Hong Kong’s 24 crypto license applicants after deadline exposes Singapore gap

A last-minute race to get in applications for virtual asset trading platform (VATP) licences ahead of the February 29 deadline this week saw the number rise to 24 by Friday, according to the latest tally on the Securities and Futures Commission (SFC) website, attracting far less interest than a similar scheme in Singapore a few years ago.

At least five crypto firms submitted their applications in the last 10 days to meet the critical deadline that would determine whether they could continue to operate in the city. Cryptocurrency exchanges operating or marketing in Hong Kong that have not yet submitted an application must now leave the city by May 31.

All the major crypto exchanges with ties to mainland China or Hong Kong, which include some of the biggest names in the industry, have applied for a licence either themselves or through affiliates. HBGL Hong Kong, an affiliate of HTX, formerly Huobi Global, submitted an application twice for its Huobi HK platform since February 20, after withdrawing its first application for undisclosed reasons.

HTX, formerly Huobi, resubmits Hong Kong crypto licence application

HKVAEX, an affiliate of Binance, the world’s largest crypto exchange, applied for a licence in April, while OKX, another large exchange founded in China, applied back in November. Most of the applicants are local exchanges, while OSL and HashKey are currently the only exchanges licensed to serve retail investors.

With the initial application window now closed, the number of applicants offers the first indication of the industry’s interest in Hong Kong’s bid to become a global crypto hub with a new regulatory scheme that some fear could be too stringent for the market to remain competitive in this space.

“I think the SFC is doing a very strong regulation,” said Tony Tong, co-founder and co-chairman of the Hong Kong Blockchain Association after he spoke on a panel at the Economist Impact’s “Technology for Change Asia” conference this week. “I think it’s very good that many companies are coming to apply for the licence, but whether you can profit from the licence is yet to be proven.”

Tong said he still believes Hong Kong is a competitive destination, as it allows crypto firms to tap into developer talent in mainland China. Still, comparisons to similar regulations in Singapore have been rife, as the two markets are seen as competing for much of the same business.

Just the process of applying for an SFC licence in Hong Kong comes at a much higher cost. The entire process, which includes paying for an external assessor and hiring a local responsible officer (RO), could cost upwards of HK$60 million (US$7.7 million), according to some estimates.

Angela Ang, a former regulator with the Monetary Authority of Singapore who is now the senior policy adviser at blockchain analytics firm TRM Labs, said she was initially surprised by the relatively low number of applicants on Thursday but that it makes sense given the stringent requirements.

“I think one thing that kind of differentiates Hong Kong is they had this external assessor requirement, which would have filtered out companies that lack the budget or commitment,” Ang said.

“And then there’s the RO requirement,” she added. “I think that’s something that is very, very unique to Hong Kong. ROs themselves have to be individually licensed, and they have a high degree of personal liability.”

Unlike Singapore, there is no clear indication of how many virtual asset platforms were eligible for the one-year grace period granted to those already operating in the city before June 2023, Ang noted. Singapore’s MAS gave crypto companies one month to give notification that they are a pre-existing operator and intend to get licensed. About 70 companies had officially applied for a license by the end of 2021, Bloomberg reported at the time, three times the number of applicants in Hong Kong so far.

One possible reason for this is that Hong Kong’s regulations may hurt crypto companies’ global competitiveness if they are using the city as a base of operations.

“The limitations imposed by the framework partially limits the scope of activities and services that can be offered to customers,” said Alessio Quaglini, co-founder and CEO of Hong Kong-based digital asset custodian Hex Trust. “In particular, it is unlikely that under the current regime VATPs will be able to operate global businesses competitively leveraging their license in Hong Kong.”

While the licensing scheme as initially proposed at the end of 2022 was criticised as being highly restrictive even then, the Hong Kong government has recently ramped up enforcement action in the wake of multiple crypto-related frauds, most notably the JPEX scandal that saw investors lose some HK$1.5 billion.

Last month, the Financial Services and the Treasury Bureau issued a public consultation on regulating over-the-counter (OTC) trading services, as they are seen as one avenue of surreptitiously moving money and a means of skirting mainland China’s capital controls.

Blockchain analytics firm Chainalsysis said in an October report that Hong Kong’s crypto trading activity heavily skews towards OTC services relative to other markets in the region.

Since Hong Kong revealed its intent at the end of 2022 to become a crypto hub and attract back some of the business that had previously left the city, questions have been raised over whether its regulations are competitive enough while Singapore, Japan and other markets are pursuing their own policies.

In a broader Web3 push, Hong Kong also aims to regulate tokenised securities and stablecoins, and the monetary authority is exploring a digital Hong Kong dollar.

Henry Zhang, founder and CEO of Singapore-based tokenised asset company DigiFT who previously worked in the Hong Kong and mainland finance industries, said both Hong Kong and Singapore are on the right track. DigiFT, already licensed in Singapore, plans to get licensed in Hong Kong.

“There is competition, always,” Zhang said. “My view is it is healthy competition … Regulators in both jurisdictions are promoting innovations, embracing the evolution of the financial industry.”

Alex Manson, the head of Standard Chartered’s SC Ventures, said he sees a convergence of global crypto regulations. Ecosystems, not regulators, are what compete with each other, he said, but there is no clear jurisdictional advantage in Asia right now.

“Both [Hong Kong and Singapore] have things to play with, meaning a community of start-ups, Web3 actors, capital dedicated to it, investors committing capital to the asset class, etc.,” Manson said. “Regulators are proceeding a little differently, but ultimately converging. So I wouldn’t say one’s got the upper hand on the other.”

Additional reporting by Kelly Le