Hong Kong Virtual Asset Exchange Regulation Enters a New Stage

The regulatory environment for virtual asset exchanges in Hong Kong is undergoing significant changes. With the deadline for withdrawal on May 31 approaching, many unlicensed exchanges have withdrawn their applications but continue to operate in a gray area, creating a phenomenon of "clearing without withdrawal."

According to the investigation, most offshore exchanges have stopped new user registrations from Hong Kong, but with a few exceptions, most are still providing services to registered Hong Kong users and have not issued any related cessation announcements.

Legal experts point out that providing virtual asset services without a license is illegal. If convicted through public prosecution, a fine of up to HKD 5 million and 7 years of imprisonment may be imposed. Even if holding a compliant license from another country, one cannot continue to provide services to users in Hong Kong or mainland China.

Currently, there are only two platforms in the Hong Kong virtual asset exchange market that have been licensed by the Securities and Futures Commission, while another 11 have been qualified to apply for a license. At the same time, the license applications of these 11 institutions have been returned, rejected, or withdrawn.

According to reports, the withdrawal of some exchanges is due to the regulatory authorities requiring applicants to commit that no entity under their control can have users from mainland China in any region. This requirement makes it difficult for traditional offshore exchanges to meet the conditions. Industry insiders indicate that institutions that have withdrawn their applications may update their legal entities or frameworks in the future to reapply, but they may not be able to use brands similar to existing offshore exchanges.

Legal experts believe that as long as the requirements for applying for a virtual currency trading license in Hong Kong are met, applications can be submitted again in the future. However, the use of a new brand is mainly to avoid public confusion regarding whether the exchange is compliant with licensing.

Experts point out that the legal compliance and operating costs of exchanges are relatively high, which is also one of the reasons many exchanges choose to withdraw their licenses. Currently, the appeal of the Hong Kong virtual currency exchange market to investors is limited.

Hong Kong Legislative Council members also expressed that the recent turmoil surrounding the licensing system has shaken the market's confidence in Hong Kong's drive to promote Web3 development. They believe that the policies and measures for the development of Hong Kong's virtual asset market lack comprehensive consideration, take too long, and that the government is overly stringent in borrowing traditional financial policies, lacking flexibility and innovation.

Facing the effective regulation of "clear but not withdrawn" unlicensed exchanges, and how to balance compliance and innovation in the future, will be key challenges for the development of the Web3 industry in Hong Kong. Regulatory agencies need to find a balance between protecting investor interests and promoting industry innovation to drive the healthy development of Hong Kong's virtual asset ecosystem.