According to the inspections, certain cryptocurrency companies place an undue reliance on a small group of executives to handle customer funds.
Following their initial provisional approvals, 11 cryptocurrency exchanges based in Hong Kong are currently subject to heightened regulatory scrutiny.
According to Bloomberg, which cited people familiar with the matter, the Securities and Futures Commission (SFC) of the city carried out on-site inspections of these “deemed-to-be-licensed” platforms and discovered a number of practices that did not meet regulatory standards.
Inspections found that certain cryptocurrency companies place an undue emphasis on a small group of executives to hold client assets, which raises questions about how well these executives can handle this responsibility.
Some Exchanges Lacked Measures to Protect Against Cybercrime
Furthermore, it was discovered that certain exchanges lacked strong security measures against cybercrime.
The inspections are still ongoing, so it is possible that more findings will be made. The SFC has not revealed which particular companies missed the standards.
Along with regional platforms like HKbitEX, PantherTrade, and Matrixport HK, the 11 exchanges under review include well-known international players like Crypto.com and Bullish.
According to the SFC, these inspections are a part of their attempt to make sure that applicants follow strict guidelines, especially when it comes to protecting client assets and following know-your-client (KYC) procedures.
Platforms that failed to rectify serious issues found during inspections might lose their “deemed-to-be-licensed” status or have their license applications completely denied, the SFC warned.
HONG KONG CRYPTO PUSH HITS SNAGS
— Crypto Town Hall (@Crypto_TownHall) August 22, 2024
Hong Kong’s digital asset ambitions are encountering headwinds.
Inspections of 11 exchanges with initial approval exposed some operational gaps.
The path to full licensing isn’t guaranteed, adding uncertainty to the city’s Web3 goals.… pic.twitter.com/zPtP14nrK1
One of the main elements of Hong Kong’s larger Web3 strategy, which was first presented in 2022, is licensing cryptocurrency exchanges.
The initiative seeks to restore the city’s standing as a significant global financial hub after years of political unrest.
The efficacy of the strategy is called into question, though, as the cautious approach adopted by regulators has not yet led to any notable changes in terms of capital inflows or personnel shifts.
As of now, only two crypto platforms, OSL and HashKey, hold full licenses in Hong Kong.
The SFC expects to issue full licenses to successful applicants by the end of 2024.
Twelve businesses, including OKX and Huobi HK, have already withdrew their applications in the interim.
On March 28, 2024, HKVAEX, suspected to be affiliated with Binance, withdrew its license application.
Subsequently, on May 14, IBTCEX, QuanXLab, and Huobi HK followed suit, followed by Gate.HK on May 22 and Bybit (Spark Fintech Limited) on May 31.
Legislator Raises Concern Over Crypto Licensing System
Just recently, Hong Kong Legislative Council member voiced criticism against Hong Kong’s cryptocurrency licensing system, citing its impact on market confidence.
The lawmarker linked the withdrawals to the Hong Kong SFC’s requirement that applicants for licenses to operate virtual asset trading platforms swear that they will not have any mainland Chinese users in any area.
For established offshore exchanges, the requirement presents a hurdle, making compliance challenging.
OKX made an unsuccessful attempt to create an industry coalition to oppose the requirement.
According to industry insiders, the entities that withdrew their applications might amend their entities or legal frameworks and submit new applications later on.
As for the well-known Bitcoin products in the US, Hong Kong has introduced its first batch of cryptocurrency-focused exchange-traded funds (ETFs), suggesting possible competition.