Hong Kong’s Securities and Futures Commission (SFC) is tightening its scrutiny on cryptocurrency exchanges that are yet to fully comply with its licensing requirements, as the region seeks to establish itself as a global fintech hub. Recent inspections have revealed significant deficiencies among some “deemed-to-be-licensed” exchanges, putting their licensing status at risk.
SFC Identifies Compliance Issues
The SFC has expressed concerns after conducting on-site inspections of cryptocurrency exchanges that have received preliminary approval but are still awaiting full licensure. These “deemed-to-be-licensed” exchanges were granted temporary status under a framework designed for firms operating in Hong Kong before the new licensing regulations took effect. However, the SFC found that some of these exchanges are not adequately managing cybercrime risks, while others overly rely on a small number of executives to oversee the custody of client assets.
A Bloomberg report, citing unnamed sources, indicated that the SFC is considering revoking the deemed licenses or rejecting the license applications of exchanges that fail to address critical deficiencies identified during inspections.
Impact of Noncompliance
Since June 1, operating a virtual asset trading platform (VATP) in Hong Kong without a proper license has been classified as a criminal offense. The SFC has made it clear that it will pursue any companies found to be violating this regulation. Among the exchanges awaiting full licensure are major players like Crypto.com, Bullish, HKbitEX, and Matrixport HK.
The exact list of exchanges failing to meet all of the SFC’s requirements has not been disclosed, but those that cannot rectify identified issues face serious consequences, including the potential loss of their deemed-to-be-licensed status.
Hong Kong’s Ambition to Become a Fintech Hub
Hong Kong has been positioning itself as a leader in financial technology, with plans to enhance its crypto regulations over the next 18 months. The city aims to attract top technology talent, build new infrastructure, and establish robust legislative frameworks. David Chiu, a member of Hong Kong’s Legislative Council, emphasized the city’s commitment to developing a sound digital asset exchange system, noting the need for new legislation related to stablecoins.
Efforts to Attract Crypto Investment
In an effort to lure investors and crypto exchanges, the SFC released draft rules for virtual asset trading platforms last year. Despite these efforts, only two exchanges—OSL and HashKey—have received full licenses so far. Other exchanges, including OKX, Bybit, and Huobi HK, have withdrawn their applications, reflecting the challenges of meeting Hong Kong’s stringent regulatory standards.
Hong Kong’s regulatory landscape continues to evolve as the city strives to balance the need for security and compliance with its goal of becoming a global fintech leader. The outcome of the SFC’s ongoing inspections will likely play a critical role in shaping the future of the cryptocurrency market in the region.
