Hong Kong's securities regulator has taken a significant step forward in its quest to become a global digital-asset hub by progressing with the licensing of 11 new cryptocurrency exchanges. Among the applicants are well-known platforms such as Crypto.com and Bullish, which have been deemed licensed by the Securities & Futures Commission (SFC).

This development marks a crucial milestone for these exchanges, as they are now poised to legally operate and market their services to local investors, pending full compliance with SFC regulations. In contrast, some prominent exchanges, including OKX and Bybit, have withdrawn their applications, while others, such as Binance, Coinbase, and Kraken, did not apply at all. By June 1, all operating crypto exchanges in Hong Kong must be at least deemed licensed.

Strategic Ambitions and Regulatory Challenges

Hong Kong's push to establish itself as a virtual-asset hub began in late 2022, as part of broader efforts to regain its standing as a financial center following a period of political unrest. The city's crypto initiatives include expanding the number of licensed exchanges, introducing spot-Bitcoin and Ether exchange-traded funds (ETFs), and developing frameworks for stablecoins and digital bond issuance on tokenization platforms.

However, Hong Kong faces stiff competition from Dubai and Singapore in its bid to become a leading digital-asset center. The city's strict regulatory framework aims to bolster investor protection and prevent money laundering and terrorism financing, but it also imposes significant compliance costs. As of now, two exchanges, HashKey Exchange and OSL Group, have fully obtained licenses, and around two dozen companies have applied to operate crypto exchanges by the February 29 deadline.

Accessing Mainland Wealth and Industry Challenges

Traditionally, Hong Kong serves as a crucial gateway for accessing wealth from mainland China. However, Beijing's ban on digital-asset trading limits mainland investors' access to Hong Kong's crypto exchanges and ETFs. Despite these restrictions, Chinese citizens reportedly continue to seek alternative investments through crypto, driven by falling home prices and overseas transfer limits. Bitcoin's substantial rise in value since early 2023 has further fueled this demand.

The crypto exchange industry, however, has a history of operating in murky areas, highlighted by high-profile cases such as the collapse of FTX and the recent legal troubles of Binance, which faced a $4.3 billion penalty for violating US laws. In Hong Kong, the JPEX crypto exchange scandal last year underscored the challenges regulators face in overseeing the industry, especially as users can evade restrictions using virtual-private networks and peer-to-peer trading.