Written by: Techub News
On June 1, the first anniversary of the Hong Kong Securities and Futures Commission’s official implementation of the virtual asset service provider licensing system (VASP system), the SFC updated the list of virtual asset trading platforms, including HKbitEX, PantherTrade, Accumulus, DFX Labs, Bixin.com, xWhale, YAX, Bullish, Crypto.com, WhaleFin, and Matrixport HK, a total of 11 platforms were considered as applicants for licensing; while BGE, HKVAX, VDX, bitV, HKX, and bitcoinworld, a total of 6 platforms were not considered as applicants for licensing.
As soon as the list was released, coupled with the news that OKX and other major exchanges had announced the withdrawal of their VASP license applications, many investors were deeply confused about what it meant to be "deemed to have been licensed"? "Is Hong Kong really not popular anymore?" In order to better understand Hong Kong's actions, Techub News interviewed practitioners (the interviewees requested anonymity).
The following is the interview content: Techub News: Why did the Hong Kong Securities and Futures Commission treat 11 platforms as licensed applicants on June 1, but at the same time, not fully licensed? What is the difference between the two?
Anonymous: According to the Hong Kong Securities and Futures Commission, virtual asset trading platforms need to obtain a license to operate legally. In the past 12 months, the Securities and Futures Commission has provided a transition period for virtual asset trading platforms that have been operating in Hong Kong before June 1, 2023. June 1, 2024 is the end date of the transition period. In the end, a total of 11 platforms were listed as applicants "deemed to be licensed" under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance. However, it is worth noting that this does not mean that these platforms have been fully licensed. In fact, these platforms still need to meet a series of policies, procedures, systems and monitoring measures in order to obtain formal licenses in the future. Therefore, although they are included in the "deemed to be licensed" list, it does not mean that they have fully met the requirements of the Securities and Futures Commission. This move is intended to help the public judge whether virtual asset trading platforms have applied to the Securities and Futures Commission for a license and can continue to operate in Hong Kong after the end of the transition period, but it does not mean that these platforms have been formally licensed, because the Securities and Futures Commission may reject or withdraw their license applications.
Techub News: What is the reason why the other 6 companies on the application list were not considered to be licensed? What is the difference compared to the other 11 companies?
Anonymous: The SFC has not stated on the relevant website the reasons and consequences for applicants who are not considered for licensing. However, the SFC’s circular on the transitional arrangements for a new licensing regime for virtual asset trading platforms dated 31 May 2023 states: “Existing virtual asset trading platforms that meet the following deemed licensing conditions may be eligible to participate in the deemed licensing arrangements under the Anti-Money Laundering Ordinance and may be deemed to be licensed to engage in the business of providing virtual asset services from 1 June 2024 while their licence applications are pending final decision:” (paragraph 12) “After reviewing the licence application and all information available to the SFC, if the SFC considers that the applicant for a virtual asset trading platform licence does not meet any deemed licensing conditions, the SFC may issue a notice (notice of deemed licensing) to the relevant virtual asset trading platform informing the latter that the deemed licensing arrangements will not apply to the platform. Although licence applications submitted under section 53 ZRK of the Anti-Money Laundering Ordinance will be subject to the deemed withdrawal procedure, the relevant virtual asset trading platform must still proceed to the deemed withdrawal procedure on 31 May 2024. ” (Paragraph 13) Accordingly, although the applications of applicants that were not deemed to be licensed are not shown as withdrawn, they will not be able to engage in the business of providing virtual asset services in Hong Kong from June 1, 2024. Techub News: What are the backgrounds of the 11 applicants that have been deemed to be licensed, and what will the competition for compliant licensed exchanges be like in the future?
Anonymous person: According to public information, the 11 applicants who were selected for licensing have different backgrounds, including original cryptocurrency participants, traditional brokerages, payment platforms, etc., but they all hope to operate in compliance in Hong Kong and become one of the licensed exchanges. As global regulation of virtual assets becomes stricter, compliant licensed exchanges will become the main theme in the future. These exchanges need to meet strict regulatory requirements to protect the interests of investors and maintain market stability. Competition will focus on compliance, user experience, product innovation, asset diversity and security. Licensed exchanges need to continuously improve the quality of their services to attract more users and maintain a competitive advantage. The advantages of compliant exchanges include:
High security: Advanced security measures are adopted to protect users' assets and privacy.
Integration with traditional finance: 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 and will be able to provide safe, reliable and high-quality services better than unlicensed exchanges.
Techub News: Did OKX and others withdraw voluntarily because their applications were rejected? Is the reason behind this their original sin? If so, why can Crypto.com and others be considered to have been licensed? Anonymous: The SFC is very strict in approving virtual asset trading platforms, aiming to strengthen investor protection while promoting the development of Hong Kong as a virtual asset center. The reason why a certain platform voluntarily withdrew is unclear. It may be because it encountered problems during the application process, or for other strategic considerations. The withdrawal and licensing of virtual asset trading platforms (including being considered to have been licensed) involve complex regulations, technologies, and strategic factors. The situation of each platform is different, so it is difficult to generalize. Techub News: It is reported that the reason why OKX and others withdrew their applications is that the Hong Kong SFC required all applicants to sign a letter of commitment, promising that they would not have mainland Chinese users in any region. This requirement made it impossible for traditional offshore exchanges to meet it. OKX tried to form an industry alliance to oppose this requirement but ultimately failed. What do you think of this news? Anonymous: I think this statement is a bit of a headline party. The quality and requirements of supervision in the world's first-tier financial centers, such as New York, London, Tokyo, and Hong Kong, are similar, that is, "fit and proper". Simply put, it is to judge whether the platform is suitable to provide this service that can suck other people's hard-earned money at any time. One of the very basic requirements of "fit and proper" is: abide by the laws of other regions. Mainland China has made it clear that this thing is illegal, so compliant exchanges certainly cannot provide them with services. This is not actually a "commitment", it's just a basic requirement. You can't do something that is clearly "illegal" and say you are "fit and proper", right? I think we should reflect on why the big exchanges can't do it? Techub News: If there are new platforms joining next, can they apply again? Anonymous: According to the regulations of the Hong Kong Securities and Futures Commission, if there are new virtual asset trading platforms that wish to operate in Hong Kong, they need to apply to the Securities and Futures Commission for a license. New platforms need to meet a series of policies, procedures, systems and monitoring measures in order to obtain formal licenses in the future.However, before being licensed by the SFC, they are not allowed to carry out any virtual asset trading platform business activities in Hong Kong or actively promote any virtual asset services to Hong Kong investors. Carrying out any unlicensed activities is a criminal offence. (Refer to paragraph 10 of the Circular on Transitional Arrangements for a New Licensing Regime for Virtual Asset Trading Platforms) In short, new platforms can apply for a license, but whether they can be successfully approved will depend on whether they meet the requirements of the SFC.
In response to this incident, Hong Kong Legislative Council member Wu Jiezhuang expressed his own views. Wu Jiezhuang said that "promoting innovation" and "balancing risks" are the key directions for Hong Kong to promote Web3 and virtual assets. From the perspective of implementation details, the relevant departments do have room for improvement, including the review time and communication mechanism between departments and applicants. Wu Jiezhuang believes that the Financial Services and the Treasury Bureau can consider allocating more resources to review the license application process to speed up the review time. Wu Jiezhuang emphasized that "as an Asian city with leading Web3 and virtual asset policies, Hong Kong's rapid development in the past year or so has not been easy. There will definitely be difficulties and challenges in the process of implementing policies, but I believe that the government and the industry maintain close contact, have a platform to express opinions, understand and understand each other, and the industry will surely accelerate development step by step. I will continue to play a good role as a bridge, summarize experiences with the industry and share them with the government, and at the same time help the government tell a good story about Hong Kong's Web3." In addition, Hong Kong Legislative Council member Qiu Dagen also expressed his views in the "Hong Kong Economic Journal" yesterday. Qiu Dagen said that there are several concerns about the new licensing system.
First, several policies and measures related to the development of the local 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 SFC requires operators to meet standards in asset custody, conflict of interest avoidance, cyber 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 the author that the authorities lack the foresight to develop the next generation of financial technology, and the traditional financial thinking to promote Web3 "financial innovation" is even more inflexible. Third, many industry insiders believe that the government and regulatory agencies lack innovative DNA. 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 are poles apart in terms of technical background, market experience and innovative spirit, and it is difficult to communicate. Qiu Dagen suggested that the SFC make a decision on the license application as soon as possible to give investors 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.