Listen to the Article: The Race for Hong Kong VASP License Begins, Which Exchanges Will Make the Cut?

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As of June 1, 2023, the Securities and Futures Commission of Hong Kong (SFC) has launched a new licensing regime for virtual asset service providers, under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.

This marks a significant milestone for the crypto trading community. In this March, Fazzaco discussed Hong Kong's intention to license virtual asset trading in an article titled "A Guide to HK SFC's Latest Consultation on Virtual Assets Regulation​".

A Major Step Forward in Crypto Regulation

Since Bitcoin came out, cryptocurrencies have gone through years of wild and chaotic growth. As investor enthusiasm has cooled down, and the market has shifted from reckless competition to a growing demand for orderly development, especially after the crypto winter of 2022 triggered by the LUNA​, Celsius​ and FTX​ debacles, various regions have started to implement stricter regulatory measures.

However, there is still a considerable divergence among countries on how to regulate the crypto community. Last year, Fazzaco explored the regulatory frameworks of a number of countries and regions in the series "Cryptocurrency Regulations: A World Tour​". For instance, even in the highly developed financial industry of the United States, there is still debate on whether cryptocurrencies should be classified as a type of securities and fall under the jurisdiction of the U.S. SEC.

Therefore, since Hong Kong announced its new licensing policy, many exchanges including OKX, BitMEX, Huobi, HashKey, BTSE, and JPEX have been gearing up to apply for VASP license.

Among them, OKX announced back in this March that it had set up a branch in Hong Kong to seek to offer virtual asset services in the local market​. As the world's second largest crypto exchange, OKX has been expanding globally. In mid-June this year, OKX's Middle East subsidiary obtained a Minimal Viable Product (MVP) preparatory license issued by the Dubai Virtual Asset Regulatory Authority (VARA)​.

Similarly, Huobi's Hong Kong subsidiary also announced on Twitter​ that it had submitted an application for a VASP license to the SFC on May 29. Earlier that month, crypto exchange BitMEX also revealed that it was pursuing a VASP license under the relevant regime​.

SFC Sets A High Bar for Licensing

After issuing a consultation paper on February 20 this year, the SFC received 152 submissions from companies and market participants. Based on the feedback received, the SFC then issued the Licensing Handbook for Virtual Asset Trading Platform Operators  in early June. According to the Handbook, license applicants must meet various requirements including investor protection, paid-up capital, anti-money laundering regulations, internal controls and more to obtain a license.

After FTX exchange was exposed for misappropriating client assets in 2022, crypto companies have been striving to enhance transparency of funds and regain market trust. Therefore, the SFC also requires companies to ensure that they have adequate funds and operational strength. Specifically, companies should always ensure that their entities in Hong Kong have sufficient liquidity of assets, not less than 12 months of operating expenses; in addition, companies need to maintain a paid-up capital of not less than HK$5 million (about US$640,000) and an immediate liquidity of not less than HK$3 million (about US$380,000) as generally considered.

In terms of operational compliance, the SFC requires companies to conduct due diligence on their listed virtual assets, including project team background, market maturity level, liquidity, technical development status and smart contracts.

Therefore, for any company intending to apply for a license, Hong Kong's VASP is not an easy one to obtain and may even require long-term preparation. Therefore, which exchanges can become the first to make the cut and secure licenses depends on the quality of their compliance work.

Industry Feedback: VASP Not as Hot as Expected

According to Yahoo News, informed sources said that Hong Kong's Monetary Authority (HKMA) has been encouraging banking institutions not to shy away from entering the virtual asset trading and believes that traditional banking thinking poses an obstacle to development. Moreover, senior executives of traditional banks are generally resistant to VASP licenses.

In June, Fazzaco followed up with reports that the U.S. SEC had sued Binance​ and Coinbase​. Hong Kong government officials publicly called for Coinbase and other global crypto exchanges to come to the city and apply for VASP licenses. Jonathan Crompton of RPC law firm said that the Hong Kong Monetary Authority's candid invitation contrasted sharply with the skepticism of other jurisdictions on cryptocurrencies, so the SFC's position was somewhat "unusual".

Fazzaco reported on June 19​ that "the UK-based lenders, and the Bank of China were questioned by the Hong Kong Monetary Authority last month on why crypto exchanges were not being accepted as clients." Therefore, it is likely that to some extent, Hong Kong's VASP license, which is heavily promoted this time, is not as hot as expected.