Editor | Wu Talks about Blockchain
On May 31, 2023, the Hong Kong Securities and Futures Commission issued a circular on the transitional arrangements for the VATP licensing manual and licensing system. The system will take effect on June 1, 2023, and a one-year transition period (until June 1, 2024) will be set. Virtual asset trading platforms operating in Hong Kong are required to obtain a license issued by the regulatory authorities by the end of the transition period, otherwise they will have to terminate their business.
On March 28, 2024, HKVAEX, suspected to be under Binance, withdrew its license application; on May 14, IBTCEX, QuanXLab and Huobi HK withdrew their applications; on May 22, Gate HK withdrew its application; on May 24, OKX HK withdrew its application; on May 31, Bybit (Spark Fintech Limited) withdrew its application. As of May 31, a total of 11 companies withdrew or returned their license applications, leaving 17 virtual asset trading platforms on the application list.
Wu said that the reason is that the Hong Kong SFC requires all applicants for virtual asset trading platform licenses to sign a letter of commitment, promising that they cannot have mainland Chinese users in any region. This requirement makes it impossible for traditional offshore exchanges to meet it. OKX tried to form an industry alliance to oppose this requirement but ultimately failed.
However, industry insiders said that the withdrawn entity can update the legal entity or framework and apply again in the future, but it should not be able to apply using a brand similar to that of offshore exchanges.
Currently, a total of 11 platforms including HKbitEX, PantherTrade, Accumulus, DFX Labs, Bixincom, xWhale, YAX, Bullish, Cryptocom, WhaleFin, and Matrixport HK have become license applicants. Currently only OSL and HashKey have official licenses. PantherTrade is a company owned by Cheetah, a traditional mobile Internet company in Beijing; Cloud Account is a finance and taxation company headquartered in Tianjin; Bixin is a traditional wallet and mining company in the Chinese currency circle, and later turned to VC business; xWhale is a Huasheng Securities Subsidiary companies; Bullish is an exchange founded by EOS development company Blockone, which subsequently acquired CoinDesk; Cryptocom is a larger offshore cryptocurrency exchange, known for its aggressive sponsorship of arenas; Whalefin’s parent company is Amber Group, which has acquired Temasek invested but was on the verge of bankruptcy in the last bear market; Matrixport is a cryptocurrency financial management company founded by Wu Jihan.
Author: David Chiu, Member of the Legislative Council of Hong Kong
Original link, from the Economic Times:
https://www1.hkej.com/dailynews/commentary/article/3782025/%E6%88%91%E5%80%91%E6%98%AF%E8%AA%8D%E7%9C%9F%E6%90%9E%E9%87%91%E8%9E%8D%E5%89%B5%E6%96%B0%E5%97%8E%3F
The new licensing system set up by the Hong Kong Securities and Futures Commission for Virtual Asset Trading Platforms (VATP) came into effect on June 1, 2023. The transitional arrangement of the new system allows operators to apply for licenses before February 29 this year, and comply with the new regulatory requirements from June 1 to continue to provide virtual asset services in Hong Kong until the authorities make a final decision on their license applications.
Virtual currency exchanges are gradually withdrawing from the market
However, as the transition period draws to a close (May 31), more and more operators are deciding to abandon the Hong Kong market. At the time of writing, 11 have withdrawn or returned their license applications.
When the SFC introduced the licensing conditions, it failed to attract large exchanges such as Coinbase to apply in Hong Kong. Since February, several internationally renowned exchanges such as Gate and Huobi have withdrawn one after another. In May, the situation worsened, with a total of 6 operators announcing their withdrawal, including OKX, which ranks among the top three in global trading volume. Most of the remaining 18 applicants are small in scale. Some lack industry experience, while others are traditional financial institutions trying to get involved in VATP business but have not deepened their presence in the Web3 field.
OKX’s exit has sparked much discussion in the industry, with some questioning whether Hong Kong has the real determination to develop and embrace Web3.
A large number of related comments appeared in my WeChat circle, such as "Is Hong Kong Web3 over just at the beginning?" and "The arrogance of Hong Kong people has broken OKX's heart." They accused the authorities of being timid and cautious when actually implementing the new system, and of weakening the competitiveness and flexibility of the licenses based on the traditional financial thinking. Some operators decided to return their applications at the last stage even though they had invested a lot of resources and upfront costs.
Many industry insiders are worried that the new licensing system will turn into a replica of the "food truck incident" or even become a case of the government's promotion of virtual banks, with much ado about nothing. They are worried that the authorities will repeat the same mistakes and that even if operators are granted licenses, it will be difficult for them to develop a profit model.
Based on the opinions of the industry, the author believes that the new licensing system shows several areas of concern. First, several policies and measures related to the development of Hong Kong's virtual asset market (such as VATP, stablecoin issuance, virtual asset over-the-counter trading, etc.) were designed by different departments, lacking overall strategic considerations for industrial development. Relevant policies entered the consultation stage or were put on the legislative process at different times, causing the entire Web3 layout to be completed in stages, taking too long and unable to keep up with the rapid pace of technological evolution.
New licensing system shakes market confidence
Second, the CSRC requires operators to meet standards in asset custody, conflict of interest avoidance, network security, accounting and auditing, risk management, combating money laundering and terrorist financing. Many of the approval conditions borrow from the operating concepts and conditions of traditional finance, which are too strict when applied to Web3 finance. Some applicants told me that the authorities lack the foresight to develop the next generation of financial technology, and the traditional financial thinking to promote Web3 "financial innovation" lacks flexibility.
Third, many industry insiders believe that the government and regulators lack the DNA for innovation. Currently, the authorities require the management of licensed operators to have many years of experience in virtual asset business. On the other hand, the board of directors and management of officials and regulators lack personnel with actual experience in operating Web3 business. The two sides have different technical backgrounds, market experience and innovative spirit, making it difficult for them to communicate.
The withdrawal of the licensing system has shaken the confidence of market participants in Hong Kong's promotion of Web3 development. In order to restore market confidence, the author hopes that the SFC will make a decision on the license application as soon as possible, so that investors can have long-term confidence in virtual asset trading platforms.
Secondly, the products provided by trading platforms must be groundbreaking and able to balance the need to maintain a sound legal system, protect investors, and financial innovation. When approving new products in the future, the authorities must demonstrate new thinking and determination to encourage Web3 finance.
In the final analysis, innovation is a thought as well as an action. If we are enthusiastic when advocating innovation but are afraid of failure and mistakes when taking action, how can we innovate?
The essence of innovation is to try and allow failure to happen. The most important thing is how to review mistakes and accumulate experience from failure, rather than retreating to the "safety line" from the beginning and delusionally promoting the so-called "innovation" with zero risk!
