Hong Kong Web3: 1 Year, 1 Card, 1 New Industry

Original author: Zhou Zhou, Foresight News

In the encrypted world of Hong Kong, there have recently appeared important new figures - the CEOs of Hong Kong's encrypted cryptocurrency exchanges that have emerged due to the new encryption policies in Hong Kong. They have taken charge of the first batch of cryptocurrency exchanges under the new Hong Kong regulations and are fully responsible for applying for Hong Kong's cryptocurrency licenses.

Foresight News has exclusively learned that Colin Zhong (HashKey Pro), Lennix Lai (OKX), Patrick Pan (BitgetX), Hugh Madden (OSL), Kevin (Gate) and other CEOs and executives of Hong Kong's cryptocurrency exchanges have taken office and are actively participating in major cryptocurrency activities in Hong Kong. However, the Hong Kong CEOs of exchanges such as Huobi, Bybit, BitMEX, and BitMart have not yet announced their candidates. Some are conducting internal selections, and some are conducting external recruitment. The final CEO candidates will be confirmed before the end of this year.

After interviewing the CEOs and current executives of several Hong Kong cryptocurrency exchanges, Foresight News has found that they all have extensive management experience in large financial institutions or Internet companies, have a high financial literacy, and have years of experience in investing in cryptocurrencies. For example, Kevin, the CEO of Gate Hong Kong, and Lennix Lai, the Chief Business Officer of OKX, both have over ten years of work experience in traditional financial institutions and years of experience in managing cryptocurrency exchanges. Before becoming the CEO of BitgetX, Patrick Pan was also the COO of a large cryptocurrency exchange and the CEO of Babytree, a listed company on the Hong Kong Stock Exchange. He has also held positions as Vice President of Beike Group and Senior Director of Alibaba Group and Vice President of 360 Group.

On June 1st, Hong Kong's new licensing system was introduced, which led to their emergence as the captains of the first batch of cryptocurrency exchanges in Hong Kong and even China under the regulatory environment. In the constantly changing global landscape, the center of gravity of global cryptocurrencies is gradually shifting towards Hong Kong, and the new CEOs of some Hong Kong cryptocurrency exchanges may thus take center stage in the encrypted world.

The New CEOs Active in Hong Kong

Met Lennix Lai, the Chief Business Officer of OKX Global, at a cocktail party held in April by OKX. He spoke fluent Hong Kong Mandarin and greeted the guests. The venue for the cocktail party was on D'aguilar Street in Causeway Bay, where many large cryptocurrency institutions were willing to hold events. There was a huge Bitcoin billboard about three meters long hanging on the street, and several cryptocurrency exchange counters were placed in the shops on the street corner, where people could freely exchange Bitcoin for Hong Kong dollars.

"Crypto Street" in Hong Kong | Foresight News Photo

Encountered Patrick Pan on an afternoon of June 20th, at the Cyberport Campus of the University of Hong Kong, where he gave a speech to the faculty and students as the CEO of BitgetX. Accompanied by him were Kong Jianping, a director of Cyberport, and Allen Zhang, the founder of Meitu. In many universities in Hong Kong, such as the University of Hong Kong, the Hong Kong University of Science and Technology, and the Chinese University of Hong Kong, there is a Web3 atmosphere, where students can easily connect with some big names and executives in the Web3 field and interact with them. When answering questions from faculty and students at the University of Hong Kong, Patrick said, "When computers and smartphones became popular, the Internet truly benefited the public. Blockchain and cryptocurrency are still in the early stages, and we are waiting for their smartphone moment."

University classrooms, cocktail parties, conference centers, Cyberport... like most Chinese Web3 entrepreneurs, these newly minted CEOs are actively engaged in Hong Kong, the new cryptocurrency center.

One notable phenomenon is that since October 2022, Foresight News has visited Hong Kong multiple times. Over the past eight months, waves of cryptocurrency frenzy have swept over practitioners in Hong Kong without stopping. After the continuous eight-month Web3 wave washed over this land of Hong Kong, it finally left a new patch of fine sand and hot land.

The emergence of new cryptocurrency exchanges and their leaders is an extremely important result and beginning of this change. This group of new CEOs stepping into the forefront of Hong Kong's cryptocurrency world has become the key role connecting the cryptocurrency world with the traditional financial world, and their organizations are forming a newly regulated industry in Hong Kong.

Foresight News statistics show that at least 10 institutions have announced applications for the Hong Kong VASP license. This license is currently the most comprehensive and substantial cryptocurrency license launched in Hong Kong. Among them are cryptocurrency institutions such as HashKey, OKX, Huobi, Bitget, BitMart, Bybit, BitMEX, OSL, and Gate, as well as traditional financial institutions like Yibo Financial. An insider revealed that internet brokerages like Tiger Brokers and Greenland Group are also highly interested in Hong Kong's cryptocurrency license. It is known that Tiger Brokers and Futu Securities have already applied for local cryptocurrency licenses in the United States and Singapore.

Among these ten institutions, there are already 5 CEOs and executives active in the cryptocurrency field in Hong Kong: HashKey Pro CEO Colin Zhong, OKX Chief Business Officer Lennix Lai, BitgetX CEO Patrick Pan, OSL CEO Hugh Madden, and Gate Hong Kong CEO Kevin. It is worth mentioning that most of them are locals from Hong Kong, with more than 10 years of experience in traditional financial institution management, and they are also the Responsible Officers (RO) required by Hong Kong's licensing regulations.

According to the requirements of the new licensing regime, these cryptocurrency exchanges without exception need to find two ROs. A practitioner in the Hong Kong cryptocurrency platform stated, "Each category of financial licenses requires a qualified RO to operate." The current CEOs of Hong Kong's cryptocurrency exchanges also hold RO positions.

"RO is a challenging problem, not something that can be solved by capital. RO needs trading experience, financial management experience, and must meet the requirements of the Securities and Futures Commission, as well as having a minimum number of years of experience." said Darin, the head of BitMart Hong Kong, to Foresight News. "Within the past 6 years, there must be at least 3 years of industry experience, which can be direct experience in operating virtual asset trading platforms or virtual asset-related experience with a No.1 or No. 7 RO license." ROs that meet these requirements are scarce.

The scarcity of ROs is a headache for many institutions applying for licenses in Hong Kong. This has led to a soaring salary for ROs and CEOs of Hong Kong exchanges. An anonymous source from a cryptocurrency exchange revealed to Foresight News that the annual salary for ROs is currently around 2 million Hong Kong dollars, while another unnamed individual from a Hong Kong cryptocurrency exchange stated it is above 3 million Hong Kong dollars.

Foresight News has learned that currently, different exchanges have different progress in obtaining VASP licenses. For example, OSL has 5 VASPs, OKX has more than two VASPs, and BitgetX currently has two VASPs: Patrick Pan (CEO) and Daniel Lai (CLO). The exchange also plans to recruit one VASP holding license No. 1 and one holding license No. 7. However, many other cryptocurrency exchanges either have no VASPs or only have one VASP, and they need to spend more costs to recruit qualified VASPs. It is reported that there are only a little over 100 qualified VASPs in Hong Kong.

Despite the scarcity of VASPs, the first batch of VASPs and CEOs in the Hong Kong cryptocurrency market are ready, and they are becoming key figures in connecting the crypto world with the traditional financial world. Hong Kong has taken action, and the SFC (Securities and Futures Commission of Hong Kong) has officially regulated the cryptocurrency industry and issued licenses. "This means that in Hong Kong, cryptocurrency exchanges are now part of the financial industry, just like stock exchanges, fund companies, and credit companies." said Darin, the Hong Kong representative of BitMart, a comprehensive cryptocurrency exchange. BitMart currently has about six or seven people based in Hong Kong, and they will continue to expand their team in Hong Kong in the future.

Kevin, the head of Gate, a large cryptocurrency exchange in Hong Kong, pointed out the potential financial opportunities brought by licensed operations in Hong Kong: "The over 7 million local users in Hong Kong are one aspect, and building a bridge for capital circulation between the vast compliant capital and cryptocurrency exchanges worldwide through Hong Kong's status as an international financial center is the significance of obtaining the license this time." "Hong Kong's cryptocurrency exchanges are not only targeting Hong Kong users, but also attract compliant capital from all over the world relying on Hong Kong's international financial center status," added Kevin in an interview with Foresight News.

Hong Kong's regulation of cryptocurrencies has sent an important signal to the capital market and the financial market: previously, capital that could not enter the cryptocurrency market due to lack of government regulation can now enter the encrypted market through Hong Kong, a financial center; traditional financial institutions that could not cooperate with cryptocurrency institutions can now collaborate with them. Hong Kong subsidiaries of state-owned enterprises such as China International Capital Corporation and Pacific Insurance have already begun to explore the cryptocurrency field, and this trend is happening globally.

Furthermore, there are already examples of cooperation between compliant cryptocurrency institutions and traditional financial institutions in some countries, such as Visa cryptocurrency debit cards, Bitcoin funds, tokenization of stocks, and cryptocurrency-denominated financial products.

Lennix Lai, Kevin, Colin Zhong, and other Hong Kong cryptocurrency exchange CEOs who have international experience in traditional financial institutions and cryptocurrency experience are naturally positioned to bring cryptocurrencies into compliance and introduce them to the traditional financial market. They are about to play a more active role in the financial center of Hong Kong.

Obtaining VASP license with 100 million

For the CEO of a Hong Kong encrypted exchange under the new license plate system, obtaining a VASP license is currently the most important task.

"Some asset management companies and banks have prepared HKD 100 million to HKD 200 million to apply for a Hong Kong VASP license." An industry insider told Foresight News. This is the "ticket" for traditional financial institutions to enter the cryptocurrency market. Due to the lack of previous layouts in traditional financial institutions, the costs are very high in terms of products, teams, and other aspects, starting from scratch. However, even for cryptocurrency institutions with rich experience, obtaining a license is not cheap.

The Hong Kong government has set up many barriers to screen high-quality cryptocurrency exchanges. For example, it is necessary to establish a physical office in Hong Kong, have at least two ROs (licensed cryptocurrency institution responsible persons) with several years of management experience in traditional financial institutions and cryptocurrency trading experience, have a certain number of cryptocurrency users and trading volume before June 1st, pass the TCSP license and obtain the 1st and 7th license plates, and operate for one year and obtain regulatory approval before obtaining the official license... This places relatively high requirements on the financial resources, experience, and time of institutions that want to obtain a license.

Cryptocurrency institutions aiming to apply for a VASP license already have a certain number of users and cryptocurrency trading volume, but most institutions have not disclosed specific data. As one of the earliest cryptocurrency exchanges to layout in Hong Kong, OKX revealed the latest data to Foresight News. As of June 27, 2023, the cumulative registered users of OKX in Hong Kong exceeded 8,800, and the total cryptocurrency trading volume reached 150 million USD.

BitMart revealed that its latest users in Hong Kong are around 300, and currently, the organization has 11,000 Hong Kong users on its global platform and has not yet migrated to the Hong Kong platform. "However, new users in Hong Kong can only apply on the new platform," Darin said.

At the University of Hong Kong, BitgetX CEO Patrick Pan talks about the global cryptocurrency exchange landscape｜Foresight News Photo

Due to their early layout, exchanges like OKX and Gate have already occupied a significant advantage in the Hong Kong market. "OKX's Hong Kong team has 500 people, of which about 60 people are specifically responsible for the license," said Lennix Lai, OKX's Chief Business Officer.

And this type of large cryptocurrency exchange also has a significant advantage in terms of cost because of its earlier international layout. "Products, risk control, and technology are all universally applicable to the entire platform, so most of the 500 people are actually employees of OKX globally," said Lennix Lai. "OKX's products will automatically adapt to different compliance entities such as Hong Kong and Singapore." According to Foresight News, platforms like Gate and BitMart also do the same, which will greatly reduce their costs.

However, even so, cryptocurrency exchanges wanting to apply for a VASP license also need to incur significant costs.

Darin, the head of BitMart's Hong Kong branch, has made a rough calculation: ""On top of having BitMart's global platform, applying for a VASP license requires HKD 20-50 million." According to Cobo COO Lily's disclosure to Interface News: "The annual operating cost may be around HKD 20 million, and the initial cost may be between HKD 30-40 million." For institutions without previous cryptocurrency-related businesses, an initial investment of HKD 100 million is not considered excessive.

The CEOs of Hong Kong's cryptocurrency exchanges need to achieve the goal of obtaining the Hong Kong VASP license within a limited time and budget.

1 Year, 1 License, 1 New Industry

How long does it take for a new industry to emerge? Hong Kong hopes that the deadline is one year.

June 1, 2023, to June 1, 2024, will be this crucial year. During this year, the Securities and Futures Commission of Hong Kong will examine whether the cryptocurrency exchanges meet their requirements. An estimated 5-10 companies are expected to obtain VASP licenses, becoming the first batch of cryptocurrency exchanges regulated by the Securities and Futures Commission in Hong Kong. A new industry, the Hong Kong cryptocurrency industry, will be preliminarily established.

The heads of cryptocurrency exchanges like OKX, Gate, and BitMart told Foresight News: "It is expected that the first batch of companies will obtain VASP licenses in early 2024 and become compliant cryptocurrency exchanges in Hong Kong." And as for the specific number of companies in the first batch, Lennix Lai predicts that there will be fewer than 10 companies that meet the requirements of the Securities and Futures Commission.

Of course, this is just the beginning. More members will appear in this industry ecosystem besides cryptocurrency exchanges: stablecoin companies, NFT startups, cryptocurrency professional investment institutions, cryptocurrency departments of financial institutions... And Hong Kong has also explicitly stated that it will regulate stablecoins in the second half of 2024. This new industry is not just about cryptocurrency exchanges. Cryptocurrency exchanges are just the beginning. Hong Kong hopes to form a new industry ecosystem - the cryptocurrency ecosystem.

Whether the cryptocurrency ecosystem in Hong Kong can be established well, the first key point lies in the selection and regulation of cryptocurrency exchanges in Hong Kong. In any region, as long as an FTX-like event occurs, the entire local cryptocurrency ecosystem will suffer a great blow, just like in the United States and Singapore.

For this, in this year, Hong Kong has set multiple time points and numerous barriers for cryptocurrency exchanges. Darin has divided the application for a VASP license into three stages.

The first stage is before June 1, 2023. Exchanges intending to apply for a license in Hong Kong must have substantial cryptocurrency trading platform operations. At this time, Hong Kong cryptocurrency exchanges need to find reliable consulting law firms and establish platforms with a certain number of users and trading volume. Darin said, "BitMart started testing in mid-April, such as KYC, AML, and in late May, users were allowed to start using the platform." As for finding a consulting law firm, Darin's suggestion is to find a firm that has previous SFC background.

In this stage, Hong Kong cryptocurrency exchanges have also basically found offices. For example, BitgetX's offices are located in Tsim Sha Tsui, and BitMart has offices in Tsuen Wan, Cyberport, and K11. Foresight News learned that setting up offices in different locations serves different purposes. For example, setting up an office in Cyberport is because it is relatively remote from the city center and has a greater role in connecting the government and industry resources.

Cyberport Campus of the University of Hong Kong, Meitu founder Cai Wensheng giving lectures | Foresight News photo

The second stage is from June 1, 2023, to March 1, 2024, which is the critical time to obtain the VASP license. During this period, the company's two ROs and the actual leader or CEO should also be determined.

During this period, the cryptocurrency exchange has obtained the Hong Kong TCSP license and established a trust company with No.1 and No.7 licenses.

Regarding the TCSP license, some institutions have prepared early. For example, Huobi Trust, a subsidiary of Huobi Technology (formerly Huobi), obtained the Hong Kong TCSP license in January 2022, and Gate also obtained the TCSP license in February 2022. By obtaining the TCSP license and establishing a wholly-owned trust subsidiary, users' cryptocurrency assets can be placed in the trust company, which facilitates regulatory agencies to conduct fund inspections and to some extent, can prevent the frequent occurrence of misappropriation of customer funds in the cryptocurrency industry.

Previously, the second largest cryptocurrency exchange FTX misappropriated customer funds and eventually went bankrupt. This event directly led to the severe crackdown on the cryptocurrency market in the United States, making the entire US cryptocurrency market bleak for a whole year. Singapore, also due to the FTX incident, had to slow down its active embrace of cryptocurrency.

On the other hand, cryptocurrency companies also need to engage third-party auditing firms to audit their user data and financial data, and submit them to the SFC regulatory agency. Foresight News understands that OKX has already reached this step, and their relevant financial data is being audited by Deloitte.

In the third phase, from March 2024 to June 2024, the first batch of cryptocurrency exchanges in Hong Kong may be born.

"Before March 2024, auditing firms basically need to audit the relevant data according to SFC standards and requirements. Exchanges that are willing to operate with licenses in Hong Kong need to submit application forms, which include the establishment time of their office, the operation of the Hong Kong station, employee situations, internal compliance and risk control, and other security measures such as investor fund security. After submission, the SFC will have a need for evaluation and review. After completing the inspection, it will probably announce a batch of exchanges that can obtain licenses by the end of May 2024," said Darin.

In this process, cryptocurrency exchanges need to make adjustments to the corresponding areas according to the requirements of the SFC. If the first batch is not successful, the next time they can obtain a license may be several years later.

"First obtain a deemed license, and then obtain a formal license. Regulatory agencies like the SFC may hope to improve some details of exchange management through this process," Darin said.

During this year, for a cryptocurrency exchange to obtain a VASP license, it needs to collaborate with various types of institutions, including law firms, third-party financial audit firms, technology audit companies, recruitment agencies for RO, and the SFC. These are all steps that need to be experienced to obtain the license.

Final thoughts

The Hong Kong financial industry has finally welcomed a new member—a licensed (VASP license) cryptocurrency exchange and its up-and-coming CEOs. It has also welcomed a growing new industry—the cryptocurrency industry.

Having a VASP license not only means that institutions can legally provide cryptocurrency trading services to residents in Hong Kong, but also means that cryptocurrency companies, like other financial institutions regulated by the Hong Kong Securities and Futures Commission, have officially become part of the Hong Kong financial industry. This represents a possibility that was previously unimaginable.

Cryptocurrency is still a highly risky industry, with crises lurking everywhere, as seen in the incidents of Mentougou, Luna, FTX, Three Arrows Capital, and others. These destructive events are bound to continue to occur in the foreseeable future. However, once a technological or financial trend takes shape, it becomes like a living entity that is difficult to suppress, unaffected by human will. The choice is only between passive acceptance and proactive selection. Hong Kong has undoubtedly become the latter.

This time, the world once again turns its attention to Hong Kong, to this city that is striving to become the center of cryptocurrency. The emerging industry formed by this city will be an important example for global financial markets to study or learn from in the future.