Author: David Chiu, Legislative Councillor
The SFC’s new licensing regime for virtual asset trading platforms (VATPs) came into effect on June 1, 2023. The transitional arrangement of the new regime allows operators to apply for a license before February 29 this year and comply with the new regulatory requirements from June 1 to continue providing virtual asset services in Hong Kong until the authorities make a final decision on their license applications.
However, as the transition period draws to a close (May 31), more and more operators have decided to abandon the Hong Kong market. At the time of writing, 11 have withdrawn or returned their license applications. When the SFC first introduced the licensing conditions, it 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 Since February, several internationally renowned exchanges such as Gate and Huobi have gradually withdrawn.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 delved deeply into 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 as it started?" 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 taking a conservative and risk-averse approach, which weakened the competitiveness and flexibility of the licenses based on traditional financial thinking. Some operators decided to return their applications at the final 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, resulting in the entire Web3 layout being 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, 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 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 demonstrate new thinking and determination to encourage Web3 finance.
In the final analysis, innovation is a thought and an action. If you are enthusiastic when advocating innovation, but are afraid of failure and mistakes when taking action, how can you 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!
