Is There a Need for a Third Exchange License in Hong Kong?

The Securities and Futures Commission (SFC) of Hong Kong is indeed committed to developing a digital asset center in Hong Kong. The SFC's proactive approach towards regulating and embracing digital assets is a significant step towards enhancing Hong Kong's role as a major financial hub. By providing clear regulatory guidelines and granting licenses to digital asset exchanges, the SFC is fostering a secure and regulated environment for digital asset trading. This not only attracts more institutional investors to the digital asset market but also strengthens investor confidence in digital assets. The SFC's initiatives are expected to further promote the growth and development of the digital asset industry in Hong Kong.

The SFC's decision to embrace crypto trading has enabled more licensed players in the Hong Kong scene. The recent approval of the Hong Kong Virtual Asset Exchange (HKVAX) as the third licensed crypto exchange in Hong Kong marks a significant step in Hong Kong's evolving crypto landscape. The journey to establish Hong Kong as a robust crypto and digital asset hub has been met with challenges, but the emergence of new players like HKVAX raises questions about the need for a third exchange license and the potential financial viability of another player in the market.

Overview of the current exchanges

HashKey Exchange is Hong Kong's first licensed retail virtual asset exchange. It provides a safe and reliable crypto trading platform for BTC, ETH, and other cryptocurrencies. HashKey Exchange is licensed by the Securities and Futures Commission of Hong Kong (SFC) with Type 1 (Dealing in securities) license & Type 7 (Providing automated trading services) license. It also holds a TCSP license (Certification No. TC006486).

OSL is a digital asset platform that provides regulated solutions for institutions, corporates, and professional investors. They are also granted Type 1 & 7 digital asset licenses by the SFC in Hong Kong. On August 3, 2023, OSL received an SFC license uplift, enabling retail investors to trade Bitcoin and Ethereum.

On the one hand, it could be argued that the existing two exchanges, HashKey Exchange and OSL, are already meeting the demand for crypto trading services in Hong Kong. These exchanges offer a wide range of features and services, including spot trading, margin trading, and derivatives trading. They also have a good reputation for security and compliance.

On the other hand, there are a number of factors that could suggest that there is still room for another exchange in Hong Kong. First, the crypto market is still growing rapidly, and there is a demand for more choice and competition among exchanges. Second, the existing exchanges are not without their critics. Some have accused them of being too restrictive in their trading policies, while others have raised concerns about their security practices.

Whether or not there is a need for a third exchange licence in Hong Kong is a matter of opinion. However, the approval of HKVAX suggests that the SFC believes that there is still room for growth in the crypto market in Hong Kong.

Is there enough room for growth?

The answer to this question depends on a number of factors, including the size of the crypto market in Hong Kong, the fees charged by exchanges, and the level of competition.

The crypto market in Hong Kong is still relatively small, but it is growing rapidly. In 2022, the total trading volume of cryptocurrencies in Hong Kong was estimated to be around $100 billion. This is expected to grow to over $200 billion by 2025.

The fees charged by exchanges vary, but they are typically around 0.1% to 0.2% of the trading volume. This means that an exchange with a trading volume of $100 billion would generate around $100 million in fees per year.

The fees are not the only determining factor. While the regulatory framework prioritizes consumer protection, it's important to consider whether the balance between safeguarding investors and fostering innovation is being adequately struck. The current regulatory limitations, such as the 12-month cooling-off period for token listings, restrictions on crypto derivatives, staking, airdrops, and the ban on stablecoins, appear to hinder the development of a comprehensive digital asset market. This would also mean that the exchanges will miss out the current hype and revenue from newly hyped-up tokens.

Is there enough liquidity depth for Hong Kong Dollar pair? That is another issue totally. The level of competition in the crypto exchange market in Hong Kong is also growing. In addition to the three licensed exchanges, there are a number of unlicensed exchanges operating in the city. This competition could drive down fees and make it more difficult for new entrants to make a profit.

Conclusion

Overall, it is difficult to say definitively whether or not there is enough money to be made for one more player in the crypto exchange market in Hong Kong. However, the factors discussed above suggest that there is a good possibility that a third exchange could be successful.

Maybe a final comment from my end is from an economic viability point of view. With the emergence of HKVAX as the third licensed exchange, questions arise about the potential profitability of additional players in the market. While having a competitive landscape can drive innovation and enhance user experience, it's essential to assess whether the existing demand for crypto trading services can sustain another entrant. The revenue potential, user base growth, and differentiated offerings are factors that should be considered before granting further licenses.

The approval of HKVAX as the third licensed crypto exchange in Hong Kong is a significant milestone for the city's crypto industry. It suggests that the SFC is committed to creating a favorable regulatory environment for crypto businesses. However, it remains to be seen whether there is enough demand and profit potential to support another exchange in Hong Kong.