“It was almost two years ago when a similar narrative took hold for Dubai, with global exchanges flocking to the city – the same ones which were bullish on Hong Kong,” said Tung Li Lim, Asia-Pacific senior policy adviser at blockchain analytics firm Elliptic. “This seems like a game of musical chairs, given that recent media reports suggest that Dubai is increasing its scrutiny of licence applicants … The global nature of crypto means that it is easy for firms to uproot themselves from a host country.”
“Hong Kong is certainly well positioned for establishing itself as a crypto hub, but while the industry can swing on a dime, a lot of the real growth is long and hard-won over time,” said Kim Grauer, head of research at Chainalysis in New York. “You weather the storm and wait for the growth periods. But from what I’ve gathered from talking to the [over-the-counter traders], there’s little feeling of pessimism and there’s still the excitement that Hong Kong has a really bright crypto future and is continuing to attract new types of customer profiles, both international and domestic.”
This continued optimism for Hong Kong within the industry has so far not resulted in a wave of new businesses moving to the city. One major hurdle is expense.
The entire process of securing a virtual asset trading platform (VATP) licence is likely to cost a company at least HK$60 million, according to Robert Lui, partner and Hong Kong digital asset leader at Deloitte. Firms are required to hire Responsible Officers (RO) to liaise with the Securities and Futures Commission (SFC). These specialists are already hard to find, according to Liu, and few specialise in crypto-related matters. Monthly salaries can range from HK$200,000 to HK$300,000, Liu said, and companies will also “burn money” on required IT staff, lawyers and professional services such as consultancies.
“The difficulty now is that while you’re trying to push for something new, the public still can’t differentiate clearly between digital assets and scams using digital assets,” Lui said. “This will create a lot of doubt and concern for the public, and leads to a lot more education work from the government.”
Hong Kong’s crypto power players applaud Web3 regulation after JPEX scandal
Hong Kong’s crypto power players applaud Web3 regulation after JPEX scandal
Joseph Wang, a former quantitative analyst who has been helping companies with the licensing process, said the process has no formal checklist and is prohibitively expensive for small companies that have to go through “risk averse” intermediaries.
“They want you to talk to the SFC first, and there’s a back-and-forth,” he said. “You only apply for the licence once the SFC tells you that you should … No small company from outside Hong Kong will go through what I’ve gone through.”
Wang said he is setting up an experimental crypto trading platform and has been going through the licensing process to see how it is done. He is still “bullish on Hong Kong”, he said, but has been disappointed by the lack of clarity for companies that may not have the resources of larger firms to complete this process.
Exchanges that announced intent to get licensed
As Hong Kong prepares for its latest FinTech Week, which kicks off on October 30, the city finds itself treading a path others have tried before, with no unqualified successes to serve as a blueprint.
All these locations have been burned by the boom-and-bust crypto cycle, major insolvencies, and prolonged “crypto winter” that began in 2022 after a pair of linked algorithmic stablecoins – Terra and Luna – collapsed. This set off a chain of reactions that eventually forced FTX to declare bankruptcy last November.
Even Singapore, where many Hong Kong crypto firms moved, has sought tighter regulations on the industry. Recently proposed rules would require retail traders to pass a test, seemingly heading in the opposite direction of Hong Kong.
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The cryptocurrency scandal gripping Hong Kong
The cryptocurrency scandal gripping Hong Kong
“The proactive regulatory measures have exposed pre-existing industry risks,” HashKey chief operating officer Livio Weng said. “While some may criticise or question the regulation, objectively speaking, these risks existed before the SFC’s regulatory policies were put in place. If the SFC had not taken the initiative to expose this criminal activity, the consequences could have been even more significant.”
Donald Day, chief operating officer of VDX, the owner of Victory Fintech, said the JPEX scandal has shown how essential Hong Kong’s new regulations are.
“While a year ago some market participants still questioned the value of being licensed and regulated, the challenges now centre around how fast the market can scale up, how quickly additional service providers can get operational in Hong Kong, and to what degree there is a pool of available, experienced and well-trained resources,” he said.
Future growth in the digital asset market will come from providing “clear value-add over traditional, and alternative, solutions”, Day added, offering tokenisation of real-world assets as one example.
Exchanges like OSL, HashKey and others based in the city have little choice but to remain committed to the vision. And like so many crypto enthusiasts in years past, some are confident that more boom times are right around the corner.
“A bull market is expected to arrive in 2024 to 2025,” HashKey’s Weng said. “Bull markets typically see a surge in retail users, with registration numbers being 10 times higher than during bear markets.”
