The Securities and Futures Commission (SFC) of Hong Kong has announced it will carry out on-site inspections of crypto trading platforms that are still in the process of licensing applications, as a key deadline approaches.

By June 1, 2024, all virtual asset trading platforms (VATPs) operating in Hong Kong must be either licensed by the SFC or deemed to be licensed temporarily until full compliance is achieved. Post-deadline, operating without the necessary licenses will constitute a criminal offense under anti-money laundering and counter-terrorism laws, according to the SFC.

Licensing Deadline Looms: SFC Scrutinizes Client Protection

During the next few months, as VATPs continue their licensing applications, the SFC will focus on-site inspections on ensuring these platforms comply with regulations, particularly in safeguarding client assets and adhering to know-your-client processes.

To date, OSL Digital Securities Limited and Hash Blockchain Limited are the only entities fully licensed by the SFC. Of the others, eighteen remain in the licensing process, while eleven have either withdrawn their applications or been removed, including notable exchanges OKX and Huobi Hong Kong.

The SFC has stressed that VATPs holding deemed-to-be licenses are not yet fully licensed and, therefore, cannot market their services or onboard new retail clients until they achieve full licensing status. Platforms found non-compliant during this interim period risk having their applications denied and may face additional regulatory actions, including a requirement to submit a plan for orderly business wind-down to protect client interests.

This stringent approach aims to ensure that only compliant and secure platforms operate within Hong Kong’s crypto market. Recent application withdrawals might be part of an effort by the SFC to streamline the process before the deeming arrangement takes effect. The decision to introduce on-site inspections highlights the SFC’s commitment to maintaining a robust regulatory environment for virtual asset trading.

Licensed Platforms and Application Withdrawals 

The SFC’s website currently lists OSL Digital Securities and Hash Blockchain as the only fully licensed VATPs. The regulator may update its lists on June 1 to reflect the number of deemed-to-be-licensed entities. The heightened licensing requirements come amid a rise in cryptocurrency-related scams in Hong Kong, prompting the SFC to warn about platforms impersonating the two licensed entities.

Hong Kong’s ambition to become a major crypto hub could face obstacles if many of the 18 applicants fail to meet this crucial deadline. The SFC has clarified that it does not expect applicants to market their services or onboard new retail clients before achieving full licensing. This cautious stance aims to protect investors and ensure only compliant platforms operate in the market.

Additionally, the SFC is considering allowing staking for Ethereum (ETH) exchange-traded funds (ETFs). Discussions with crypto ETF issuers about permitting staking through licensed services are ongoing, which could potentially provide investors with passive income opportunities. If approved, this regulatory change would place Hong Kong ahead of the United States, where staking for Ether ETFs is not yet permitted. 

Hong Kong’s Crypto Hub Aspirations: Challenges and Opportunities

The SFC launched six spot Bitcoin (BTC) and Ether (ETH) ETFs at the end of April, stirring activity in the Hong Kong crypto market. However, these spot exchange-traded products have recently experienced significant net outflows, with a notable increase on May 13, recording a net outflow of 519.5 BTC—a 420% rise from the previous Friday’s outflow of 99.99 BTC.

Of this total, ChinaAMC’s spot product accounted for more than 48% of the outflow, losing 251.65 BTC, followed by Harvest with a 147.86 BTC outflow, and Bosera HashKey with 119.99 BTC.

The regulatory landscape in Hong Kong is evolving as the SFC intensifies its oversight of crypto platforms. This increased scrutiny is part of the city’s broader efforts to establish itself as a major crypto hub while ensuring investor protection and market integrity. As the June 1 deadline nears, the outcome of these licensing applications will significantly influence the future of Hong Kong’s crypto industry. 

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