Hong Kong’s New Crypto Exchange Regulatory Regime Comes into Effect: Operating Licenses Cost Up to $20 Million

In a significant development for the crypto industry, Hong Kong’s revised regulatory framework has kicked into gear, potentially requiring cryptocurrency exchanges to fork out substantial sums of money for operating licenses. The new regime, which became effective in June, demands trading platforms dealing in virtual assets to acquire fresh approvals or exit the city within a year.

Prominent players in the crypto exchange arena, namely OSL and HashKey, both of which previously held licenses under the former opt-in regime, have successfully navigated the transition to the new system. As a result, these exchanges are now permitted to cater to retail investors in compliance with the updated regulatory guidelines.

Nevertheless, sources familiar with the ongoing application process, who chose to remain anonymous due to non-disclosure agreements, disclosed that obtaining the newly required licenses could carry a hefty price tag, estimated to range from $12 million to a staggering $20 million. These projections take into account various expenses incurred during the application process, encompassing pre-license operational costs and essential service payments.

The financial prowess of OSL and HashKey, being affiliated with larger financial service groups, potentially places them in a favorable position to handle such considerable costs. However, this new cost consideration under the revised regulatory rules is likely to act as a deterrent for many smaller firms within the crypto exchange sector.

Industry insiders have revealed that licensing consultants could demand fees of up to $1 million to provide expert guidance throughout the application procedure. Compliance requirements set forth in the new regime stipulate that exchanges must maintain a paid-up share capital of 5 million Hong Kong dollars (equivalent to $640,000), in addition to possessing liquid capital exceeding $380,000. Moreover, exchanges are obligated to possess liquid assets equivalent to at least one year’s worth of operational expenses, excluding virtual assets.

Cryptocurrency Firms Face Stringent Requirements for Hong Kong Licensing

In a bid to enhance the security and accountability of the cryptocurrency market, companies seeking to operate in Hong Kong are required to adhere to a set of stringent guidelines. These measures are aimed at ensuring the segregation of client funds, safeguarding digital assets, conducting thorough smart contract audits, and maintaining a strong corporate governance framework.

Prior to onboarding investors and clients, firms are now tasked with evaluating their proficiency and understanding of virtual assets. This move underscores the importance of industry knowledge in a market that has seen rapid growth and innovation in recent years.

Central to the regulatory framework is the mandate for companies to establish a local presence in Hong Kong. Seed phrases and private keys, along with their respective backups, must be securely stored within the jurisdiction. This requirement aims to bolster the overall security of digital assets and prevent potential breaches.

To oversee compliance with these regulations, cryptocurrency firms are obligated to appoint licensed responsible officers (ROs). These compliance officers play a pivotal role in ensuring that businesses meet the regulatory standards set forth by Hong Kong authorities. It is noted that the demand for licensed ROs has surged, leading to a premium being charged for their services.