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DLT, not degens: Hong Kong’s great crypto regime exodus

A raft of crypto businesses gives up on an SFC license, which says a lot about the industry and its future.



Then there were eighteen: 11 crypto businesses of an original 27 have abandoned their efforts to obtain a virtual-asset transaction platform (VATP) license in Hong Kong.

A few, such as HTX (aka Huobi H.K.), quit as early as February. They were the smart ones. The costs of operating a business while waiting to be licensed are high. Gate.HK, IBTCEX, QanxLab, VAEXC and OKX only withdrew their applications in the past week.

These firms have been allowed to operate in Hong Kong pending a license until June 1.  Those exiting the process have said they will stop trading and hand over user assets by today, 31 May. (Registered applicants may continue to operate onshore as ‘deemed to be licensed’).

Why would big names such as OKX, a frequent sponsor of crypto-related events in the city, give up at such a late stage?

Quel surprise

DigFin has heard a range of guesses. One is that the Securities and Futures Commission, which now regulates crypto in Hong Kong under its virtual-asset regime, has quietly told some applicants that they aren’t welcome.

“We’ve seen a change in the regulator’s approach” at the last minute, said one person at a crypto exchange that is still gunning for a license.

Another person says the exodus was triggered by the SFC reminding these companies that they cannot serve mainland customers if they are licensed in Hong Kong.

These guesses suggest some kind of surprise – that the SFC for some reason decided to change course.

But it is not a surprise that the SFC was not going to let them service mainlanders. It’s in the rules. The likes of OKX, Huobi, Binance-linked HKVAEX and KuCoin all have mainland Chinese roots and businesses. What kind of business did they expect they’d be allowed to conduct onshore?

Common sense suggests the SFC can never allow virtual-asset firms to cater to mainland users so long as crypto is banned in mainland China. Just look at the convoluted rules around Stock Connect and the hoops required to create corridors for mainland money to invest in Hong Kong-listed securities. Why would Beijing countenance Hong Kong to so readily provide a legal conduit for capital flight?

And yet industry executives believe the SFC had to spell it out, with one person alleging the SFC demanding the responsible officers of these applicants to personally attest they don’t serve mainland clients.

What were these crypto bros thinking? That they would bamboozle the regulators? That the SFC didn’t mean it?


For other firms, the problem may not be regulatory. It’s simply that the numbers don’t add up. Hong Kong retail represents a small portion of wallet from a global audience. Although recent launches of spot bitcoin ETFs provide some comfort, there just isn’t enough liquidity in the regulated retail space to make money.

There are currently two licensed players, OSL and HashKey. OSL is publicly listed and its 2023 annual report says it made a HK$249.8 million loss. Privately held HashKey is probably also unprofitable.

Their execs are presumably happy to see competitors leave; there are still 18 applications in the queue, including from Bullish, and Bybit, so that’s a lot of fish in a small pond. If the leaders can’t make money, how will everyone else?

It’s likely that quite a few of these applications aren’t serious when it comes to long-term business strategy: they wanted a license because any license is valuable. The SFC may be thinking of this too and weeding out firms it suspects are just here to flip their license.

But the exodus also suggests many applicants weren’t serious in other ways. Industry players suspect they submitted incomplete information, couldn’t stand up to an audit, and continue to operate platforms with leaky know-your-customer and anti-money-laundering controls. 

“No one built things the right way,” lamented a trader. “Their management teams don’t fit regulatory definitions of fit and proper. Even big players are AML fails.”

Regulator’s contradiction

While the SFC is probably happy to be rid of these applicants, the exodus puts an uncomfortable spotlight on the regulator, too.

The SFC’s Virtual Asset Service Provider legislation (essentially updating KYC/AML rules) was designed to protect retail investors. The SFC has allowed professional investors to play onshore, but it got criticized (including by DigFin) for leaving retail in the cold: these people were not enjoying any kind of protection, as they were left to the vagaries of the unlicensed crypto world. Local politicians, excited by ‘Hong Kong as a Web3 hub’ and other visions of sugar-plum fairies, hammered SFC on this point.

No sooner had the SFC finally expanded the scope of its virtual-assets regime to retail then the territory was rocked by the JPEX scandal. JPEX being a crypto brokerage that lied about being locally licensed and whose shadowy owners made off with HK$1.6 billion ($205 million) in Hongkonger assets. The police arrested more than 70 people but these are all low-level social-media influencers and other peddlers of snake oil.

Crypto is a borderless, 24/7, peer-to-peer mover of digital assets. In theory, the SFC could eventually trace those accounts. Does the Hong Kong government have the resources to apprehend the scammers or recover the assets? Do they have the global law-enforcement links if someone’s hiding in Dubai or where have you?

The answer is likely no. Which is why the SFC wants a licensing regime. Regulation requires their responsible officers be on the ground, to be questioned or arrested if something goes wrong. These are the people whom the SFC allegedly has asked to sign a paper averring they have no mainland customers.

But these exchanges don’t have to be onshore! OKX and others can legally service Hongkongers who open accounts on their exchanges overseas. They just can’t market to people onshore.

The SFC has been early in building a regulatory regime for crypto that includes retail investors. It deserves applause for that, and for insisting on standards for anyone seeking to play in this market. But it faces the uncomfortable reality that crypto regulation is as dependent on network effects as bitcoin. A single regime is helpless in the wild.

Why stay

Where does this leave Hong Kong as a digital-assets hub? It is still in a leadership position, but this is not going to be friendly turf for exchanges catering to degens (risk-loving retail traders). Nor can it be regarded as a funnel for mainlander money, at least not openly.

Hong Kong’s future is as a capital market. That’s its expertise. This means tokenization: infrastructure for securities, funds, loans. Tokenization is embryonic, taking many innovations from crypto, including DeFi networks, P2P instant settlement and programmability. But it’s often more about the underlying plumbing of distributed-ledger technology (DLT), a dirty word in many bitcoin circles, than it is about minting meme coins.

The important thing about why OSL and HashKey aren’t making money is that they hope to become exchanges for these broader, regulated tokenization projects. But it takes time to develop the ecosystem of rules, expertise, issuers, investors, traders, and sponsors. Little may happen without a regulated cash-like element, be it stablecoins, deposit tokens, or a central-bank digital currency.

It is this long-term hope for the weight of institutional money that drew OSL and HashKey to get a license in the first place. It’s what drives the other exchanges still in the hunt for SFC approval.

If serving degen appetite for trading bitcoin or monkey jpegs is how a firm intends to make money, then Hong Kong is not going to be an attractive place to do business. Unregulated crypto is a lot easier and more lucrative than the licensed kind – for the time being, while regulation in other jurisdictions is also nascent.

And there’s an audience for this, because people including the residents of Hong Kong like to gamble on crypto. They will find what they want overseas, and good luck to them. Now that there exists a retail licensing regime in Hong Kong, the SFC – and the Hong Kong taxpayer – is no longer responsible for these punters the next time they get burned.

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