Hong Kong 531 new policy after the market changes? Top firms, Hong Kong consortiums rush to eat “compliance rice”, an inventory of 24 license applicants]
Recently, with the stimulation of U.S. spot ETF funds entering the market and institutions increasing their holdings, Bitcoin exceeded US$69,000 on the evening of March 5, reaching a record high. The market capitalization of Coinbase has reached $54 billion, even exceeding that of the Hong Kong Stock Exchange. It can be said that the compliance circuit has led the opening and short-term climax of the current bull market. In addition to the continuous action in the West, Hong Kong's compliance track is also advancing very quickly.
At the end of last month, the final application deadline for Hong Kong's public Virtual Asset Trading Platform (VATP) expired. This is a clear clearing action, in order to provide virtual asset trading services in Hong Kong in the future, must be licensed, and those who have not applied for a license will be retired.
Now, the final list of applicants has been finalized, with a total of 24 companies submitting applications in addition to the two licensed virtual asset trading platforms, Hashkey and OSL, including well-known companies such as the Hong Kong Digital Asset Trading Group, the Hong Kong Virtual Asset Exchange, Victory Digital, and Cheetah Trading (Hong Kong).
In this article, we will take a look at 24 organizations to take stock of the Eastern compliance players.
1、Native Web3 organization: more than half of the top exchanges on board
According to statistics, more than half of the top 12 cryptocurrency exchanges in CoinMarketCap have submitted applications for operating licenses, but well-known exchanges such as Coin, Coinbase, and Kraken are not among them.
Exchanges that have applied for licenses include Bybit, OKX, Gate.io, BGE, HTX, Bullish, Crypto.com, and HKVAEX.
In addition to the above Web3 exchanges, Matrixport, a crypto-financial services company owned by Bitmain founder Jihan Wu, filed an application on February 26th to provide digital asset management, trading, and custodian services.
DFX Labs is also on the list, with COO Simon Au Yeung graduating from the Wharton School of Business. Previously, he was CEO of Blockchain Finance and BGE. He joined DFX Labs in September 2023 after leaving BGE to co-found the IEEE.
In addition, Bixin.com, founded and led by Wu Gang, has also made an application, with its owner NewBX Limited registered in Hong Kong, a wholly-owned subsidiary of the Coin Group. Bixin.com originated from HaoBTC, which was founded in 2014, and has grown to become a well-known brand in the crypto community. Its product Onekey is the best-selling hardware wallet on the market. While the above players have proven experience in providing users with a wide range of digital assets and innovative trading features, Hong Kong's compliance policy restricts the number of currencies that can be traded and requires teams to be in operation for three years before they can be allowed to start a business. This, coupled with the thresholds of the Hong Kong Securities and Futures Commission's RO mechanism, means that smaller companies are expected to face a greater burden in terms of operation. How to promote business localization is also one of the issues that the Exchange needs to consider.
2. Hong Kong's Traditional Finance: HKEx Regulars, Consortium Admission
On the other hand, Hong Kong's traditional financial institutions have also carried out license deployment, and the following platforms are worth paying attention to:
- HKVAX, which received a Notice of Approval-in-Principle from the Hong Kong Securities and Futures Commission (SFC) in August last year, has become the third licensed virtual asset trading platform in Hong Kong by allowing it to conduct Type 1 and Type 7 regulated activities. HKVAX's CEO, Weiliang Wu, was previously the CEO of CoinSuper Premium, a crypto asset trading platform owned by Hong Kong's traditional financial conglomerate, the Pioneer Group, and prior to that he worked with a number of leading financial institutions, including Morgan Stanley, JPMorgan Chase, and Wanfang Asset Management.
CTO Cheng Liu has extensive experience in financial product management and complex system research and development at Alibaba and Ant Gold. According to official disclosure, HKVAX has raised several rounds of financing since 2020. Sources familiar with the matter have revealed that the shareholders behind HKVAX may be related to a mining group in southwest China, as well as entertainment background capital.
- VDX is backed by Hong Kong's leading local brokerage firm, Victory Securities, with an average monthly turnover of US$10 million, and its virtual assets business has already turned profitable. The goal is for Victory Securities to generate 20% of its revenue from digital assets within three years.
- BGE is a wholly owned subsidiary of HKE Holdings, a Hong Kong listed company. The Chairman of the Board of Directors of BGE, Mr. H.M. Lien, is the founder of Monmonkey Group Holdings Limited, which holds Hong Kong's traditional financial licenses No. 1, No. 4 and No. 9. According to reports, Mr. Lien has invested tens of millions of dollars in blockchain-related projects over the past three years. After completing the acquisition of HKE Holdings in 2021, its virtual asset exchange team has grown to more than 120 people, and BGE is likely to receive a virtual asset trading platform license from the Securities and Futures Commission in the first quarter of this year, with plans to expand its business to Southeast Asia.
- HKbitEX was founded by a team from the Hong Kong Stock Exchange (HKEx) and is one of the four major business segments of Taiji Capital Group. Founder and CEO Gao Han worked at HKEx and participated in projects such as HK Stock Connect and Bond Connect, and the platform has attracted a number of former HKEx employees to join. Last year, Tai Chi Capital launched Hong Kong's first real estate STO PRINCE token for "professional investors", marking the first fund tokenization fundraising mode permitted by the Hong Kong Securities and Futures Commission.
- The MeexMeex team combines native cryptocurrency veterans with local Hong Kong forces and is backed by a Hong Kong consortium. Jason FENG, CEO, was formerly acting CEO of Gazprom, and Lu Zhichao, CTO, was formerly Technical Director of Bybit. Vince Lam, Head of Operations, was previously Head of Operations at HKbitEX, a similarly license-pending exchange.
These institutions have built up a good reputation and earned the trust of their clients by providing stable and reliable financial services over a long period of time. This trust is particularly important in the relatively new market of virtual assets. Moreover, traditional financial institutions have extensive customer networks, which provide a natural advantage for the promotion and adoption of virtual asset services.
However, traditional financial institutions may be at a disadvantage in terms of technological adaptability and speed of innovation compared to emerging companies focused on virtual assets or blockchain technology. The technical architecture and business processes of these traditional institutions tend to be more complex and entrenched, and they may not be able to adapt and innovate as quickly as pure cryptocurrency companies. Similarly, the development and maintenance of a secure and compliant virtual asset trading platform requires significant initial investment and ongoing operational costs in terms of technology development, security, compliance and customer service. For traditional financial institutions, these costs may put pressure on the cost-effectiveness of their overall business.
3、Mainland Enterprises: Internet Brokerage Firms Embrace Compliance
Apart from the above two categories, mainland online brokerage firms have also chosen to go overseas and embrace Hong Kong compliance at this moment:
- BitV, which has been in operation since May 2023, is applying to become a licensed VASP with a team comprised of Gold Digger Securities' local Hong Kong management team and the world's leading Virtual Asset Exchange (VASP) compliance business line team. The core members of the management team are Hong Kong-based securities firm executives, leading core management team members of securities firms with licenses #1, #2, #4, #5, and #9, as well as a compliance officer with license #7. The backgrounds of these core members include senior executives who graduated from the University of Cambridge with a degree in Economics and have worked at Lehman Brothers and Royal Bank of Canada, as well as specialists with PhD degrees in Engineering from the Chinese University of Hong Kong who have worked as senior executives at BOCI and Fortune.
- Accumulus, belonging to the Top 500 Chinese Enterprises, Cloud Account Technology (Tianjin) Co., Ltd. has registered in Hong Kong to set up Cloud Account Greater Bay Area Technology (Hong Kong) Ltd. and has been granted over HK$1.1 billion of offshore investment quota. On December 6, 2023, the company formally submitted its application for a virtual asset trading platform license to the Hong Kong Securities and Futures Commission. Cloud Account has become one of the largest online human resources service enterprises in China, serving 82 million freelancers in 120 countries and regions around the world, with 2022 revenue exceeding HK$110 billion, based on 7 years of providing flexible employment services. Chairman Yang Hui is a member of the National Committee of the Chinese People's Political Consultative Conference. Accumulus is regarded as one of the representatives of mainland enterprises entering Hong Kong web3.
- Tiger Brokers was granted an upgrade to its Type 1 license by the Hong Kong Securities and Futures Commission (SFC) in January this year, allowing professional investors to trade virtual assets on Tiger Trade, Tiger's flagship trading platform. Tiger's chief financial officer, John Fei Zeng, said the company currently has 865,500 funded accounts with US$18.9 billion in assets under management. PantherTrade, a subsidiary of another online brokerage giant, filed an application for a virtual asset trading platform on November 15 last year. PantherTrade's directors are from Jingdong Securities and Huobi Asset Management, among others.
- xWhale is a joint venture between Sina's online brokerage firm, Watson Securities, and BusyWhale. Watson Securities has around 2 million registered users in Hong Kong, with a daily peak of around 600,000 active users. The company aims to build a professional OTC trading system with two self-developed trading systems: OrderBook and RFQ and negotiation protocol, which can satisfy the needs of both institutional and individual investors.
These online companies have a large user base in China and specialize in user experience design, integrating traditional and digital asset trading platforms, and providing educational resources to help retail investors familiarize themselves with Web3.
In addition to the above companies, IBTCEX Willows Asia Technology Company Limited (known as Willows Asia Technology Company Limited in English), which has disclosed less information, has no public information for the time being. In addition, HKX, whose Hong Kong entity is hi5 (Hong Kong) Limited, and QuanXLab, whose entity is QuanYi Technology Company Limited, applied on February 29th, with less information disclosed to the public. Other companies such as Greenland Hong Kong, Jazillion, and CIMB Wind Harbor (Hong Kong) had their applications withdrawn.
4. First-mover advantage is the key to the success.
After taking stock, we can see that the 24 applicants have different business focuses. Although the Hong Kong government welcomes Web3, the preparation and operation of a compliant exchange requires substantial investment, including the establishment of a legal compliance team, the investment of security and technical resources, the implementation of capital segregation and risk management mechanisms, the establishment of an audit and reporting system, and the provision of compliance training and education. It is not easy to achieve long-term regulatory development, and it is necessary to be prepared for a protracted battle, have strategic certainty, and ensure good cash flow in the long term.
In terms of pace, the newly licensed platforms may not be able to complete their performance breakthroughs in this round of long market, and they may not be able to make their mark until the next bull market cycle. In today's hot market, investors who want to buy virtual assets in a safe and compliant manner can pay attention to Hashkey Exchange, which has already received a license and has been officially operating for half a year.
When Hashkey Exchange was born in 2018, it foresaw that the compliance of the industry is an unstoppable trend, so the very beginning was the globalization of the compliance layout, applying for the relevant licenses in many places such as Hong Kong, Singapore and Japan, etc. Up to now, Hashkey Exchange has obtained the Virtual Asset Service License of the Japanese Financial Services Agency (FSA) in Japan, and the Digital Asset Investment License of the Financial Services Authority (FSA) in So far, Hashkey Exchange has obtained the Virtual Asset Service License from the Financial Services Agency of Japan (FSA) in Japan and the Digital Asset Investment License in Singapore. Such prophetic insight and layout laid the foundation of Hashkey Exchange as the Coinbase of the Orient.
As Hashkey Exchange has already gained a head start, its weekly trading volume has exceeded HK$15 billion, making it the largest licensed virtual asset exchange in Hong Kong. As a pioneer of compliant exchanges, its solid foundation can be seen in the following aspects of its operational capabilities and results.
In terms of asset diversity, Hashkey Exchange currently opens nearly 20 tokens to professional investors (PIs) and has applied to the SFC to open 8-10 to retail investors for trading, and is in close communication with the SFC.
In terms of security, the Hashkey Exchange system has 0 downtime and 0 incidents, and the user experience is very silky smooth, with an opening time that is almost as good as that of a compliant exchange.
In addition, Hashkey Exchange has established a unique fiat currency deposit and withdrawal features, the pain point of this industry in the past is that the deposit and withdrawal is easy to be blocked, easy to receive dirty coins, in order to solve the pain point of this industry, Hashkey exchange launched a unique Hong Kong dollar trading pairs, the user can be very silky smooth in and out of the deposit, and do not have to worry about getting dirty coins.
In the long market, fiat currency deposits and withdrawals are the most cost-effective way for users to invest in BTC through the Hashkey Exchange, as it eliminates fluctuations in the exchange rate and the exaggerated premiums of the USDT/USDC pair on traditional exchanges.
To put it bluntly, a user who pays $1000 in fiat currency for $1000 in USDT will only be able to buy less than $1000 in USDT on other exchanges.
While Hashkey exchange has achieved a leading position in retail customer service, it has not relaxed its pace in promoting institutional cooperation. For the Hong Kong BTC spot ETF, which is currently attracting a lot of attention, Hashkey exchange is currently working closely with more than 10 leading brokerage firms to prepare the spot ETF, mainly as a licensed custodian.
In preparation for the Hong Kong BTC spot ETF, HashKey provides underlying infrastructure support for funds applying for ETFs in Hong Kong, which covers trading, custody, SSA, etc. Hashkey Exchange itself has been in stable operation for more than a year and is becoming the most practical custodian option for fund organizations to start virtual asset spot ETFs. Hashkey Exchange's own custody business has been in stable operation for more than a year, with over HK$1.5 billion of assets under custody, and is becoming the most pragmatic custody option for fund organizations to launch virtual asset spot ETFs.
Complex Compliance Framework and Long Road to Application
With the popularity of cryptocurrency in Hong Kong, the market has become a mixed bag.
Hong Kong's cryptocurrency crime rate has tripled over the past three years, with nearly RMB 4.4 billion (about US$611 million) involved in recorded cryptocurrency cases in 2023. The Hong Kong Securities and Futures Commission (SFC) recorded 1,397 and 2,336 cryptocurrency crime cases in 2021 and 2022 respectively. And this number rises to 3,415 cases in 2023.
The road to compliance is long. Last year, investors lost US$180 million in the highly publicized JPEX incident, which became one of the largest financial fraud cases in Hong Kong's history. Most of the investors' funds have not yet been recovered.
From the perspective of the regulatory authorities and the industry, the most urgent task is how to make the licensed and compliant exchanges more competitive in the market, form a benign development of the ecology of the compliance industry, and avoid the bad coins from driving out the good coins in the market. The directions that can be explored here include: further incentives for innovation in compliance, strengthening the linkage between multiple departments to accelerate the improvement of the regulatory system, and continuously lowering the cost of the experience of compliance and the cost of resources in order to promote sustainable development of the industry. The directions that can be explored include further incentives for compliance innovation to accelerate the improvement of the regulatory system, reducing the cost of compliance experience and resources to promote sustainable development of the industry, etc.
Today, virtual asset trading platforms that have not submitted a license application must close down their business in Hong Kong on or before 31 May. Virtual asset trading platforms will need to obtain the necessary SFC licenses to resume business activities in Hong Kong or to promote virtual asset services to Hong Kong investors, and any unlicensed activity is a criminal offence.
For investors, they need to hurry up and switch their trading platforms to a compliant platform before May 31st to ensure that they can safely and compliantly participate in this bull market!
