11 Hong Kong cryptocurrency exchanges, which initially received provisional approvals, are now under increased regulatory scrutiny.
The city’s Securities and Futures Commission (SFC) conducted on-site inspections of these “deemed-to-be-licensed” platforms and found several practices that fell short of regulatory expectations, Bloomberg reported, citing sources familiar with the situation.
The inspections revealed that some crypto firms are overly dependent on a limited number of executives for the custody of client assets, raising concerns about their ability to manage these responsibilities effectively.
Some Exchanges Lacked Measures to Protect Against Cybercrime
Additionally, some exchanges were found lacking in robust measures to protect against cybercrime.
The SFC has not disclosed which specific firms failed to meet the standards, and the inspections are still ongoing, leaving the possibility of further findings.
Among the 11 exchanges under review are well-known global players such as Crypto.com and Bullish, alongside local platforms like HKbitEX, PantherTrade, and Matrixport HK.
The SFC said that these inspections are part of their effort to ensure that applicants adhere to stringent requirements, particularly concerning the safeguarding of client assets and adherence to know-your-client (KYC) processes.
The SFC warned that platforms unable to address critical deficiencies identified during inspections could face the removal of their “deemed-to-be-licensed” status or have their license applications rejected outright.
Licensing crypto exchanges is a key component of Hong Kong’s broader Web3 strategy, which was first outlined in 2022.
The initiative aims to revitalize the city’s reputation as a major international financial center, following years of political upheaval.
However, the cautious approach taken by regulators has not yet resulted in significant changes in terms of personnel shifts or capital inflows, raising questions about the effectiveness of the strategy.
As of now, only two crypto platforms, OSL and HashKey, hold full licenses in Hong Kong.
The SFC expects to issue full licenses to successful applicants by the end of 2024.
Meanwhile, 12 companies, including Huobi HK and OKX, have already withdrawn their applications.
On March 28, 2024, HKVAEX, suspected to be affiliated with Binance, withdrew its license application.
Subsequently, on May 14, IBTCEX, QuanXLab, and Huobi HK followed suit, followed by Gate.HK on May 22 and Bybit (Spark Fintech Limited) on May 31.
Legislator Raises Concern Over Crypto Licensing System
Just recently, Hong Kong Legislative Council member voiced criticism against Hong Kong’s cryptocurrency licensing system, citing its impact on market confidence.
The lawmarker attributed the withdrawals to the requirement imposed by the Hong Kong SFC, which requires applicants for virtual asset trading platform licenses to commit to not having mainland Chinese users in any region.
The requirement poses a challenge for traditional offshore exchanges, making it difficult for them to comply.
OKX attempted to form an industry alliance to oppose the requirement but was ultimately unsuccessful.
Industry insiders have mentioned that the entities that have withdrawn their applications could potentially update their legal frameworks or entities and reapply in the future.
Meanwhile, Hong Kong has launched its first batch of ETFs focused on cryptocurrencies, marking potential competition for the popular Bitcoin products in the United States.
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