The CEO of one of Hong Kong’s two licensed cryptocurrency exchanges has criticized the city’s new approach to digital asset trading, saying it could limit access to global customers.
Hong Kong’s new regime for cryptocurrency exchanges, part of its push to become a hub for the industry, has required exchanges operating in the city to apply for regulatory approval by February this year, with 24 companies that submitted bids for the highly prized licenses.
But Livio Weng, chief executive of HashKey Exchange, told the Financial Times that his decision to launch a licensed exchange in Bermuda this week was partly due to fears that new regulations would limit access to foreign investors.
“So this prevents many global users from coming to Hong Kong,” Weng said, adding that the city would suffer if it issued too many licenses. “The local market is not that big.”
HashKey’s comments come just months after the only other licensed digital asset exchange, OSL, sold a nearly 30% stake to BGX, which two people familiar with the deal described as an unlicensed crypto group with connections to China.
Their moves have raised questions about the long-term viability of operating an exchange under the city’s new crypto standards, even as new companies seek approval to operate in one of the world’s most active cryptocurrency markets.
Digital currencies remain very popular in Hong Kong, despite links to a number of freewheeling practices of the past. Sam Bankman-Fried’s FTX was founded in the city, and Hong Kong was also home to cryptocurrency group JPEX, which has been accused of committing a HK$1.4 billion (K$180 million) fraud. dollars).
Residents spend billions of dollars trading in unregulated markets, forcing authorities to propose more restrictive rules while trying to build the city’s status as a respected and open market.
The rules allow exchanges to only serve customers who can pass “know-your-customer” checks and have funds in a local bank account or a bank account in certain foreign jurisdictions.
Weng said the new rules are needed to allow a wider range of foreign investors to trade in the local market. “Otherwise, let’s forget about 24 companies, I think [the market] I couldn’t even sustain four.
HashKey’s move overseas contrasts with other companies’ rush to secure a local license. The city’s proximity to China has sparked strong interest, even though the country banned cryptocurrency trading in 2021.
The companies are eager to get a regulatory stamp from the city’s Securities and Futures Commission, considered a top financial regulator, analysts said.
Hong Kong lawmakers have also been actively courting cryptocurrency exchanges. Pro-Beijing lawmaker Johnny Ng, who is also a member of China’s top political advisory body, invited Coinbase and other cryptocurrency exchanges to set up in the city last year after the group was hit with a lawsuit from Securities and Exchange Commission of the United States.
HashKey and OSL have already secured licenses, and those hoping to join include Singapore’s Bullish and Crypto.com, but the regulator did not provide a timeline for approvals.
Industry insiders said the limited size of the Hong Kong market meant early approvals would be the most valuable.
“In the context of Hong Kong, which only has about 8 million people, 24 is actually quite a lot,” said Jason Chan, partner at Howse Williams. He estimates that around 10 licenses could ultimately be granted.
Underlining the value of a license was OSL’s sale of a 29.97% stake in it to BGX for HK$712.8 million last November. OSL has seen its share price rise 126% in the last six months.
Its rise comes even as OSL, formerly known as BC Technology, has not made an annual profit since at least 2019, when it changed its name from Branding China, and lost HK$266 million last year. The company said it has successfully raised capital multiple times since then.
Two people familiar with the sale said BGX, run by Patrick Pan — whose LinkedIn profile lists former employment at Alibaba and China Mobile — was an unlicensed crypto group looking for a foothold in the regulated space. Pan’s LinkedIn page says the group is based in Singapore.
Pan said at the time that the investment, which made BGX the company’s largest shareholder, reflected “our confidence in the immense potential of the digital assets market.”
Pan did not respond to requests for comment.
Fees have soared as cryptocurrency groups race to secure their spots. Two lawyers who help exchanges apply for licenses in the city estimated that crypto groups were paying HK$2 million to HK$8 million for advice in hopes of speeding up the process.
A third person familiar with the licensing process estimated that the cost of working with professional services firms on internal assessments required by regulators could cost an additional HK$5-6 million.
“Due to the limited number of service providers and the large number of applicants, as well as the fact that the process is very complex and human-intensive. . . many of them [were] at full capacity, which drove up rates, especially near the application deadline,” said Chan of Howse Williams.
Some wonder whether it will be worth the expense for a market of just 8 million people. But King Leung, head of fintech at Invest Hong Kong, a government-sponsored body, said the city is now focused on attracting other market participants such as market makers and technology developers.
“In [Hong Kong]we seek a more complete ecosystem that goes beyond simple exchanges,” he said.