Hong Kong Legislator Criticizes Region’s Crypto Licensing System

Hong Kong’s cryptocurrency licensing system is under fire. David Chiu, a member of the Legislative Council of Hong Kong, says the system is killing market confidence. Major exchanges like Binance and OKX can’t get licenses, and those that do can’t make a profit.

Also Read: OKX Ends Services in Hong Kong, Withdraws License Bid

On May 31, 2023, the Hong Kong Securities and Futures Commission (SFC) released a circular about the new licensing system. This system took effect on June 1, 2023, with a one-year transition period ending on June 1, 2024. Crypto trading platforms were to get a license by then or stop operations immediately.

Exchanges Are Withdrawing From Hong Kong 

In his letter, Chiu highlights that the SFC requires all applicants for virtual asset trading platform licenses to commit to not serving mainland Chinese users. Traditional offshore exchanges cannot meet this requirement. OKX tried to form an industry alliance to oppose this rule but failed.

Industry insiders say these firms can update their legal entities and reapply, but not under similar brand names, according to Chiu. Currently, HKbitEX, PantherTrade, Accumulus, DFX Labs, Bixincom, xWhale, YAX, Bullish, Cryptocom, WhaleFin, and Matrixport HK are still licensed applicants. However, only OSL and HashKey have formal licenses.

The new licensing system was meant to streamline operations and make them easier. It allowed the exchanges to apply for licenses before February 29, comply with new rules from June 1, and continue services until a final decision was made. However, as the transition period ends, more operators are leaving the Hong Kong market. As of press time, 11 have withdrawn or returned their license applications.

New Licensing System Shakes Market Confidence

When the SFC set the licensing conditions, it didn’t attract big exchanges like Coinbase. Since February, major exchanges like Gate and Huobi have withdrawn. Six exchanges, including OKX, one of the top three in global trading volume, pulled out in May alone. Most of the remaining 18 applicants are smaller operations. Chiu believes some lack industry experience, while others are traditional financial institutions new to Web3.

Also Read: Worldcoin Project Ordered to Stop Operations in Hong Kong

OKX’s exit sparked industry debate. Some questioned Hong Kong’s commitment to developing and embracing Web3. Critics accused the authorities of being too cautious, weakening the competitiveness and flexibility of the licenses.

Like previous government initiatives, many industry insiders fear the new licensing system will fail. They worry that even if licenses are granted, it will be hard to develop profitable business models. The withdrawal of license applications has damaged market confidence. Chiu hopes the SFC will make licensing decisions quickly to restore investor confidence.

He also calls for trading platforms to offer innovative products that balance legal compliance, investor protection, and financial innovation. He urges the authorities to embrace new ideas and display determination when approving new products.

“Innovation is both a thought and an action,” Chiu says. “We can’t advocate for innovation but fear failure. The essence of innovation is to try and accept failure. The key is to learn from mistakes, not retreat to safety from the start and pretend to innovate with zero risk.”

Cryptopolitan reporting by Jai Hamid