Challenges abound if Binance seeks haven in Hong Kong amid US crackdown, analysts say
South China Morning Post
5 min read
Binance, the world's largest cryptocurrency exchange, might be in for an uphill battle if it was to seek shelter in Hong Kong in the face of a crackdown in the US, as the Asian financial hub lays out new licensing requirements this month for operators.
While establishing a legitimate foothold in Hong Kong could be beneficial to Binance, the firm may be deterred by the range of operational adjustments it must make to get licensed in the city, while charges brought by the US Securities and Exchange Commission (SEC) this week could create additional challenges, analysts said.
"Binance would be keen on establishing a meaningful presence in any market with a clear regulatory framework for crypto, and this is only accelerated by the pressure they're facing in the US," said Carlton Lai, head of blockchain and cryptocurrency research at Daiwa Capital Markets. "If Hong Kong's regime goes well, I would be surprised if Binance does not look into getting a [virtual asset service provider] licence."
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But an application "definitely won't be easy in the near term" for Binance, Lai said, noting that the SEC's lawsuit "could be a problem".
Crypto firms, including those with Chinese roots such as OKX and Huobi, are jockeying for a piece of the Hong Kong market, which recently rolled out new rules requiring centralised crypto exchanges to seek a licence to sell and market to the city's retail investors.
In contrast, Binance, which also started in China, has not publicly expressed interest in seeking a licence in the city despite CEO Zhao Changpeng's recent efforts to talk up Hong Kong's new regulatory regime for crypto and China's support for the Web3 sector.
"We welcome more regulatory clarity for the industry and we are reviewing the rules carefully and considering our options to best encourage adoption of cryptocurrencies, to support Hong Kong becoming a virtual asset hub whilst prioritising protecting our users," a Binance spokeswoman said earlier this week in response to a Post inquiry.
"We regularly review and update our compliance policies and procedures to ensure that we comply with the laws, regulations and compliance requirements of each jurisdiction."
The company declined to comment on whether it would apply for a Hong Kong virtual asset licence.
An advertisement for Bitcoin on a street in Hong Kong. Photo: AP photo alt=An advertisement for Bitcoin on a street in Hong Kong. Photo: AP photo>
Under Hong Kong's latest regulations that took effect on June 1, exchanges that already have a major presence in the city now have a one-year window to continue operations while they prepare to comply with the new rules or exit the market.
Those hoping to stay in the city will have to comply with a broad range of requirements covering areas including user onboarding, asset custody, cybersecurity and corporate governance. They also need to conduct due diligence on the crypto tokens they admit, and offer only those with large market capitalisations and high liquidity, according to Hong Kong's Securities and Futures Commission (SFC).
Such requirements may pose a unique challenge for a global entity as big as Binance, said Joey Garcia, head of legal and regulatory affairs at Xapo Bank.
"If the Binance group was regulated in Hong Kong, hypothetically, users would be subject to a different onboarding process and suitability assessment", even though users in the city can possibly use services offered by Binance's global-facing entities without being required to go through the same on-boarding exercise.
The logo of Binance.US is seen at a stand during the Bitcoin Conference 2022 in Miami Beach, Florida in April 2022. Photo: Reuters alt=The logo of Binance.US is seen at a stand during the Bitcoin Conference 2022 in Miami Beach, Florida in April 2022. Photo: Reuters>
Binance would also be restricted from using its existing global custody infrastructure and be required to establish another one in Hong Kong, which could introduce added complexity, Garcia said.
"This is not necessarily a negative, but it is significantly in excess of what the Binance group will need to comply with to be regulated in other jurisdictions around the world," he added.
For large global exchanges, getting licensed in Hong Kong does not necessarily make sense from a business perspective, according to Jason Ho, Asia Leader of FTI Capital Advisors.
"The last thing some of these companies want to do is come to Hong Kong, as they need to disclose and restrict some of the existing business, which is profit making," Ho said. "From a commercial risk perspective, they may want to just keep the status quo and not come here."
Visitors pose during Hong Kong Fintech Week 2022 in November 1. Photo: AFP alt=Visitors pose during Hong Kong Fintech Week 2022 in November 1. Photo: AFP>
Sean Lawrence, head of Asia-Pacific at crypto data provider Kaiko, also said several key elements of the Hong Kong licensing regime will present "an immediate challenge" to digital asset market participants in upgrading their operating models.
These include the requirement to have a fully staffed, incorporated entity in Hong Kong, the need for transparency around ultimate beneficial owners, and the requirement to pass the "fit and proper" test for key and senior employees.
"These are considerable challenges for traditional finance operations, let alone those operating in digital assets," Lawrence said.
He added that legal and regulatory problems overseas may complicate applications in Hong Kong, noting that the SFC stated in its conclusion paper last month that platform operators "should ensure that their operations are compliant with local laws and regulations in all jurisdictions where they or their affiliates operate, as any breach of those requirements would affect the fitness and properness of the platform operator to continue to provide services in Hong Kong".
"The enforcement proceedings in the US against Binance appear to be civil rather than criminal," said Padraig Walsh, a partner at law firm Tanner De Witt in Hong Kong. "But nonetheless, in the published claim, there are allegations there, even if it is just in relation to Binance.US, that would raise an eyebrow with any regulator of an affiliated business somewhere else."
