Why Are Institutions Withdrawing VASP License Applications in Hong Kong?

In the past, amid tightening global crypto regulations, Hong Kong's open stance made it a magnet for crypto enthusiasts, earning it the title of a crypto hub. As Hong Kong moved toward a compliant framework, its policies caught the eye of many in Southeast Asia. Its openness positioned Hong Kong as a trailblazer in crypto compliance.

On June 1, 2023, the “Guidelines for Virtual Asset Trading Platform Operators” came into effect, allowing these operators to apply for licenses. Initially, many institutions were enthusiastic. However, recently, several have been withdrawing their applications. So, which platforms are pulling out, and why is the once-favored crypto hub losing its appeal？

Multiple Institutions Withdrawing License Applications

The transitional period for licensing Virtual Asset Service Providers (VASP) in Hong Kong ends on May 31, 2024. The Securities and Futures Commission (SFC) will then decide if existing providers can continue operating. As of now, according to the SFC's official website, 10 institutions, including VAEX, OKX HK, and Huobi HK, have withdrawn their exchange license applications.

Currently, only two institutions have been officially licensed by the SFC as virtual asset trading platform operators, while 18 others are still in the application process.

Reasons Behind the Withdrawals

Industry insiders point to high compliance costs and the limited appeal of the local market as the main reasons. Hui Kin-shing, former chairman of the Hong Kong Computer Society, highlighted that running a trading platform in Hong Kong involves high costs, such as licensing fees and hiring responsible personnel. Trading activity on existing platforms hasn't increased significantly, and their liquidity is lower than that of overseas platforms, failing to attract international customers. The market might not be able to support many license applicants. Large international platforms with established overseas businesses might withdraw applications due to local market profitability issues.

Data from Coingecko shows that Hashkey Exchange, one of the licensed exchanges, supports only 20 tokens with a daily trading volume of just $40 million. With a population of only 7.5 million, a Hong Kong license means catering only to local users. For exchanges, the potential user growth is not attractive enough. Furthermore, limitations on the tokens that can be listed might also be a reason for several institutions withdrawing their licenses.

In essence, as Hong Kong's crypto policies evolved, so did those of other countries. At present, Hong Kong's crypto policies aren't as open, and setting up a crypto exchange in Hong Kong comes with too many restrictions. Given the costs versus the benefits, it's not worthwhile, leading to many exchanges withdrawing their applications for Hong Kong exchange licenses.