Hong Kong’s push to become a digital-asset hub is facing challenges as uncertainty grows over whether 11 cryptocurrency exchanges will successfully obtain full licenses. These firms had received initial approvals earlier this year.

The Securities and Futures Commission (SFC) of Hong Kong found several issues at some of the “deemed-to-be-licensed” platforms during inspections conducted since June, according to sources familiar with the matter. These individuals requested anonymity due to the private nature of the information.

SFC Inspections Reveal Concerns

The concerns identified during the inspections vary. Some crypto companies are overly dependent on a few executives to manage client asset custody. Others have been criticized for failing to adequately protect against cybercrime risks.

The specific firms that fell short of the SFC's standards were not disclosed. The inspections are ongoing, and the situation remains subject to change, the sources noted.

The 11 platforms currently holding provisional status include international entities such as Crypto.com and Bullish, as well as Hong Kong-based exchanges like HKbitEX, PantherTrade, Accumulus, DFX Labs, Bixin.com, EX.IO, YAX, WhaleFin, and Matrixport HK. Crypto.com declined to comment on the inspections, while other exchanges did not respond to inquiries from Bloomberg News.

Crypto Exchanges Face Revocation

A spokesperson for the SFC stated that the agency does not comment on individual cases. However, the spokesperson emphasized that the inspections were intended to determine if the exchanges are complying with the regulatory requirements.

The focus was primarily on the safeguarding of client assets and the implementation of know-your-client (KYC) processes.

The spokesperson also noted that for platforms unable to address critical deficiencies identified during these inspections, the SFC may revoke their provisional licenses or reject their full license applications.

Full Licenses Expected 2024

The exchanges currently under review are not permitted to onboard new clients until they obtain full licenses. If their applications are rejected, they will need to start the submission process again from the beginning.

Full licenses are expected to be issued by the end of 2024 for firms that meet all regulatory requirements, according to SFC Chief Executive Officer Julia Leung. As of now, only two crypto platforms, OSL and HashKey, hold full licenses in Hong Kong.

Exchanges that were operational before the licensing regime was implemented were allowed to continue operating while applying for a license. However, those that did not apply were required to exit the market by the end of May.

So far, 12 companies have withdrawn their applications from the licensing process. These include names like Huobi HK, OKX, Bybit, and VAEX.