By: Wu Wenqian, Attorney at Mulana Investment Management

June 1 is an important date set by the Securities and Futures Commission of Hong Kong.

Exchanges operating in Hong Kong before June 1 last year can enjoy the transitional arrangement, that is, they can operate without obtaining a license until May 31 this year. After June 1 today, all exchanges must first obtain a license or permission from the SFC before they can operate.

More things have happened in the Hong Kong Web3 market in the past year than in any previous year, and the development has been much faster than in the past.

Let’s review the policy and regulatory development of Web3 in Hong Kong from June 1 last year to May 31 this year.

Before June 1, 2023, various exchanges, or institutions interested in applying for exchange licenses, are busy building the simplest exchange, using the fastest method to attract users and increase user trading volume. The purpose is to be eligible for transitional treatment and can continue to operate until May 31 this year, during which license applications will be submitted.

By the time the license application deadline came on February 29 this year, there were a total of 24 applicants, including many leading exchanges, including Binance, Huobi, OKEx, Kucoin, Gate, Bybit, etc.

Basically all the top exchanges have withdrawn their applications. The most shocking news is of course the news that OK has decided to withdraw its application a few days ago. After all, it is well known that OK has invested a lot of resources in applying for a license.

Regarding the withdrawal of the application by the head exchange, I think there are the following interpretations:

1. They all took the initiative to withdraw their applications, not because the CSRC rejected them. There is a clear difference between the two. Taking the initiative to withdraw may be because the exchange has considered factors such as cost, future business development, and the number of competitors, and found that there is a big gap between cost and future development, so it gave up.

2. The Hong Kong market is small, and the exchange only allows customers from 18 countries (mainly European and American countries) to register remotely. Hong Kong already has two licensed exchanges, and two have received in-principle approval, but have not yet opened up the domestic market. The competition among the exchanges is huge. With high operating costs, the market believes that the exchanges will not be profitable for at least a few years.

3. If you have paid attention to Coinbase's policy towards Hong Kong, you will find that in February last year, Coinbase announced that it would suspend Hong Kong users. However, at the beginning of this year, some people found that Hong Kong users can register on Coinbase. This means that overseas exchanges may not operate in Hong Kong, not promote in Hong Kong, and do not deliberately attract Hong Kong users, but can still allow Hong Kong users to register on the platform.

4. All the leading exchanges have some non-compliance issues, such as opening contracts or derivative products to Hong Kong users. The Securities and Futures Commission clearly stated in 2018 that any contract product belongs to the category of securities and requires a license to issue. It may be difficult for exchanges to explain past non-compliance issues, making it more difficult to obtain a license.

Based on the above reasons, I think it is a rational choice to withdraw the application actively. It is the right choice for the long-term development, sustainability, cost-effectiveness, etc. of the entire exchange.

By the way, looking back at the strategies of various exchanges, the acquisition of OSL by Bitget’s affiliate is a very smart move. No wonder Bitget is the fastest growing exchange in recent years.

Although exchanges are very important, they are only a part of the entire cryptocurrency ecosystem. The Hong Kong government has recently been vigorously promoting tokenized securities and RWA. Most of the underlying assets of RWA are traditional securities products. Hong Kong regulators and investors are more familiar with them.

It is worth noting that GF Securities and NV Technology jointly issued tokenized short-term financing notes at the beginning of the year. Both institutions have Chinese-related backgrounds or are friendly with Chinese institutions. As a pioneer, GF Securities has the opportunity to enable more Chinese financial institutions to boldly promote virtual currency-related products in the future.

RWA has a wide range of application scenarios. If it is combined with the Hong Kong dollar stablecoin in the future, it is more likely to develop horizontally. For example, if RWA products can be used as collateral to borrow Hong Kong dollar stablecoins, and stablecoins can be connected to decentralized product pledges, then the traditional market and the cryptocurrency market can be integrated.

Another point worth noting is the implementation of spot ETFs in Hong Kong.

Investors of spot ETFs can purchase through traditional securities investment accounts, without the need to set up additional virtual asset wallets and trading accounts. Unlike ETFs in the United States, investors can also redeem with physical virtual currencies, and it is open to retail investors. Hong Kong's ETFs have definitely made history.

In addition, the market for virtual asset fund investment seems to be active again recently. It is also worth noting the latest investment immigration program launched this year. Although the products recognized by the investment immigration program do not include virtual assets, the limited partnership fund (LPF) or open-end fund company (OFC) opened by the CSRC licensed asset management company can be used as 10 million of the 30 million investment amount of the investment immigration program, and these two funds do not restrict the assets or products that can be invested. This means that both LPF and OFC can invest in virtual currencies. Therefore, in any case, if you choose to invest in virtual currencies, it is recommended to cooperate with companies that have been approved by the CSRC to upgrade to invest in 100% virtual asset management.

In terms of licenses, in addition to exchange licenses, the Hong Kong government has also actively promoted stablecoin sandbox and OTC licenses this year. It is understood that the HKMA attaches great importance to the application scenarios of stablecoin licenses and believes that stablecoins should not only be used as trading pairs on exchanges. The application scenarios should be broader and more versatile than pure transactions.

The three licenses of exchanges, OTC, and stablecoins are supervised by three different government departments, but they are all coordinated by the Financial Services and the Treasury Bureau. This arrangement helps the government establish a robust and transparent regulatory environment, maintain policy continuity, and enable the sustainable development of Web3.

In summary, compared to last year's overwhelming publicity and massive activities, this year it is clear that all industry stakeholders are working hard to prepare for the bull market and work for the development of Web3 in Hong Kong. Despite this, I think there are more actual developments and opportunities than last year.

List of applicants whose licence applications have been returned, refused or withdrawn: