Hong Kong virtual asset exchange regulation tightening, unlicensed platforms face legal risks

The transition period for the regulation of virtual asset exchanges in Hong Kong has ended, and trading platforms that have not obtained licenses are facing severe legal challenges. Although some exchanges have withdrawn their license applications, they continue to operate in a gray area, resulting in a phenomenon of "clear but not withdrawn."

According to actual testing, most offshore exchanges have stopped new user registrations in Hong Kong, but with the exception of a few platforms, most still provide services to registered users in Hong Kong and have not issued any relevant announcements regarding service cessation.

Legal experts point out that providing virtual asset services without obtaining a license is illegal. If convicted through public prosecution, one can face a fine of up to 5 million HKD and 7 years of imprisonment. Even if one holds a compliant license from another country, they cannot continue to provide offshore virtual asset trading services in Hong Kong.

Currently, in the Hong Kong virtual asset exchange market, only two platforms have obtained licenses from the Securities and Futures Commission, while another 11 have obtained qualifications pending licensing. At the same time, the license applications of the 11 exchanges have been returned, rejected, or withdrawn. It is reported that some exchanges have withdrawn due to their inability to meet the commitment letter requirements signed with the Hong Kong Securities and Futures Commission, which stipulates that applicants cannot have users from mainland China in any region.

Industry insiders say that exchanges that have withdrawn their applications may apply again in the future by updating their legal entities or frameworks, but they may not be able to use brands similar to the current offshore exchanges. This is mainly to avoid public confusion over whether the exchange is licensed and compliant.

Legal experts emphasize that, according to the existing regulatory policies in China, virtual currency exchanges cannot operate in China and cannot provide services to Chinese citizens. For exchanges applying for a license again, as long as they meet Hong Kong's requirements for virtual currency trading license applications, they can, in principle, reapply.

However, the legal compliance and operational costs of exchanges are relatively high, which is one of the reasons why many exchanges choose to withdraw their license applications. Currently, the Hong Kong virtual currency exchange market does not seem to be regarded as an attractive business opportunity.

Some Hong Kong Legislative Council members have indicated that the recent turmoil surrounding the licensing system has shaken market confidence in Hong Kong's promotion of Web3 development. They pointed out 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 borrowing from traditional financial policies has led to overly strict regulation, lacking flexibility and innovative spirit.

Therefore, how to effectively regulate unlicensed exchanges that are "clean but not retreating", and how to balance compliance requirements with innovative development in the future, will become key challenges faced by the Hong Kong Web3 industry. Hong Kong regulators need to find a balance between protecting investor interests and promoting industry innovation to maintain its position as an international financial center while fostering the healthy development of the virtual asset industry.