Livio Weng, CEO of HashKey Exchange, suggested that Hong Kong’s financial regulator may have considered the user base from a “sensitive region” during its review of license applications from certain international crypto exchanges. In an interview with The Block on Monday, Weng hinted at the importance of this factor in the negotiations between the Hong Kong Securities and Futures Commission (SFC) and the exchanges that have since withdrawn their license applications.

While Weng did not specify the “sensitive region,” it is implied that this consideration played a significant role in the SFC's decision-making process. The SFC mandates that crypto trading platforms failing to submit their license applications by February 29 must cease operations in Hong Kong by May 31. From June 1, all Virtual Asset Trading Platforms (VATPs) in Hong Kong must be either licensed by the SFC or “deemed-to-be-licensed” applicants, including Crypto.com, Bullish, and Matrixport HK.

Several global exchanges, such as OKX, Gate.io, and HTX, have withdrawn their license applications in Hong Kong. OKX announced plans to wind down its Hong Kong business by the end of August. According to Wu Blockchain, the SFC had required all applicants to ensure they would not serve mainland Chinese users in any region—a condition difficult for some exchanges to comply with. OKX reportedly attempted to form an industry alliance to oppose this requirement but ultimately failed.

The SFC reiterated last week that crypto trading platforms must implement measures to prevent Mainland Chinese residents from accessing their services. Angela Ang, a senior policy advisor at TRM Labs and former Monetary Authority of Singapore regulator, stated that it is common for regulators to require licensees not to contravene the laws of other jurisdictions. Serving residents in a jurisdiction where crypto is banned would be a no-go, making the SFC's stance on China unsurprising but stringent.

Ang also noted that Hong Kong is often seen as a gateway to the mainland market, and this regulatory stance might drive withdrawals. An inability to meet regulatory expectations for a license could also lead to withdrawals as a better alternative to outright rejection.

Yat Siu, chairman of Animoca Brands, suggested that withdrawing applications might also be a strategy to exert pressure on the SFC, highlighting the desire to operate in Hong Kong but pushing for more favorable conditions. Duncan Chiu, a Hong Kong lawmaker, has criticized the “excessively stringent” regulations for crypto exchanges, arguing that these rules have discouraged major global exchanges from entering the Hong Kong market and have dampened market confidence.

According to Weng, the license withdrawals might also reflect the SFC’s consideration of market size. He suggested that the number of licenses issued should align with market capacity to ensure a balanced and competitive environment.

As Hong Kong navigates the complexities of crypto regulation, the interplay between regional user bases, regulatory compliance, and market dynamics continues to shape the landscape for international crypto exchanges.