Hong Kong launches new crypto regulatory regime to attract digital asset firms


1st June 2023 – (Hong Kong) Hong Kong has launched a new regulatory regime for cryptocurrencies in a bid to establish itself as a global hub for the industry. The new framework, which came into effect on Thursday, allows crypto exchanges to offer trading services to individuals and institutions if they secure and comply with licenses designed to shield investors from the risky practices exposed in the 2022 market crash. Hong Kong‘s Securities and Futures Commission has received dozens of inquiries from interested parties, while firms such as Huobi, OKX, and Amber Group have said they plan to apply for licenses under the framework.

The move by Hong Kong is part of its efforts to revive its image as a cutting-edge financial center, and the city’s proximity to Chinese wealth could prove particularly attractive if Beijing ever loosens its 20-month-old ban on crypto trading on the mainland. However, major digital-asset outfits, including the likes of Binance, Coinbase, Bybit, and Huobi, have refrained from elaborating on specific investment plans for Hong Kong when asked by Bloomberg News. These exchanges accounted for the vast bulk of crypto trading volumes.

Potential investors are proceeding cautiously in setting up virtual-asset trading platforms in Hong Kong. Vince Turcotte, director of digital assets at regulatory technology firm Eventus, which is working with some companies seeking licenses, said, “They want to be sure that they don’t end up burning cash.” The challenges that investors face in Hong Kong include requirements for investor risk assessmentsinsurance cover, and asset custody that couldadd to costs. It remains unclear how many crypto exchanges the local Hong Kong market can support, and whether officials will retain crypto as a priority longer term given the sector’s susceptibility to scandal.

The new regulatory regime is being rolled out as crypto firms search for suitable bases amid a crackdown in the US, and other jurisdictions, including Dubai and Singapore, seek to attract companies. However, the spot digital-asset trading volumes remain depressed globally as the market has only partially recovered from a US$1.5 trillion rout last year, which caused bankruptcies and thousands of layoffs.

Cryptocurrency exchanges OKX and Bybit have already invested in Hong Kong before the new regulatory regime, and both plan to apply for permits, but Bybit will be conservative in its initial investment. Meanwhile, Binance, the largest crypto platform, has called for flexible and inclusive rules, and said it looks forward to seeing continuous development in Hong Kong.

Hong Kong’s mandatory licensing regime allows trading by retail investors, but they are restricted to larger coins like Bitcoin and Ether that feature in at least two acceptable, investible indexes from independent providers, one with experience in the traditional financial sector. The SFC has stated that licensed platforms should comply with a range of robust investor protection measures covering onboarding, governance, disclosure, and token due diligence and admission before providing trading services to retail investors.