legal assets from being used by lawbreakers to engage in criminal activities. The listing review of licensed exchanges also needs to formulate rules and complete due diligence on project teams, liquidity, technical security, and regulatory status. Therefore, exchanges will never have fraudulent projects if they comply with regulations.
At OSL, a large part of the operating expenses falls on investor protection. Private key management, cold wallet maintenance, etc. can effectively prevent hackers from stealing investors' assets. In addition, licensed exchanges are also required to purchase third-party insurance for customers' custodial assets to provide multiple protections for customer assets and provide tangible value.
Accounting and Auditing
The "Guidelines for Virtual Asset Trading Platform Operators" issued by the Hong Kong Securities and Futures Commission show that licensed virtual asset exchanges and their subsidiaries must submit their audited accounts and financial information to the Hong Kong Securities and Futures Commission on a regular basis, and platform operators should always have fully liquid assets in Hong Kong entities, the amount of which should be equivalent to the platform's operating expenses for at least 12 months. In addition, the Securities and Futures Commission also has the right to enter its business premises for inspection and investigation when necessary, and will issue circulars and frequently asked questions from time to time. If there is any inconsistency between them and the regulations, the more stringent regulations shall prevail.
OSL Exchange's parent company is OSL Group (863.HK), a company listed on the main board of the Hong Kong Stock Exchange. In addition to the requirements of the Securities and Futures Commission, OSL is also audited by one of the Big Four accounting firms. If accounting is a language, then auditing is an "objective and fair reflection" of these languages. Investors can understand the actual situation of the company and make rational decisions.
summary
to innovation or to regulation? On June 1 this year, the transition period of Hong Kong’s virtual asset trading platform licensing system officially ended. Hong Kong’s virtual asset trading platform licensing system has taken the lead in the world in terms of supervision. However, it is worth noting that some trading platforms also announced their withdrawal from the Hong Kong market in the first half of the year.
From this perspective, encouraging innovation and ensuring good supervision is a delicate balance. History always follows similar rhymes, but it is not always completely repeated. From this perspective, the future of emerging exchanges such as OSL is unfolding - the previous STO and OTC business, as well as the virtual asset ETF business just launched this year, OSL Exchange has played an indispensable role as a leading compliance platform.
We need to be patient enough in the construction of the industry's leading players. We believe that product innovation under regulatory compliance will occupy an increasingly important weight in future global competition. Although this trend is not yet obvious, time will eventually magnify its impact.
over
The views and opinions expressed in this article are those of the author alone and do not necessarily reflect the views or positions of OSL Group Ltd or its affiliates. Any forecasts and opinions contained herein are intended as general market commentary only and do not constitute an offer of securities or investments, nor a solicitation of an offer, recommendation, investment advice or guaranteed returns. The information, forecasts and opinions contained herein are as of the date hereof, are subject to change without notice and should not be considered as any investment product or market recommendation.
