Until a few years ago, Hong Kong was considered the friendliest jurisdiction for digital asset businesses. But the $200 million local exchange fraud has prompted regulators to become stricter and are now increasingly licensing exchanges while balancing investor protection and fostering innovation. City regulators say they plan to issue licenses to nearly a dozen virtual asset service providers (VASPs) by the end of this year.
Elsewhere in East Asia, South Korea is reviewing stablecoin laws and consulting with other jurisdictions, including the European Union and Japan.
Hong Kong acquires 11 VASP licenses
A year ago, when JPEX collapsed with HK$1.6 billion (US$225 million) of investor money, the Securities and Futures Commission (SFC) was criticized for failing to protect Hong Kong investors. This led to a complete overhaul of its handling of digital assets, including launching a public list of VASP license applicants “in light of public demand”.
It also revised the licensing regime for VASPs, requiring them to obtain a new license to provide services to Hong Kong investors. Haskey and OSL become the first two exchanges to obtain this license under the new regime, with HKVAX joining them a week ago.
SFC plans to grant licenses to 10 more exchanges by the end of this year, CEO Julia Leung said in a recent interview with local media outlet HK01.
Leung said the watchdog had field-visited and reviewed 11 applicants and expected to issue them licenses this year. She did not identify the applicants, but the SFC website shows they include Hong Kong Digital Asset EX Limited, Whalefin Markets, Panthertrade Limited and DFX Labs Limited. Bullish, an exchange launched in 2021 by EOS parent company Block.one, is also one of the applicants.
Interestingly, none of the global exchanges are on the list, despite Hong Kong being one of the largest target markets in Asia. Some companies, such as Binance, OKX, Gate.io and HTX, all founded in China, withdrew their license applications earlier this year. Local outlets claimed the withdrawals were made due to SFC’s rule that they could not serve Chinese customers under the new regime.
“Applicants who do not meet the requirements will lose their license, while applicants who meet the requirements will receive their license on a conditional basis,” Leung said.
Despite Hong Kong building its image as a digital asset hub, it remains fairly limited for retail traders. Before August, retailers worth less than $1 million could only buy and sell BTC and ETH, but options were slightly expanded to four tokens. Professional investors have a lot more tokens to choose from.
Korea strengthens stablecoin regulations
Meanwhile, South Korea is strengthening its laws on stablecoins to close criminal loopholes in cross-border fund transfers.
The Ministry of Strategy and Finance (MoEF) said it was considering a proposal to extend strict foreign exchange regulations to transactions involving stablecoins pegged to fiat currencies.
The Financial Services Commission (FSS), the government agency that oversees day-to-day supervision and regulatory enforcement, is leading the review. The FSS aims to prioritize stablecoins in the next phase of the Cryptocurrency User Protection Act, a framework that came into effect in May last year, which includes anti-money laundering (AML), consumer protection, licensing and licensing for VASPs. It deals with public contracts.
FSS will initially focus on stablecoins pegged to the Korean Won and then expand to stablecoins pegged to the US dollar and other foreign currencies. In Korea, most domestic exchanges offer their own stablecoins pegged to the Korean Won, but these are limited to the exchange ecosystem. However, some companies have issued a broader range of won-pegged stablecoins with limited success.
As in most other countries, stablecoins are gaining traction for cross-border fund transfers, posing a challenge to governments as they are more difficult to track than traditional means.
Professor Hwang Seok-jin of Dongguk University in Seoul said, “International transactions of stablecoins are not reflected in official statistics, which may create loopholes in government policy.”
Mr. Jin joins many other Korean economic experts, including Bank of Korea Governor Lee Chang-yong, who are concerned that capital could flow overseas during the economic crisis as investors convert won-denominated assets to foreign currency-pegged stablecoins.
FSS plans to consult with other jurisdictions, including the European Union (EU) and neighboring Japan, before setting stablecoin regulations. The latter is strict about stablecoins and only allows banks, trust companies and money transfer services to issue these tokens.
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