7th June 2024 – (Hong Kong) In the wake of the JPEX scandal, Hong Kong is grappling with a surge of unlicensed over-the-counter (OTC) cryptocurrency shops, posing a threat to its aspirations of becoming a global crypto hub. As the city seeks to polish its image and attract reputable businesses, the government must act swiftly to clamp down on these unregulated entities flourishing across the territory.

The JPEX debacle, which defrauded thousands of local investors out of over HK$1.5 billion, has cast a dark shadow over Hong Kong’s crypto ambitions. The scandal not only exposed the vulnerabilities of the unregulated crypto market but also underscored the urgent need for robust oversight and investor protection measures.

A total of 17 crypto trading platforms have submitted license applications in Hong Kong, as revealed by the Securities and Futures Commission (SFC). This surge in applications follows the recent deadline of 29th February for platform operators to comply with the SFC’s Transitional Arrangements for Virtual Asset Trading Platforms, marking a significant step towards regulatory compliance and investor protection in the city’s virtual asset landscape.

Under the new regulations, all virtual asset trading platforms operating in Hong Kong are required to submit their license applications by 29th February, 2024. Failure to do so will result in the forced cessation of operations in Hong Kong by May 31st, 2024. The SFC has stressed the importance of verifying the regulatory status of platforms through the official website, where a list of licensed virtual asset trading platforms and applicants is available.

Currently, two licensed crypto service providers in Hong Kong stand out: OSL Digital Securities Limited (OSL) and HashKey Digital Asset Group Limited (HashKey). These licensed providers offer regulated digital asset trading services exclusively to institutional and professional investors. OSL made history by becoming the first Type 1 SFC-licensed digital asset broker to distribute security tokens in Hong Kong, while HashKey obtained a license to operate a virtual asset trading platform.

Among the 17 applicants for crypto trading platforms in Hong Kong are renowned names such as Hong Kong BGE Limited (BGE), HKbitEX, HKVAX, VDX, PantherTrade, Accumulus GBA Technology (Hong Kong) Co., Ltd., DFX Labs Company Limited, Bixin.com, Thousand Whales Technology (BVI) Limited (xWhale), HighBlock Limited (bitV), YAX, Bullish (GI) Limited, Foris DAX HK Limited (Crypto.com), Whalefin, Matrixport, hi5 (Hong Kong) Limited, and Bitcoin World Technology Limited (BitUniverse).

Notably, some platforms have chosen to withdraw their license applications. BitMEX, a well-known cryptocurrency exchange, voluntarily withdrew its application on 13th March, 2024, citing a shift in its business strategy.

While the government has taken steps to regulate centralised crypto exchanges, the proliferation of unlicensed OTC shops has become a growing concern. These shops, operating under the radar, offer spot trading of cryptocurrencies without proper licensing or oversight, leaving investors vulnerable to potential scams and fraudulent activities.

One such example is Crypto Panda, an OTC shop that has been operating openly in TST, despite not being listed among the licensed operators or applicants on the Securities and Futures Commission’s (SFC) website. Similarly, other OTC companies such as One Satoshi Trading (Hong Kong) Limited, coingaroo, continue to operate freely, raising questions about the effectiveness of the city’s regulatory efforts.

The government’s inaction in addressing these unlicensed entities not only tarnishes Hong Kong’s reputation but also undermines its efforts to establish a robust regulatory framework for the crypto industry. Investors, both local and international, may lose confidence in the city’s ability to protect their interests, deterring reputable businesses from setting up shop in Hong Kong.

Crypto Panda
One Satoshi Trading (Hong Kong) Limited

In February, the Hong Kong government expressed its commitment to regulating stablecoins and OTC crypto exchanges, with the Financial Services and the Treasury Bureau’s (FSTB) secretary, Christopher Hui Ching-yu, stating that bills on licensing rules for OTC trading services and stablecoin issuers would be submitted to the Legislative Council “as soon as practicable.”

However, words alone are not enough. The government must back its promises with swift and decisive action. A comprehensive crackdown on unlicensed OTC shops is crucial to restoring investor confidence and positioning Hong Kong as a trustworthy and well-regulated crypto hub.

The proposed measures, including licensing requirements for OTC operators and stiff penalties for non-compliance, are a step in the right direction. However, their effective implementation and enforcement will be the true test of the government’s commitment to safeguarding the interests of investors and the integrity of the crypto industry.

Hong Kong’s ambition to become a global crypto hub hinges on its ability to strike a delicate balance between fostering innovation and ensuring robust investor protection. By clamping down on unlicensed OTC shops and maintaining a zero-tolerance policy towards unregulated activities, the city can demonstrate its commitment to upholding the highest standards of regulatory oversight and transparency.

Failure to do so could have far-reaching consequences, not only for the crypto industry but also for Hong Kong’s broader financial services sector. Investors may lose faith in the city’s ability to protect their interests, leading to a potential exodus of businesses and capital to more regulated jurisdictions.