HONG KONG: Hong Kong digital assets exchange warns over viability of city’s new crypto rules

The chief executive of one of Hong Kong’s two licensed cryptocurrency exchanges has hit out at the city’s new approach to trading digital assets, saying it could restrict access to global clients.

Hong Kong’s new regime for crypto exchanges, which is part of its push to become a hub for the industry, required exchanges operating in the city to apply for regulatory approval by February this year, with 24 companies making bids for the highly prized licences.

But Livio Weng, chief executive of HashKey Exchange, told the Financial Times that its decision to launch an exchange licensed in Bermuda this week was in part owing to fears that the new regulations restricted access to overseas investors.

“So this blocks a lot of global users from coming to Hong Kong,” said Weng, adding that the city would suffer if it issued too many licences. “The local market is not that big.”

The comments by HashKey come only months after the only other licensed digital assets exchange, OSL, sold a near-30 per cent stake in itself to BGX, which two people familiar with the deal described as an unlicensed crypto group with links to China.

Their moves have raised doubts 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 crypto trading markets.

Digital coins remain highly popular in Hong Kong despite links to a series of freewheeling practices in the past. Sam Bankman-Fried’s FTX was founded in the city, and Hong Kong was also the location of cryptocurrency group JPEX, which has been accused of committing a HK$1.4bn (US$180mn) fraud.

Residents spend billions of dollars on trades in unregulated markets, forcing authorities to propose tightening rules while simultaneously trying to build the city’s status as a respected and open market.

The rules only allow exchanges to serve clients who can pass know-your-customer checks and have funds in a local bank account or bank account in certain overseas jurisdictions.

Weng said the new rules needed to allow a wider range of overseas investors to trade in the local market. “Otherwise, forget 24 companies, I think [the market] couldn’t even support four.”

HashKey’s move overseas stands in contrast to the rush from other companies to secure a local licence. The city’s proximity to China has garnered intense interest, even though the country banned crypto trading in 2021.

Companies are eager to obtain a regulatory stamp from the city’s Securities and Futures Commission, seen as a top-tier financial regulator, analysts said.

Hong Kong lawmakers have also actively courted crypto exchanges. Pro-Beijing legislator Johnny Ng, who is also a member of China’s top political advisory body, invited Coinbase and other crypto exchanges to set up in the city last year after the group was hit by a lawsuit from the US Securities and Exchange Commission.

HashKey and OSL have already secured their licences, and among those hoping to join are Bullish and Singapore’s Crypto.com, but the regulator has not provided a timeline for approvals.

Industry insiders said the limited size of the Hong Kong market meant the first approvals would be the most valuable.

“Within the context of Hong Kong, having only around 8mn people, 24 is actually quite a lot,” said Jason Chan, a partner at Howse Williams. He estimated that about 10 licences could eventually be granted.

Underscoring the value of a licence was OSL’s sale of a 29.97 per cent stake in itself to BGX for HK$712.8mn last November. OSL has seen its share price jump 126 per cent in the past six months.

Its rise comes even though OSL, previously 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$266mn last year. The company said it has successfully raised capital several 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 states the group is based in Singapore.

At the time Pan said the investment, which made BGX the company’s largest shareholder, reflected “our belief in the immense potential of the digital asset market”.

Pan did not respond to requests for comment.

Fees have soared as cryptocurrency groups race to secure their places. Two lawyers who help exchanges apply for licences in the city estimated that crypto groups were paying HK$2mn-HK$8mn for advice in the hope of speeding up the process.

A third person familiar with the licensing process estimated that the cost of working with professional services firms on the internal assessments required by regulators could cost a further HK$5mn-HK$6mn.

“Because of the limited amount of service providers and the large number of applicants, as well as the fact that the process is very involved and human-intensive . . . many of them [were] at full capacity, which drove up the fees, especially nearer to the deadline of the application,” said Chan at Howse Williams.

Some question whether the expense will be worth it for a market of just 8mn people. But King Leung, head of fintech at Invest Hong Kong, a government-sponsored body, said the city was now focused on attracting other market participants such as market makers and tech developers.

“In [Hong Kong], we look for a more complete ecosystem beyond just the exchanges,” he said.