OKX and seven other exchanges exit Hong Kong — what this means for the crypto market

summary

• Hong Kong exchange's sudden exit highlights challenges of obtaining a license

• The development raises new questions about Hong Kong's plans to become a cryptocurrency hub.

• But the exodus could be good news.

I attended my first crypto event in Hong Kong last June, shortly after arriving there. I was not disappointed.

The party, organized by OKX and the Manchester City Hong Kong Fans Club (Manchester City is England's top soccer team and a partner of the cryptocurrency exchange), was lively. The room was packed with people wearing light blue Erling Haaland jerseys, who listened semi-attentively to OKX executives' speeches while enjoying free food and drinks. At the time, OKX was clearly excited about a bright future in Hong Kong's revitalized market and was preparing to apply for a virtual asset trading platform license.

Shortly after the party, OKX General Manager Lennix Lai told me he was excited to solidify the company’s business base in the city. However, just last week, OKX abruptly withdrew its application for a license from the Hong Kong Securities and Futures Commission.

Consider carefully

OKX said the withdrawal was a decision made after “careful consideration” of its business strategy, while assuring Hong Kong users that their funds were safe. OKX will stop trading services by Friday.

At first glance, OKX’s departure appears to be a blow to Hong Kong’s aspirations to become Asia’s cryptocurrency hub. The centralized exchange, with $3 billion in daily trading volume, is the world’s fourth-largest platform, according to CoinMarketCap.

In addition, seven companies, including OKX, have withdrawn their license applications since the application deadline at the end of February. These companies, as well as any company that provides services to Hong Kong customers but has not applied for a license, need to gradually stop serving Hong Kong residents by May 31.

In addition to OKX, subsidiaries of other international exchanges have also withdrawn from Hong Kong in recent weeks, including Gate.io and HTX, formerly known as Huobi. Last October, HKVAEX, which is backed by Binance, also withdrew its application, according to the South China Morning Post.

Substantial investment

However, the departure of these companies may signal progress by regulators in cleaning up Hong Kong’s free-wheeling cryptocurrency market.Last year, Lai told me that obtaining a license was not an easy process. Finding qualified personnel to conduct the required audits can be a challenge. OKX also had to invest heavily in talent recruitment, innovation, technology, compliance, and system security to prepare for the application.According to CoinDesk, the cost of applying for a license is estimated to be between $12 million and $20 million.

The problem is that getting a license is supposed to be difficult. That’s the point. Given the level of fraud in Hong Kong’s cryptocurrency market, the SFC expects cryptocurrency exchanges to adhere to strict regulations. The number of companies withdrawing their applications is not necessarily unusual.

According to Nikkei Asia, when Singapore implemented a licensing system for cryptocurrency service providers in January 2021, more than 100 of the 170 applicants withdrew or were rejected by the end of the year. In the UK, 71% of applications submitted to the Financial Conduct Authority (FCA) were also withdrawn.

Angela Ang, senior policy advisor at TRM Labs, told DL News that this situation seems to be normal in Hong Kong. “This may be due to higher regulatory expectations after the FTX incident and the fact that the cryptocurrency industry is relatively new to regulation,” she said.

Time and Money

Still, applying for a license is no small feat and requires a lot of time and money. "After investing all that time and resources, no one would easily back out. Those who do back out may only do so after it becomes clear that their application would otherwise be rejected.

The timing of withdrawing the application just before the deadline could also be an effort by the SFC to screen out companies that do not meet the conditions to continue operating. This clearly shows what kind of cryptocurrency hub Hong Kong hopes to establish.