Livio Weng, CEO of HashKey Exchange, indicated that Hong Kong’s financial regulator may have considered the user base from a “sensitive region” during the review of license applications from certain international crypto exchanges.

Weng told The Block in an interview on Monday that he couldn’t elaborate on the “sensitive region,” but it appeared to be a main focus in the negotiations between the Hong Kong Securities and Futures Commission and the exchanges that have now withdrawn their license applications.

The SFC stipulates that crypto trading platforms that fail to submit their license applications by Feb. 29 must close down their businesses in Hong Kong by May 31. The regulator said that after June 1, all VATPs operating in Hong Kong must be either licensed by the SFC, or “deemed-to-be-licensed” applicants, which included Crypto.com, Bullish and Matrixport HK.

Many global exchanges — including OKX, Gate.io and HTX — have withdrawn their license applications in Hong Kong. OKX, for example, said that it will wind down its Hong Kong business by the end of August. 

Wu Blockchain reported that during the negotiations, the SFC had asked all applicants to agree that they would not serve mainland Chinese users in any region — a request that would be difficult for some exchanges to comply with. “OKX once tried to form an industry alliance to oppose this requirement but ultimately failed,” the report said.

Both OKX and HTX declined to further comment on the matter.

China's crypto ban at play?

The SFC reiterated in a statement last week that crypto trading platforms should implement measures, including “preventing Mainland Chinese residents from accessing any of their virtual asset-related services.”

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Angela Ang, senior policy advisor of TRM Labs and a former Monetary Authority of Singapore regulator, said that it’s common for regulators to require that their licensees not contravene the laws of another jurisdiction. “From that perspective, serving residents in a jurisdiction where crypto is banned would be a no-go,” she added. 

“The SFC’s stance on China thus should not be a complete surprise to the industry, but the explicit direction may have upped the ante,” Ang also said. “Hong Kong is generally seen as a springboard to access the mainland market, so this could well be a factor driving withdrawals.” 

Ang explained that another factor could be an inability to meet regulatory expectations for a license. “In that case, withdrawal is a better alternative to an outright rejection,” she said.

“This is now in the realm of speculation, but withdrawing applications can also be used as a mechanism to create pressure,” Yat Siu, chairman of Animoca Brands, told The Block. “There might also be an element of negotiating and saying: ‘Look, we want to be in Hong Kong, but this is too much. We want something else.’”

Siu said that it’s hard to make a blanket statement regarding the reason why these exchanges withdrew license applications. “I don't believe that any exchange really doesn't want to do business in Hong Kong. It is a very good crypto market. It's got much higher awareness of the space than other places. It's got a concentrated audience. It's got high liquidity.”

Duncan Chiu, a Hong Kong lawmaker, has raised concerns over the “excessively stringent” regulations for crypto exchanges to obtain a license, criticizing that these rules have pushed major global exchanges away from entering Hong Kong and have dampened market confidence.

The license withdrawals from the major global exchanges might also reflect the SFC’s consideration regarding market size, according to Weng of HashKey. “The specific number of licenses given out should better be adjusted based on the market capacity,” Weng added.