In November 2022, the FTX Exchange, a prominent cryptocurrency trading platform, faced a severe liquidity crisis which ultimately led to global regulatory interventions. This occurred as the platform struggled to gather billions of dollars to fulfill a surge of withdrawal requests during that year. Among the regulatory bodies taking action was Hong Kong, which initiated a mandatory regulatory framework for digital assets. This framework aimed to safeguard retail investors and implement stricter regulations for digital asset companies. The new regulations, active since June, demand that all trading platforms and exchanges obtain a license; failing to do so could result in fines and imprisonment. Additionally, operators are required to conduct thorough client verifications to prevent the inclusion of retail traders from China, where cryptocurrency trading is prohibited.

These measures encompass enforcing exposure limits for retail investors and allowing retail trading solely for highly liquid tokens that have been in circulation for at least one year. The new system also extends to the marketing of services from unlicensed platforms. Ms. Elizabeth Wong, the head of the SFC’s fintech unit, emphasized that promoting services from unlicensed platforms, even by social media influencers, is now considered an offense.

As of August 3rd, HashKey Exchange has secured the first license under Hong Kong’s novel crypto regulatory framework. This marks the legalization of retail token trading in the city, as authorities aim to nurture a global hub for the digital asset industry. HashKey Exchange achieved this milestone by upgrading its existing licenses. Consequently, the company can now provide services to retail investors. Although the Securities and Futures Commission (SFC) has yet to release an official statement, this development aligns with Hong Kong’s pursuit of restoring its reputation as a forward-looking financial center.

The establishment of the mandatory crypto framework in June represents a strategic move to differentiate Hong Kong from the United States, where stricter regulations have been enacted. Despite this positive shift, Hong Kong is still striving to attract significant investments from an industry that was impacted by a market downturn in 2022. HashKey Exchange and its competitor OSL were the only two crypto exchanges with permits under Hong Kong’s previous voluntary licensing program.

HashKey Group is engaged in various sectors, including venture funding, asset management, and trading. The company was reportedly in preliminary discussions to raise substantial funding, potentially ranging from $100 million to $200 million, at a valuation exceeding $1 billion, according to Bloomberg News.

Under the new regulations in Hong Kong, cryptocurrency exchanges can offer trading services to both individuals and institutions, provided they obtain and adhere to licenses designed to mitigate the risks exposed by the 2022 market crash and the FTX platform collapse. Retail investors are limited to trading larger coins such as Bitcoin and Ether, which are included in at least two acceptable and investible indexes. The introduction of requirements for risk assessments, insurance coverage, and asset custody might lead to higher operating costs for these exchanges.

In light of the substantial drop in token prices from their peak in 2021, totaling $1.8 trillion, crypto businesses are approaching new investments with caution. This market volatility resulted in thousands of job losses across the industry. A Bloomberg survey conducted in May revealed that 15 major digital asset companies, including significant exchanges responsible for a significant portion of crypto trading volumes, refrained from disclosing specific investment plans for Hong Kong.

Simultaneously, the SFC has received numerous inquiries from crypto firms like Huobi, OKX, and Amber Group, all of which intend to apply for licenses. Hong Kong offers not only a local market but also a potential gateway to Chinese wealth, especially if Beijing were to ease its ban on cryptocurrency trading within the mainland.

As the digital asset sector seeks growth opportunities, Asia is becoming an increasingly attractive region due to its evolving regulatory landscape. Jurisdictions like Hong Kong, Japan, Singapore, and South Korea are actively courting crypto businesses. However, they face competition from other global hubs such as Dubai and the European Union. In contrast, the United States is grappling with regulatory uncertainties stemming from conflicting court rulings, inter-agency conflicts, and debates regarding proposed legislation.

August 3, 2023
Delino Gayweh
Serrari Financial Analyst

photo source Google