Hong Kong is in quite a challenging situation as it tries to become one of the most prominent crypto hubs. Even with the city’s efforts to create a favorable regulatory environment, more than a dozen exchanges are struggling to get full licenses from the Securities and Futures Commission.

According to a report from Bloomberg, this situation highlights the challenges that lie ahead for Hong Kong’s crypto ambitions.

Crypto: Closer Supervision by Regulators

The SFC keeps a close eye on crypto exchanges and preliminary results from the aforementioned inspections warn of bad practices.

There have been reports of unsatisfactory practices on 11 exchanges that were on the verge of being licensed, according to the competent authorities.

They range from poor cyber protection to over-reliance on a few top executives to manage client funds. Crypto.com and Bullish are under investigation, which is why their Hong Kong operations are lagging.

Only OSL and HashKey have full city licenses. While compliance is difficult, the SFC hopes to issue more licenses by 2024.

Lawyers said 12 parties have withdrawn their petitions, including Bybit and Huobi HK, which are well-known. These companies are increasingly concerned that the SFC’s strict rules will conflict with their business practices.

List of Hong Kong-based cryptocurrency exchanges that withdrew their license applications. Source: Hong Kong SFC

The Impact of the JPEX Scandal

The sector has come under increased scrutiny following the JPEX scandal, which saw thousands of investors lose more than $200 million when an unlicensed platform was accused of defrauding 2,600 victims.

The incident has further accelerated the SFC’s push for strict compliance measures across the board, with the regulator focused on protecting client assets and ensuring robust know-your-customer arrangements.

The JPEX case clearly shows that the SFC will not do anything that would jeopardize the integrity of the crypto market in Hong Kong.

It leaves exchanges hoping to get a piece of Hong Kong’s lucrative market in a quandary. Most of these companies had ambitions to serve customers on the mainland, where cryptocurrency trading is banned.

Complications arise in the context of One Country, Two Systems, where exchanges are now realising that they cannot serve the much larger mainland market from Hong Kong. This could deter potential investors and companies from setting up shop in the city.

Competition with other jurisdictions

This puts Hong Kong’s ambitions at odds with its ambitions to become a crypto hub and growing competition from Singapore. While Hong Kong has taken some positive steps towards a regulatory framework that is open and secure, its slow pace of licensing has drawn criticism.

Some observers are now questioning whether Hong Kong could offer a more favorable environment for crypto companies than other areas with clearer and more encouraging regulations.

The outlook is not so bleak yet and industry insiders are still hopeful. If properly regulated, Hong Kong could regain its former glory as one of the world’s prominent crypto hubs.

Main image by Getty Images, chart by TradingView