Hong Kong virtual asset exchange faces regulatory challenges, balancing Compliance and innovation becomes key

With the end of the transition period for virtual asset exchanges in Hong Kong, unlicensed exchanges face severe legal risks. Although some exchanges have withdrawn their license applications, they continue to operate in the gray area, resulting in the phenomenon of "clearing but not withdrawing."

An on-site investigation found that most offshore exchanges have stopped registering new users from Hong Kong but are still providing services to existing Hong Kong users without issuing any related service suspension announcements. Legal experts point out that providing virtual asset services without obtaining a license is illegal and may face hefty fines and imprisonment.

Regarding sentencing, legal experts explain that if convicted through public prosecution procedures, the maximum penalty can be a fine of 5 million HKD and 7 years of imprisonment. If it is a continuous crime, an additional fine of 100,000 HKD can be imposed for each day. For summary conviction, a fine of 5 million HKD and 2 years of imprisonment can be imposed, with an additional fine of 10,000 HKD for each day of continuous crime. In addition, non-compliance with anti-money laundering regulations will also incur corresponding criminal liability.

It is worth noting that even if an exchange holds compliance licenses from other countries, it cannot conduct virtual currency exchange business in Hong Kong or mainland China. This means that relying solely on foreign licenses does not meet the regulatory requirements of Hong Kong.

Currently, in the Hong Kong virtual asset exchange market, only two platforms have obtained licenses from the Securities and Futures Commission, 11 have obtained the qualification for pending licensing, and another 11 applications have been returned, rejected, or withdrawn. It is reported that some exchanges have withdrawn because they cannot meet the commitment required by the Hong Kong Securities and Futures Commission not to have users from mainland China.

Industry insiders say that exchanges that withdraw their applications may reapply in the future by updating their legal entities or frameworks, but they may not be able to use brands similar to existing offshore exchanges. This approach aims to avoid public confusion regarding the compliance status of the exchange.

Legal experts point out that the compliance and operational costs of exchanges are relatively high, which is one of the reasons why many exchanges choose to withdraw their licenses. Currently, the Hong Kong virtual currency exchange market is not seen as an attractive business opportunity.

Members of the Legislative Council of Hong Kong also stated that the recent turmoil surrounding the licensing system has shaken market confidence in Hong Kong's development of Web3. He believes that the development policy for the virtual asset market in Hong Kong lacks comprehensive consideration, takes too long, and relies too heavily on traditional financial policies, lacking flexibility and innovation.

Therefore, how to effectively regulate non-licensed exchanges that are "transparent yet not retreating", and how to balance compliance and innovation in the future, will be key challenges faced by the Web3 industry in Hong Kong. Hong Kong regulatory authorities need to provide sufficient space and flexibility for industry development while protecting investor interests, in order to maintain its competitiveness as an international financial center.