New regulations to dissuade or sell shells to generate income? Online rumors that OSL withdrew from Hong Kong's Web3 "gold rush"

On July 5, Tencent News' "Qianwang" broke the news that Hong Kong's compliant virtual asset trading platform OSL has withdrawn from the ranks of various institutions rushing to Hong Kong's Web3 and competing for this emerging crypto market. In addition, the platform began looking for buyers with acquisition intentions in the market shortly after the end of the Spring Festival this year, but the next buyer has not yet been determined.

Contrary to rumors, OSL previously disclosed that the platform has developed well this year. It not only launched an artificial intelligence trading robot, but also applied for a Hong Kong digital asset retail trading license on June 1. OSL's parent company BC Technology CFO Hu Zhenbang also said that it would cooperate with some local brokerages in Hong Kong to promote retail business.

As the world's first compliant virtual asset trading platform to obtain Category 1 and 7 licenses from the Hong Kong Securities Regulatory Commission, is OSL really no longer committed to deepening its Hong Kong crypto market trading service business as rumored, but is it selling its existing business system and licenses to obtain market returns to supplement its parent company? In addition, the Hong Kong government actively embraces Web3, but how much more will it give to virtual asset trading platforms when the new licenses and new market environment are not relaxed and friendly enough?

Below, Golden Finance will comprehensively sort out the possibilities of this incident based on the actual situation of all parties.

BC Technology Group

BC Technology Group Co., Ltd. is an investment holding company that mainly engages in digital assets and blockchain platform businesses. In 2019, it was renamed "BC Technology" from "Brand China", a Hong Kong-listed company. Since then, benefiting from the concept of blockchain and the approval of its digital asset trading platform OSL, BC Technology's market value has been rising.

However, trapped in the cryptocurrency winter of 2022, its latest financial report shows that BC Technology Group's revenue in 2022 was 116 million, a year-on-year decrease of 64.28%; the net profit loss widened to 550 million Hong Kong dollars. However, in early February this year, BC Technology Group issued a profit warning, indicating that there would be a net loss of about 369 million Hong Kong dollars in 2021.

In addition, BC Technology Group's stock price has also fallen from its high point since February 2021. Especially after OSL announced the upgrade of its retail trading license, BC's stock price has reached its historical low of around HK$1.55.

BC's continued losses also prompted its third largest shareholder to reduce its holdings. On June 19, GIC Private Limited reduced its holdings of BC Technology Group by 197,500 shares at a price of HK$1.7519 per share.

Regarding the company's losses, BC Group believes that the increase in net losses is mainly due to: losses incurred from maintaining digital assets to facilitate transactions in the normal course of its digital asset trading business; and increased expenses related to building corporate and technical infrastructure for a compliant, institutional-level digital asset business division, including technology, legal and compliance, and insurance.

Based on this, BC Group has completed two company-wide organizational reorganizations in the second half of 2022 and the first half of 2023 to improve business efficiency. However, the company still stated that operating costs are expected to decline further in the future.

The unsatisfactory sustained revenue situation has deepened the outside world's idea of ​​BC Group to sell its OSL trading platform. At the same time, since BC Group's executive director Gao Zhenshun was once known as the "Hong Kong Shell King" and has rich experience in "shell speculation", selling OSL again is also a routine operation for him.

OSL Trading Platform

On December 15, 2020, OSL, a digital asset trading platform under BC Technology Group, obtained Type 1 and Type 7 licenses under the regulatory framework of the Hong Kong Securities Regulatory Commission. OSL became the first digital asset trading platform with a listed parent company, licensed in Hong Kong, assets covered by insurance, and audited by the Big Four accounting firms.

After the new virtual asset policy in Hong Kong was officially implemented on June 1, 2022, OSL also took the lead in becoming one of the crypto platforms to apply for virtual asset retail trading business. For a long time, OSL was the only licensed and listed digital asset trading platform in Hong Kong.

Benefiting from its compliance advantages, the platform has successively carried out business cooperation with traditional financial giants such as DBS Bank and Standard Chartered Bank in the field of digital assets, and received an investment of HK$543 million from Singapore's sovereign fund GIC.

However, the revenue situation is just as bad as that of its parent company. In 2022, OSL's cryptocurrency revenue was HK$71.48 million, which was less than one-third of the HK$270 million in the previous year.

In addition, OSL Exchange has also experienced multiple rounds of layoffs. In June last year, the exchange laid off 40 to 60 people, accounting for about 15% of the total number of employees. In January of this year, Bloomberg broke the news that it was laying off employees again, but refused to disclose the number of people, and also planned to cut about one-third of the total cost.

In response, Hugh Madden, CEO of OSL's parent company BC Technology Group, said in a statement that the decision to cut costs was in response to "current market conditions." This shows that OSL's operating situation is precarious and urgently needs external help.

Government supervision

In October 2022, the Policy Declaration on the Development of Virtual Assets in Hong Kong was released. On December 7 of the same year, Hong Kong passed the latest amendment to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance 2022. This means that while the Hong Kong government is determined to develop virtual assets, it will also strictly crack down on and regulate all types of encrypted transactions.

The "Guidelines for Virtual Asset Trading Platform Operators" (VASP Guidelines), which were officially implemented on June 1 this year, have made strict regulations for new and old licensed and pre-compliant crypto institutions. All centralized virtual asset exchanges that do business in Hong Kong or actively promote their services to Hong Kong investors, regardless of whether they provide security token trading services, must be licensed and regulated by the SFC.

The threshold for license application has been raised, and the operational requirements have also been greatly increased. Under the background of the "mandatory licensing" of the VASP system, asset custody and exchange business cannot be separated, and OSL needs to provide protection for retail customers - including expanding existing cold and hot wallet facilities.

However, to achieve this kind of operation, sufficient personnel, hardware, software, insurance, and auditing are required. The more assets a client has, the higher the cost, and the annual expenditure will be very high. In addition, governments and auditing companies will often verify on the blockchain network to ensure that these assets are real.

Therefore, it can be said that operating a crypto exchange in Hong Kong requires both maintaining high operating costs and being placed under highly transparent supervision.

In addition, in order to meet the requirements of the Hong Kong government, the cost of applying for a license is also very high. Two people who are trying to apply for an exchange license told the media that they expect the cost before submitting the application for a license to be at least around HK$100 million, which includes not only the cost of management personnel, but also more requirements for system technology.

Market Environment

The regulatory authorities, led by the Hong Kong Securities and Futures Commission and the Hong Kong Monetary Authority, actively promoted Hong Kong's open attitude and policies towards the Web3 field, and took the initiative to invite financial professionals related to virtual assets in Hong Kong to meet. Although some companies registered in Hong Kong have landed in the Hong Kong Science Park with the support of relevant government departments, they are still unable to open bank accounts.

Hong Kong plans to build an international virtual asset center, but difficulty in opening bank accounts remains the primary challenge faced by virtual asset companies in Hong Kong.

Ruan Guoheng, deputy chief executive of the Hong Kong Monetary Authority, pointed out that there is no regulatory requirement prohibiting banks in Hong Kong from providing banking services to virtual asset-related institutions.

Han Shanshan, CEO of a virtual asset company, said that in the past, virtual assets did not comply with traditional banks' requirements for collateral certification, financial audits and other factors, and Hong Kong banks were not very friendly to start-ups.

Although the Hong Kong government has been pressuring Hong Kong banks to open accounts for crypto platforms, as of June this year, HSBC, the largest bank in Hong Kong, only allowed its customers to buy and sell virtual asset ETFs listed on the Hong Kong Stock Exchange. The fact that Standard Chartered Bank has successfully opened an account for a certain exchange in Hong Kong was only revealed by netizens on social platforms.

In this regard, Hu Zhenbang said that traditional banks have always had concerns about these crypto institutions because they have not met the standards of general securities firms and some banks in terms of KYC, anti-money laundering, market monitoring, and whether customer assets have been misappropriated.

From the bank's perspective, it may not necessarily make a lot of profit from these crypto institutional clients, but it faces great risks, including the compliance and monitoring costs required to conduct this business, so it is relatively conservative in accepting cryptocurrency-related clients.

Therefore, considering that traditional financial institutions are still reluctant to accept crypto companies, it is even more difficult for virtual asset exchanges, which are already in the crypto bear market, to make profits.

Conclusion

Lily Z King, COO of Cobo, revealed that in addition to OSL and Hash Blockchain Limited, there are currently 140 companies in the license application queue. However, the cost of license application and compliance operation is very expensive, "the annual operating cost may be around HK$20 million, and the initial cost may be between HK$30 million and HK$40 million."

Therefore, the fixed cost expenditures have been listed, and the regulatory regulations are strict and the market environment is not good. In the case of long-term losses for the company, there is really no need to hold on to this hot potato. It is better to get rid of it as soon as possible.

However, as the COO said, Hong Kong's move to open up the retail end of Web3 reflects a stance of embracing the entire Web3 industry, so it is not important how many institutions apply and how many institutions obtain licenses in the end. What is important is everyone's recognition of Hong Kong's attitude.