Hong Kong kicked off a new crypto regulatory regime in a bid to nurture a digital-asset hub, a pivot that’s stirred interest but has yet to win big investment pledges from an industry chastened by a market rout last year.

The rules apply from Thursday and let crypto exchanges offer trading services to individuals and institutions if they secure and comply with licenses designed to shield investors from the risky practices exposed in the 2022 crash.

The framework, months in the making, is rolling out just as crypto firms scour the globe for suitable bases amid a crackdown in the US. Jurisdictions like Hong Kong and Dubai are seeking to attract companies, while Singapore plans curbs on retail-investor participation. The European Union in April approved the most comprehensive digital-asset rules of any developed economy.

Hong Kong’s Securities & Futures Commission has received dozens of inquiries from interested parties, while firms such as Huobi, OKX and Amber Group have said they plan to apply for licenses under the framework.

Hong Kong telegraphed the policy shift last year as part of an effort to restore its image as a cutting-edge financial center. The city offers not just a local market but also a conduit to Chinese wealth, particularly if Beijing ever loosens a 20-month-old ban on crypto trading on the mainland.

Yet 15 major digital-asset outfits — including exchanges, crypto lenders and stablecoin issuers — refrained from elaborating on specific investment plans for Hong Kong when asked about them by Bloomberg News. The exchanges included the likes of Binance, Coinbase, Bybit and Huobi and taken together accounted for the vast bulk of crypto trading volumes.

“Potential investors are proceeding conservatively in setting up virtual-asset trading platforms in Hong Kong,” said Vince Turcotte, director of digital assets at regulatory technology firm Eventus, which is working with some companies seeking licenses. “They want to be sure that they don’t end up burning cash.”

Challenges

The challenges include requirements for investor risk assessments, insurance cover and asset custody that could add to costs. Hong Kong Monetary Authority Chief Executive Eddie Yue has said there’s excitement about creating a virtual-asset ecosystem while adding “that doesn’t mean light-touch regulation.”

It also remains unclear just how many crypto exchanges the local Hong Kong market can really support — and whether officials will retain crypto as a priority longer term given the sector is prone to bouts of scandal.

Spot digital-asset trading volumes remain depressed globally as the market has only partially recovered from a $1.5 trillion rout last year. The implosion sparked bankruptcies like FTX, thousands of layoffs and much circumspection.

“We’ll have to wait and see whether regulators and industry expectations match up in reality, for example on the pace of licensing and implementation of compliance programs,” said Angela Ang, senior policy adviser at blockchain intelligence firm TRM Labs and a former regulator at the Monetary Authority of Singapore.

Among exchanges, major platform OKX has an office in Hong Kong and had already invested in the city before the new crypto regulatory regime.

“We’ve invested millions of dollars in talent acquisition, product development, compliance and system security to benchmark our exchange against traditional exchanges like HKEX,” OKX’s Global Chief Commercial Officer Lennix Lai said.

Rival Bybit plans to apply for permits but will be conservative in its initial investment in Hong Kong. “It takes a bit of patience building up presence in new markets and that’s what we will be doing,” its head Ben Zhou said.

Binance, the largest crypto platform, called for “flexible and inclusive” rules and said it looks “forward to seeing continuous development in Hong Kong.”

‘Tough’ Criteria

While Hong Kong’s mandatory licensing regime allows trading by retail investors, they are restricted to larger coins like Bitcoin and Ether that feature in at least two acceptable, investible indexes from independent providers, one with experience in the traditional financial sector.

The SFC said last month that licensed platforms should “comply with a range of robust investor protection measures covering onboarding, governance, disclosure and token due diligence and admission, before providing trading services to retail investors.”

Some of the criteria around retail-investor access seem to be tougher than almost any other jurisdiction, according to Joey Garcia, head of legal and regulatory affairs at Xapo Bank. Garcia said he’s not convinced platforms will “race to Hong Kong to take advantage of the framework.”

--With assistance from Sidhartha Shukla.

Author: Suvashree Ghosh, Annabelle Droulers and Kiuyan Wong