Hong Kong virtual asset exchange faces strict regulation, unlicensed platforms are in trouble

The transitional period for the regulation of virtual asset exchanges in Hong Kong ended on May 31. Although some exchanges have withdrawn their license applications, there are still some platforms operating in a gray area, resulting in the phenomenon of "clearing without retreating."

According to on-site investigations, most offshore exchanges have stopped new user registrations from Hong Kong. However, many exchanges are still providing services to registered Hong Kong users, with the exception of a few platforms, and have not issued any announcements regarding the cessation of services.

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.

Regulatory authorities require unlicensed exchanges to cease trading services starting from June 1 and complete the withdrawal of Hong Kong clients' assets by August 31. This means that platforms without a license must exit the market. Even if they hold compliant licenses from other countries, it is still illegal to continue providing offshore virtual asset trading services to Hong Kong users.

In addition to criminal liability, non-compliant platforms may also face disciplinary actions from regulatory agencies, including suspension or revocation of licenses, reprimands, demands for remedial actions, and fines.

Currently, in the Hong Kong virtual asset exchange market, only two platforms have obtained formal licenses from the Securities and Futures Commission, while 11 others have received qualifications pending issuance of licenses. At the same time, the license applications of 11 platforms have been returned, rejected, or withdrawn.

Insiders say that the withdrawal of some exchanges is due to regulators requiring applicants to commit that no entity in any region can have users from mainland China. This requirement makes it difficult for traditional offshore exchanges to meet the conditions. Although it may be possible to reapply in the future by updating the legal entity or framework, it may not be possible to use a brand similar to that of existing offshore exchanges.

Legal experts emphasize that under China's existing regulatory policies, virtual currency exchanges cannot operate in China and cannot provide services to Chinese citizens. As for the practice of changing entities to reapply, it is generally feasible as long as the licensing requirements in Hong Kong are met. However, using a brand similar to that of existing offshore exchanges may confuse the public regarding its compliance.

There is a view that the policies and measures for the development of the virtual asset market in Hong Kong lack comprehensive consideration and take too long. At the same time, the government's adoption of traditional financial policies has led to overly strict regulation, lacking flexibility and innovation.

How to effectively regulate non-licensed exchanges that are "clear but not retreating", and how to strike a balance between compliance and innovation, will become key challenges for the future development of the Web3 industry in Hong Kong.