As titans gird for battle over institutional crypto trading in Hong Kong, one startup is attempting to break through on the strength of its backers’ expertise, rather than any existing franchise.
That company is Hong Kong Digital Asset EX Limited, or as its founders are branding it, HKbitEX.
If that sounds like the incumbent HKEX with a digital insertion, that’s because the founders come from Hong Kong Exchanges and Clearing.
It’s possible they are building their crypto trading venue in order to attract the attention of their former employer.
The experience
Gao Han, HKbitEX founder and chairman (pictured), was previously a manager on HKEX’x China team, where he played a role in tech builds including its “China connect” programs for stocks and bonds.
The connect programs are currently the focus of HKEX’s project to build a blockchain-based platform to process trades.
We’ve built something that is institutional grade
Gao Han, HKbitEX
He was also a proprietary trader at China Investment Corporation and at Goldman Sachs in New York, as well as CEO of Sinolink Securities (H.K.).
His partner is Zuo Tao, who is head of cyber security. Zuo was previously a managing director at HKEX and head of its mainland-based technology company, as well as a member of the technical committee at China Securities Depository and Clearing. Zuo previously had data and I.T. architecture roles at Dalian Commodity Exchange and CME Group.
The ambition
Their backgrounds are central to measuring the ambitions and potential of HKbitEX. They are leveraging their exchange, data, and China experience to create a crypto trading venue. They intend to apply for a type-7 license from the Securities and Futures Commission.
“We’ve built something that is institutional grade,” Gao said. Such a business must be a market operator, enforce regulations, and make a profit. “This requires talented people with experience in regulated exchanges like HKEX, or from institutional investors.”
The business now has about 20 employees in Hong Kong plus a team of programmers in Shenzhen, with more hires planned.
Serving institutional investors and wealthy individuals means ensuring digital currencies and assets on blockchain protocols are safe and secure, even in the event of a protocol fork.
“We’re like a RegTech company,” Zuo said. “We need to be resilient.”
They will be competing for institutional flow against BC Group, now backed by Fidelity. DigFin has also opined, based on discussions with industry players, that HKEX itself is expected to extend its reach into digital assets.
This is large-scale competition among global financial institutions. How will HKbitEX compete as a startup with no existing business? (Hashkey, another blockchain-based tech company, is also expected to bid for a license.)
The playing field
Gao and Zuo’s bid dates back to 2018, when they tried to build a blockchain-based market at HKEX for private companies. This was part of a broader innovation effort that included allowing dual-class share listings on the main board and creating a secondary board for biotech and other “new economy” companies.
Those other efforts were achieved but the private-market idea was dropped because it wasn’t seen as a revenue generator by HKEX senior executives. Nor was the exchange prepared to take a bet on an unproven technology.
The attempt whetted Gao and Zuo’s appetite to do something, however. They teamed up in April 2019 after the SFC had announced its intention to create a pathway to regulation for digital asset operators. They embarked on a funding round. The founders say Tim Draper Fund is among their backers (DigFin couldn’t verify this).
We’re like a RegTech company
Zuo Tao, HKbitEX
DigFin wanted to know how they viewed their effort vis-à-vis their former employer. The founders weren’t prepared to comment directly. They note that HKEX is extending its reach into different areas of digital finance. In addition to its internal blockchain program, it has taken a stake in a virtual bank: Fusion Bank, a joint venture including Tencent and ICBC.
HKEX lacks such a footprint in the crypto world. It would be forced to separate it from its main business. It is expected to enter the digital-asset space but it may not be in a hurry, and reluctant to finance a fresh build.
The strategy
The strategy for HKbitEX is therefore to build now, secure a license, and keep the lines of communication with HKEX open. It could of course look to partner elsewhere, particularly if HKEX decides to pursue digital assets by itself.
But it looks to DigFin like part of the business rationale is to create the licensed machinery in a way that it could readily partner with HKEX or be acquired. This appearance alone may be enough to convince institutional investors to trade with HKbitEX.
First the business needs to launch. The founders say the core matching-engine and clearing tech is ready. They are in talks with vendors for the ancillary functions such as market surveillance, banking services, and compliance for anti-money laundering and KYC regulations. It is also looking to secure a Big Four accountant for auditing, and is in talks with a European insurer to cover cyber and business continuity risks as well as protecting the digital assets under the exchange’s custody.
They didn’t say when they might go live. The founders need to demonstrate a track record but are also keeping an eye on the SFC’s timetable for announcing the first batch of licenses – which could be as soon as the end of the year.
“The SFC wants to see an exchange that is headquartered in Hong Kong, with a real address, a real business, and systems and procedures ready,” Zuo said.
