web3dom #26 - In the Post-FTX Era: Licensed Hong Kong Exchange Hashkey Test Drive

CC-BY momo

Ever since the Hong Kong government clarified its policy on regulating the blockchain industry last year, after over a year of development, licensed exchanges and virtual asset fund managers have started operating one after another. Although I advocate for decentralization, I understand that exchanges are an essential part of promoting the adoption of cryptocurrencies. Therefore, I specifically registered and tested two new-generation blockchain enterprises based in Hong Kong: Hashkey Exchange and RedotPay VISA credit card, to share my experience, in line with the Hong Kong government's policy of 'telling good stories of Hong Kong.'

Exchanges serve as a bridge between the traditional financial system and blockchain, and it's crucial to manage elements like deposits, withdrawals, trading, and custody effectively. I advocate for quick withdrawal after trading and learning to manage assets independently. Therefore, the designed testing steps mainly involved deposits, trading, and withdrawals:

1. Registering at Hashkey Exchange

2. Deposit: Transfer money from a bank to Hashkey

3. Trading: Purchase USDC at Hashkey

4. Applying for a RedotPay VISA credit card

5. Withdrawal: Transfer USDC from Hashkey to RedotPay

6. Spending: Using the RedotPay VISA card

Although I couldn't complete the above process in the system, from deposit to withdrawal, the overall experience was quite smooth, just one step away from closing the loop. Due to space constraints, this issue will only introduce the first part: the registration, deposit, trading, and withdrawal experience at Hashkey Exchange.

Hashkey is currently one of the two licensed virtual asset trading platforms in Hong Kong, granted a Type 1 securities trading license and a Type 7 automated trading service license by the Securities and Futures Commission (SFC), commonly known as license 1 and 7. They are also authorized to expand their license scope to conduct retail business, offering limited services to retail investors (i.e., broke-asses) with assets less than 8 million Hong Kong dollars. While I disagree with the logic that wealth equates to expertise, the practice of defining 'professional investors' with assets over 8 million Hong Kong dollars for advanced services is, frankly speaking, a common international approach, and a step forward in compromise.

The other licensed exchange, OSL, has not yet officially launched its services to the public. After the JPEX incident, the SFC originally intended to keep the applications confidential but decided to increase transparency and disclose them. Among the other five applications being processed, there are no familiar names to users. With the ongoing sanctions between China and the US, US-based exchanges like Coinbase, Kraken, Gemini, will almost certainly not apply for a license in Hong Kong. Similarly, Taiwanese exchanges such as MAX, XREX, etc., are unlikely to apply for a Hong Kong license to avoid handing over user data and scaring off their local market users.

Mainland China-based exchanges like Huobi, OKX, and Justin Sun's acquired Poloniex, which barely managed to 'escape', are unlikely to 'return' easily, and hence, may not be willing to disclose information to the Hong Kong government. Even if they apply for a Hong Kong license in the future, it is believed they will use a 'Outlaw Doppelgänger Technique' with a new company and brand, separate from their existing businesses. Among the potential applicants, DBS Bank is the most promising because traditional banks supporting cryptocurrencies would allow existing customers to directly purchase assets like Bitcoin, having a profound impact.

According to information released by Hashkey, customer assets are stored separately from the group's assets, with 98% in cold storage and 2% in hot wallets. The external audit is handled by KPMG, group internal audit by PwC, and code audit by EY, with insurance coverage by Aon. Frankly, as an institutional exchange, this is a commendable effort and provides considerable assurance. However, this is not a sponsored piece, and no amount of regulation would make me encourage readers to entrust their cryptocurrency, as 'not your keys, not your coins' is the mantra. Assets should be withdrawn after trading and stored in personal wallets.

As for the most concerning issue for Chinese users, Hashkey only accepts users who have obtained a Hong Kong ID and are not using a mainland IP address, obviously to prevent capital outflow. Given the low threshold for mainland citizens to obtain a Hong Kong ID, I am not worried about potential user numbers for Hashkey, but I can't imagine why any Chinese users would want to use such an exchange.

Perhaps due to guarding against VPN users, Hashkey is very sensitive to VPNs. I usually have my VPN on and during the testing process, Hashkey alerted me twice, asking me to turn off my VPN and even to explain why I was using it. In my 6 years of experience using exchanges, this is the first time I've encountered such a request.

The process of registering an account and completing the Know Your Customer verification (KYC) with Hashkey was seamless and could be completed in a few minutes. I hope Hashkey's boss won't be mad at me for saying it's as smooth as my experience with JPEX.

A highlight is the deposit process. Hashkey collaborates with Standard Chartered Bank, making deposits a simple local bank transfer for users with Hong Kong bank accounts, with no fees and instant crediting – it's straightforward. As expected, the surprise was that Standard Chartered Bank provides each user with a 'virtual account', allowing the platform to identify asset ownership just by the account number, avoiding the hassle and risk of lost assets due to missing or forgotten notes. I only tested depositing HKD $10,000 to meet the bank certification criteria. The amount was within the daily limit for Faster Payment System (FPS), making the operation even simpler. From making the payment to Hashkey showing the credited amount, it took less than 30 seconds – undoubtedly the smoothest deposit experience I've had; although I personally no longer have a need to make deposits (no money to deposit), I'm still happy for Hong Kong users.

I have always advised readers to avoid using their regular bank accounts for deposits, especially never to use accounts linked to building mortgages. If the bank were to freeze your account – a scenario more likely than one in ten thousand – the aftermath would be extensive and troublesome. Times change, and although the Hong Kong government's stance on cryptocurrencies has done a 180-degree turn, even publicly urging banks to accommodate web3 industry accounts, my advice remains unchanged. I advocate for separating bank accounts involved in cryptocurrency transactions from those used for everyday purposes. This is not because cryptocurrencies are necessarily shady or illegal, but because many banks have prejudices against them, and their AI systems for detecting high-risk accounts are also biased. The mere fact that the government needs to use persuasive tactics for banks to cooperate with the business sector in opening accounts shows that banks are not becoming more welcoming to blockchain users due to new policies.

Furthermore, banks don’t freeze your assets. They can close your account without having to prove any wrongdoing, preferring to lose a customer rather than serve cryptocurrency users. 'A wise man does not stand beneath a crumbling wall.' Since the licensing of virtual banks, opening new bank accounts has become much simpler. Even traditional banks, facing competition, have largely abolished minimum deposit requirements. It might be wise to open one or two additional bank accounts, not only for the purpose of making deposits and withdrawals but also to have them available for unforeseen needs.

According to the test plan, I was supposed to buy USDC with Hong Kong dollars and then spend it using the RedotPay VISA credit card. However, I discovered that buying stablecoins is a privilege reserved for professional investors. Broke-ass users with less than 8 million Hong Kong dollars in assets can only buy Bitcoin and Ethereum with Hong Kong and US dollars. I understand the conservative approach of taking things step by step, but I can't comprehend why the risk of stablecoins is considered higher than Bitcoin. Like other incomprehensible and disagreeable laws, there's nothing to do but accept them. I had no intention of FOMOing into Bitcoin during its recent surge, but for testing purposes, I exchanged 10,000 HKD for Bitcoin at the market price. A system alert then popped up, warning me of the risk of having 99.99% of my assets in Bitcoin – an over-concentration. This kind of well-intentioned warning is something I've never encountered before. After confirming, the transaction was completed, and I received 0.0361 BTC.

Speaking of well-intentioned advice, Hashkey even thoughtfully sends asset reports via email every day. Given that cryptocurrency markets can fluctuate by tens of percent in a single day, those who find these reports excessive can filter out the emails. But if used wisely, these daily reports are quite valuable, whether for frequent checks or post-analysis.

About 15 minutes after buying Bitcoin, I sold all 0.0361 BTC for 9,987 HKD, resulting in a 0.13% loss. Then, I withdrew the full amount back to my original bank account. The withdrawal fee was 5 HKD, and the amount was credited within 3 minutes, which was very convenient. I'm not sure about the efficiency of using foreign bank accounts for deposits and withdrawals, but for me, using a Hong Kong bank account, this was the fastest and smoothest withdrawal process I've experienced.

Last year, the Hong Kong government made a dramatic turn and suddenly started promoting blockchain technology. At the end of October, it released a 'Government issues Policy Statement on development of Virtual Assets in Hong Kong', declaring its ambition to transform Hong Kong into a 'Virtual Asset Management Center'. As these words are still fresh, the bankruptcy of FTX caused a huge uproar, plunging the entire cryptocurrency market into a winter. It seemed like a setback for the Hong Kong government, but in reality, bear markets are not only ideal for investors to stock up and entrepreneurs to develop but also more favorable for the government to issue licenses. The Hong Kong government was once again fortunate, as its policy was launched during a bear market, providing ample time to draft detailed rules, open applications, and review licenses. By the time the licensed companies started operating, the market had entered a bull phase, making their business much more effective.

Furthermore, at the same time, the U.S. Securities and Exchange Commission (SEC) has become increasingly hostile towards the blockchain industry, not only rejecting multiple BTC and ETH ETF applications but also suing numerous cryptocurrency projects and exchanges. They even targeted Coinbase, which adheres strictly to regulations. Users of Coinbase in Taiwan and Hong Kong were notified to close their accounts, likely due to regulatory pressure. I'm unsure what protection these regulatory measures offer to investors, but one thing is certain: the SEC's heavy-handed approach is inadvertently helping its competitors, pushing users and even the industry towards Hong Kong.

If you're interested in using a licensed exchange regulated by the Hong Kong government and are not concerned about your data being handed over to China, you can use my invitation code 0Sli3q to register with Hashkey. After your first transaction, both of us will receive 60 HSK platform coins. However, don't be tempted by small benefits and decide whether to register based on your needs.

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