PANews reported on June 1 that in response to the recent withdrawal or return of applications for Hong Kong licenses, Hong Kong Legislative Council member Qiu Dagen wrote that when the SFC introduced the licensing conditions, it had failed to attract large exchanges such as Coinbase to apply to Hong Kong. Since February, several internationally renowned exchanges such as Gate and Huobi have gradually withdrawn. 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.

Qiu Dagen believes that the new licensing system shows several concerns:

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 failing to keep up with the rapid pace of technological evolution.

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, and many of the approval conditions borrow from the operating concepts and conditions of traditional finance, which are too harsh 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 regulatory agencies 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 regulatory agencies 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, Qiu Dagen 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 the virtual asset trading platform. Secondly, the products provided by the trading platform must be breakthroughs that can balance the need to maintain a sound legal system, protect investors, and financial innovation. When approving new products in the future, the authorities must show new thinking and determination to encourage Web3 finance.

It is reported that the new licensing system set up by the Securities and Futures Commission for virtual asset trading platforms (VATP) has come 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.