Hong Kong Web3: 1 year, 1 license, 1 new industry

In the crypto world of Hong Kong, important new faces have recently emerged: CEOs of Hong Kong cryptocurrency exchanges that emerged as a result of the new Hong Kong crypto policy. They began to "manage" the first batch of cryptocurrency exchanges under the new system in Hong Kong and were fully responsible for applying for Hong Kong's cryptocurrency licenses.

Foresight News has exclusively learned that Colin Zhong (HashKey Pro), Lennix Lai ( OKX ), Patrick Pan (BitgetX), Hugh Madden (OSL), Kevin ( Gate ) and other CEOs and heads of many Hong Kong cryptocurrency exchanges have already taken office and have begun to be active in major crypto activities in Hong Kong. However, there is no news yet on the confirmation of the Hong Kong CEOs of cryptocurrency exchanges such as Huobi, Bybit , BitMEX , and BitMart . Some are being selected internally, while others are conducting external recruitment. They will confirm the CEO candidates by the end of this year at the latest.

After interviewing several CEOs and current actual persons in charge of cryptocurrency exchanges in Hong Kong, Foresight News found that they all have extensive management experience in large financial institutions or Internet companies, high financial literacy, and many years of experience in cryptocurrency investment. For example, Kevin, CEO of Gate Hong Kong, and Lennix Lai, Global Chief Business Officer of OKX, both have more than ten years of work experience in traditional financial institutions and many years of experience in managing cryptocurrency exchanges, while Patrick Pan, CEO of BitgetX, was previously the COO of a large cryptocurrency exchange. Previously, he was the CEO of Babytree, a Hong Kong-listed company, and served as Vice President of Beike Zhaofang Group, Senior Director of Alibaba Group, and Vice President of 360 Group.

The new licensing system in Hong Kong on June 1st has made them the first batch of cryptocurrency exchanges in Hong Kong and even China under the regulatory environment. In the context of the rise of the East and the decline of the West, the focus of global cryptocurrency is gradually shifting to Hong Kong, and some new CEOs of Hong Kong cryptocurrency exchanges may therefore move to the center of the crypto world stage.

New CEOs active in Hong Kong

I met Lennix Lai, global chief commercial officer of OKX, at a cocktail party held by OKX in April. He spoke Hong Kong Mandarin and greeted the guests. The cocktail party was held on Tang Lung Street in Causeway Bay, where many large cryptocurrency organizations are willing to hold events. A huge Bitcoin poster about three meters long was hung on the street, and there were several cryptocurrency counters in the shops on the corner of the street, where people could freely exchange Bitcoin for Hong Kong dollars.

Hong Kong's famous "Crypto Street"｜Photo by Foresight News

I met Patrick Pan on an afternoon of June 20 at the Cyberport campus of the University of Hong Kong. As the CEO of BitgetX, he gave a speech to the teachers and students of the University of Hong Kong. He was accompanied by Kong Cyberport Director Kong Jianping and Meitu founder Cai Wensheng. Many universities in Hong Kong, such as the University of Hong Kong, Hong Kong University of Science and Technology, and the Chinese University of Hong Kong, have such a Web3 atmosphere. Students can easily get in touch with some big names and corporate executives in the Web3 field and interact with them. When answering questions from teachers and students of the University of Hong Kong, Patrick said: "When computers and smartphones became popular, the Internet really benefited the public. Blockchain and cryptocurrency are still in the early stages, and we are waiting for its smartphone moment."

University classrooms, cocktail parties, conference centers, Cyberport... Like most other Chinese Web3 entrepreneurs, the new CEOs are actively active in Hong Kong, the new cryptocurrency center.

One phenomenon worth mentioning is that since October 2022, Foresight News has visited Hong Kong many times. In the past eight months, the craze for cryptocurrency in Hong Kong has hit practitioners one after another without stopping. After more than eight months of Web3 heat waves that continued to wash over the land of Hong Kong, it finally left behind a brand new piece of fine sand and hot soil.

The birth of new cryptocurrency exchanges and the emergence of their leaders are an extremely important result and beginning of this change. This group of new CEOs stepped into the forefront of the Hong Kong crypto world and became key players in connecting the crypto world with the traditional financial world, and their institutions are forming a new industry in Hong Kong that is regulated by the government.

According to Foresight News, at least 10 institutions have announced their application for Hong Kong VASP licenses, which is also the most comprehensive and comprehensive cryptocurrency license currently launched in Hong Kong. Among them are both crypto institutions such as HashKey, OKX, Huobi, Bitget , BitMart, Bybit, BitMEX, OSL and Gate, as well as traditional financial institutions such as E-BOF. An informed source said that Internet brokerages such as Tiger Securities and Greenland Group are also very concerned about Hong Kong's crypto licenses. It is reported that Tiger Securities and Futu Securities have applied for local cryptocurrency-related licenses in the United States, Singapore and other places.

Among these ten institutions, there are currently five CEOs and persons in charge who are active in the Hong Kong crypto scene: HashKey Pro CEO Colin Zhong, OKX Global Chief Business Officer Lennix Lai, BitgetX CEO Patrick Pan, OSL CEO Hugh Madden, and Gate Hong Kong CEO Kevin. It is worth mentioning that most of them are local Hong Kong people, most of whom have more than 10 years of experience in traditional financial institution management, and are all ROs (license holders and executors required by Hong Kong).

According to the requirements of the new licensing system, all these crypto exchanges need to find two ROs. A practitioner of a Hong Kong cryptocurrency platform said: "Each financial license category needs to be matched with a qualified RO to operate." The current CEOs of Hong Kong cryptocurrency exchanges are also RO holders.

"RO is a difficult problem to solve. It is not something that can be solved by capital alone. RO needs to have trading experience and financial management experience, needs to meet the requirements of the Securities Regulatory Commission, and also needs to meet the requirements of years of service." Darin, head of BitMart Hong Kong, told Foresight News. "At least 3 years of industry experience in the past 6 years. This experience can be direct experience in operating a virtual asset trading platform, or virtual asset-related experience with a No. 1 or No. 7 RO license." ROs that meet these requirements are very scarce.

The shortage of ROs is a headache for many licensed institutions in Hong Kong. This has also led to a surge in the annual salary of ROs and CEOs of the Hong Kong Stock Exchange. An unnamed person from a cryptocurrency exchange told Foresight News that the current annual salary of ROs is around HK$2 million, while another unnamed person from a Hong Kong cryptocurrency exchange said it is upwards of HK$3 million.

Foresight News learned that the progress of various exchanges in RO is different. For example, OSL has 5 ROs; OKX has more than two ROs; BitgetX currently has two ROs: Patrick Pan (CEO) and Daniel Lai (CLO), and the exchange will also recruit an RO holding No. 1 and No. 7 licenses respectively. However, more cryptocurrency exchanges have no RO or only one RO, and they need to pay more costs to recruit qualified ROs. It is reported that the number of qualified ROs in Hong Kong is only a little over 100.

Although ROs are in short supply, the first batch of ROs and CEOs in the Hong Kong crypto market are ready and are becoming key figures in connecting the crypto world with the traditional financial world. Hong Kong has taken action, and the SFC (Hong Kong Securities and Futures Commission) has officially regulated the cryptocurrency industry and issued licenses. "This means that in Hong Kong, cryptocurrency exchanges, like stock exchanges, fund companies, and credit companies, are also part of the financial industry." Darin, the Hong Kong head of the cryptocurrency exchange BitMart, told Foresight News. BitMart is a comprehensive cryptocurrency exchange with about six or seven people currently stationed in Hong Kong. In the future, they will continue to recruit more people in Hong Kong.

Kevin, head of Gate Hong Kong, a large cryptocurrency exchange, pointed out the potential financial opportunities brought by operating in Hong Kong with a license: "The more than 7 million local Hong Kong users are one aspect, and the significance of this license is to build a bridge for the flow of funds between the huge global compliant capital and cryptocurrency exchanges through Hong Kong's status as an international financial center." "Hong Kong's cryptocurrency exchanges are not only aimed at Hong Kong users, but also rely on Hong Kong's status as an international financial center to attract global compliant capital." Kevin added to Foresight News.

Hong Kong's regulation of cryptocurrencies has sent an important signal to the capital market and financial market: capital that previously could not enter the cryptocurrency market due to lack of government regulation will now be able to enter the cryptocurrency market through Hong Kong, a financial center; traditional financial institutions that previously could not conduct business cooperation with cryptocurrency institutions will now be able to cooperate with cryptocurrency institutions. Currently, state-owned Hong Kong subsidiaries such as Bank of China International and Pacific Insurance have begun to explore the cryptocurrency field, and this trend is happening globally.

Compliant cryptocurrency institutions in some countries have already had precedents of cooperation with traditional financial institutions, such as Visa cryptocurrency debit cards, Bitcoin funds, stock tokenization, financial products denominated in cryptocurrencies, and so on.

Lennix Lai, Kevin, Colin Zhong and other Hong Kong crypto exchange CEOs who have experience in international traditional financial institutions and cryptocurrencies are naturally suited to introduce cryptocurrencies into compliance and into traditional financial markets. They are about to play a more active role in Hong Kong, a financial center.

100 million to get a VASP license

For the CEO of a Hong Kong crypto exchange under the new licensing system, obtaining a VASP license is the most important task at present.

"Some asset management companies and banks have prepared HK$100 million to HK$200 million to apply for a Hong Kong VASP license," an industry insider told Foresight News. This is the "ticket" for traditional financial institutions to enter the cryptocurrency market. Since traditional financial institutions have not previously made relevant arrangements, they have to start from scratch in terms of products, teams, etc., so the cost is very high. However, even for cryptocurrency institutions with rich experience, the cost of obtaining a license is not low.

The Hong Kong government has set up many thresholds to achieve the goal of screening high-quality crypto exchanges. For example, it is necessary to set up a physical office in Hong Kong, at least two ROs (regulators of licensed crypto institutions) with many years of experience in traditional financial institution management and virtual currency trading, a certain number of cryptocurrency users and trading volume before June 1, a TCSP license, No. 1 license and No. 7 license, and a formal business for one year and regulatory approval before obtaining a formal license... This has relatively high requirements on the financial resources, experience and time of institutions that want to obtain a license.

Cryptocurrency institutions that intend to apply for VASP licenses now basically have a certain number of users and cryptocurrency trading volume, but most institutions have not disclosed specific data. As one of the earliest cryptocurrency exchanges in Hong Kong, OKX revealed the latest data to Foresight News. As of June 27, 2023, OKX Hong Kong has accumulated more than 8,800 registered users and a total cryptocurrency trading volume of 150 million US dollars.

BitMart revealed that its latest users in Hong Kong are around 300. Currently, there are 11,000 Hong Kong users on the global site of the organization, and they have not yet been migrated to the Hong Kong platform. "But new users in Hong Kong can only apply on the new platform." Darin said.

At the University of Hong Kong, BitgetX CEO Patrick Pan talks about the global cryptocurrency exchange landscape. Photo by Foresight News

OKX and Gate, for example, have already taken a big lead in the Hong Kong market because they were established earlier. "OKX's Hong Kong team has 500 people, and about 60 of them are responsible for licenses," said Lennix Lai, OKX's global chief commercial officer.

Moreover, these large cryptocurrency exchanges have considerable cost advantages because they have an early international layout. "Products, risk control, and technology are common to all platforms, so most of these 500 people are actually still OKX global employees." Lennix Lai said. "OKX's products will automatically adapt to different compliance entities such as Hong Kong and Singapore." According to Foresight News, the same is true for platforms such as Gate and BitMart, which will greatly reduce their costs.

However, even so, cryptocurrency exchanges will have to pay a considerable cost to apply for a VASP license.

Darin, the head of BitMart in Hong Kong, has made a rough calculation: "Based on the BitMart global site, applying for a VASP license will cost HK$20 million to HK$50 million." Cobo COO Lily revealed to Interface News: "The annual operating cost may be around HK$20 million, and the initial cost may be between HK$30 million and HK$40 million." For an institution that has no cryptocurrency-related business before, a basic investment of HK$100 million is not an exaggeration.

CEOs of Hong Kong cryptocurrency exchanges need to achieve the goal of obtaining a Hong Kong VASP license within a limited time and money.

1 year, 1 card, 1 new industry

How long does it take for a new industry to be born? Hong Kong hopes that this period is one year.

June 1, 2023 - June 1, 2024 is this critical year. During this year, the Hong Kong Securities Regulatory Commission will examine whether cryptocurrency exchanges meet its requirements. It is estimated that 5-10 companies will obtain VASP licenses and become the first batch of cryptocurrency exchanges regulated by the Hong Kong Securities Regulatory Commission. A new industry - the Hong Kong cryptocurrency industry will be initially established.

The Hong Kong heads of cryptocurrency exchanges such as OKX, Gate, and BitMart told Foresight News: "It is expected that the first batch of companies will obtain VASP licenses in early 2024 and become compliant cryptocurrency exchanges in Hong Kong." As for the specific number of the first batch of companies, Lennix Lai predicts that the number of companies that can meet the requirements of the CSRC will be less than 10.

Of course, this is just the beginning. More importantly, in addition to cryptocurrency exchanges, there will be more members in this industry ecosystem: stablecoin companies, NFT startups, cryptocurrency professional investment institutions, cryptocurrency departments of financial institutions... Hong Kong has also made it clear that it will regulate stablecoins in the second half of 2024. This new industry is not just cryptocurrency exchanges. Cryptocurrency exchanges are just the beginning. Hong Kong hopes to form a brand new industry ecosystem - the cryptocurrency ecosystem.

Whether Hong Kong's cryptocurrency ecosystem can be built well depends on whether Hong Kong's selection and supervision of cryptocurrency exchanges are appropriate. No matter which region, as long as an FTX incident occurs, the entire local crypto ecosystem will be hit hard, such as the United States and Singapore.

To this end, Hong Kong has set multiple time points and thresholds for cryptocurrency exchanges this year. Darin divides the application for a VASP license into three stages.

The first stage is that before June 1, 2023, exchanges that intend to apply for a license must have substantial cryptocurrency trading platform business operations in Hong Kong. At this point in time, cryptocurrency exchanges in Hong Kong need to find a reliable consulting law firm, build a platform, and have a certain number of users and cryptocurrency trading volume. Darin said: "In mid-April, BitMart started testing, such as KYC and AML, and users were allowed to start using the platform in late May." As for finding a consulting law firm, Darin's suggestion is to find a law firm with a previous SFC background.

At this stage, most cryptocurrency exchanges in Hong Kong have also found offices. For example, BitgetX's office is in Tsim Sha Tsui Center, and BitMart has set up offices in Tsuen Wan, Cyberport, and K 11. Foresight News learned that the functions of setting up offices in different locations are also different. For example, setting up an office in Cyberport, because Cyberport is relatively remote from the city, is more for connecting government and industry resources.

Meitu founder Cai Wensheng is teaching at the Hong Kong University Cyberport Campus｜Photo by Foresight News

The second phase is from June 1, 2023 to March 1, 2024, which is the critical time for obtaining the VASP license. During this period, the company's two ROs and the actual helmsman or CEO must also be basically determined.

During this period, cryptocurrency exchanges have obtained Hong Kong TCSP licenses, established trust companies, and obtained No. 1 and No. 7 licenses.

Some institutions have prepared for the TCSP license earlier. For example, Huobi Trust, a subsidiary of Xinhuo Technology (formerly Huobi Technology), obtained the Hong Kong TCSP license in January 2022, and Gate also obtained the TCSP license in February 2022. With a TCSP license and the establishment of a 100% controlled trust subsidiary, users' cryptocurrency assets can be placed in the trust company, which is convenient for regulators to conduct fund reviews and to a certain extent avoid the misappropriation of customer funds that often occurs in the cryptocurrency industry.

Previously, the world's second largest cryptocurrency exchange FTX misappropriated customer funds and eventually went bankrupt. This incident directly led to the United States' severe crackdown on the cryptocurrency market, and the entire US cryptocurrency market was bleak for a year. Singapore also had to slow down its active embrace of encryption because of the FTX incident.

On the other hand, cryptocurrency companies also need to contact third-party auditing companies to audit their user data and financial data, and submit them to the SFC, a regulatory agency. Foresight News learned that OKX is currently at this stage, and their relevant financial data is audited by Deloitte.

The third stage is from March 2024 to June 2024, when the first batch of cryptocurrency transactions in Hong Kong may be born.

"Before March 2024, auditing companies will basically audit relevant data according to SFC standards and requirements. All exchanges willing to operate with a license in Hong Kong must submit an application form. The application form includes the establishment time of the office, the operation of the Hong Kong station, employee situation, internal compliance and risk control, etc. It also includes some security measures, such as measures to protect the safety of investors' funds. After submission, the SFC will have an evaluation and review requirement. After the inspection, it will announce a batch of exchanges that can obtain licenses around the end of May 2024." Darin said.

During this process, cryptocurrency exchanges need to make adjustments according to the requirements of the SFC. If the first batch is not successful, it may take several years for them to get a license again.

“First get a deemed license, and then get a formal license. SFC and other regulatory agencies may hope to improve some detailed requirements for exchange management in this way,” Darin said.

During this year, if a cryptocurrency exchange wants to obtain a VASP license, it needs to cooperate with multiple institutions, including law firms, third-party financial auditing agencies, technical review companies, RO recruitment agencies, and SFC, etc., and these are all the steps that need to be taken to obtain the license.

Final Thoughts

Hong Kong’s financial industry has finally welcomed new members - licensed (VASP license) cryptocurrency exchanges and their new CEOs, and has also welcomed a thriving new industry - the cryptocurrency industry.

Holding a VASP license not only means that institutions can legally provide cryptocurrency trading services to residents in Hong Kong, but also means that crypto companies, like other financial institutions regulated by the Hong Kong Securities Regulatory Commission, have officially become part of Hong Kong's financial industry. This represents possibilities that were previously unimaginable.

Cryptocurrency is still a very high-risk industry, like a dark forest full of hidden dangers. The Mentougou, Luna, FTX, Three Arrows Capital and other incidents seem like yesterday, and such destructive events will continue to occur in the foreseeable future. However, once a technological or financial trend is formed, it is like having a life and it is difficult to be strangled. This is not subject to human will. There are only two choices: passive acceptance and active choice, and Hong Kong has undoubtedly become the latter.

This time, the world has once again turned its attention to Hong Kong, a city that is striving to become a cryptocurrency center. The new industry formed in this city will become an important case for the global financial market to learn or refer to in the future.