The East-West Competition in Location Selection for Global Cryptocurrency Enterprises (III): Headquarters Siting of Centralized Cryptocurrency Exchanges
TechFlow Selected TechFlow Selected
The East-West Competition in Location Selection for Global Cryptocurrency Enterprises (III): Headquarters Siting of Centralized Cryptocurrency Exchanges
This article will continue to explore the location selection of centralized cryptocurrency exchanges from a tax perspective.
Navigating Web3 tides with focused insightsAuthor: Ray
1. Introduction
In previous articles, we conducted a preliminary analysis of the financial environments and tax policies in Hong Kong and Singapore, discussing the advantages and disadvantages for mining enterprises establishing operations in these two locations. In this article, we continue our exploration from a taxation perspective, focusing on the location selection for centralized cryptocurrency exchanges (CEX). A centralized cryptocurrency exchange is a digital platform or marketplace where users can buy, sell, and trade various cryptocurrencies—examples include Coinbase and Binance. Unlike decentralized exchanges, the term "centralized" indicates that there exists a central authority or entity managing the exchange, giving operators control over users' funds and transactions. According to data from Coincarp and CoinMarketCap, all of the current top fifteen cryptocurrency exchanges are centralized, with several—including Binance, Bybit, OKX, Gate.io, Kucoin, HTX, MEXC, and Bitget—having Eastern origins. Notably, multiple such exchanges either are or were registered in Singapore, including Kucoin, MEXC, and Bitget. Even exchanges like OKX and Gate.io, which have relocated their registrations to jurisdictions such as Malta or the Cayman Islands, still maintain subsidiaries or Asia headquarters in Hong Kong and Singapore. This demonstrates that Hong Kong and Singapore serve as primary registration hubs for centralized cryptocurrency exchanges in Asia. Beyond their openness toward cryptocurrencies, we aim to explore the institutional and economic reasons behind this trend through the lens of regulatory and tax policies.
2. Main Revenue Streams of Centralized Cryptocurrency Exchanges
Unlike mining enterprises, centralized cryptocurrency exchanges engage in more diverse business activities and possess broader revenue sources. Currently, the main revenue streams of centralized cryptocurrency exchanges include:
(1) Transaction fee income. Centralized exchanges charge fees during user trading processes, including maker fees, taker fees, and withdrawal fees.
(2) Listing fees. A listing fee refers to the charge imposed by an exchange on a project team before launching its token. While exchanges do not always collect listing fees—and amounts vary significantly—the total revenue generated from new projects emerging constantly remains substantial.
(3) Lending income. Beyond providing intermediary services such as trade matching, centralized exchanges also conduct financial operations like lending. For example, in leveraged trading, exchanges may lend out users’ funds deposited for wealth management products, earning interest spreads.
(4) Advertising and sponsorship income. Given their large user traffic, centralized exchanges can generate significant revenue by offering advertising space or accepting sponsorships.
(5) Cryptocurrency issuance and appreciation gains. The cost of issuing tokens on-chain is relatively low, so many exchanges issue proprietary tokens—such as BNB by Binance and OKB by OKX. Initial coin offerings (ICOs) thus constitute an important source of income. Additionally, exchanges often hold certain cryptocurrencies as reserve or investment assets. When these appreciate in value and are later sold, they yield considerable profits.
(6) Direct trading income. Some exchanges may directly participate in leveraged and perpetual contract trading, and even engage in strategic trades against specific counterparties using back-end data. Due to users’ disadvantages in capital and information compared to exchanges, operators can profit substantially. Of course, such practices carry serious ethical and legal risks; however, due to difficulties in evidence collection and inadequate regulation, these behaviors remain largely unchecked and have become key revenue sources for some mid-sized and small exchanges.
The diversified revenue streams of centralized cryptocurrency exchanges pose challenges to regulatory and tax systems. Both Singapore and Hong Kong have responded with targeted regulations and incorporated relevant earnings into existing tax frameworks, which will be analyzed in detail below.
3. Regulatory and Tax Policies in Singapore for Centralized Cryptocurrency Exchanges
3.1 Regulatory Framework in Singapore
Before detailing the applicable regulatory and tax policies, it is essential to briefly explain how the Monetary Authority of Singapore (MAS) classifies cryptocurrencies, as this classification directly affects the scope of regulation applied to centralized exchanges.
According to MAS, cryptocurrencies are categorized into three types: utility tokens, security tokens, and payment tokens. Utility tokens refer to tokens redeemable for specific goods or services; security tokens are used for fundraising or initial coin offerings (ICOs); payment tokens include any cryptocurrency usable for payments. In practice, these categories often overlap within a single token.
In Singapore, utility tokens currently lack dedicated legislation. Security tokens and payment tokens are regulated under two primary laws: the Payment Services Act (PSA) and the Guide to Digital Token Offerings. Under the PSA, financial institutions dealing with payment tokens must obtain licenses. Among the four types of institutions eligible to apply for payment token operations, approved exchanges face the strictest regulatory requirements regarding cryptocurrency derivatives. With the passage of the Financial Services and Markets Bill, activities involving direct or indirect trading, exchange, transfer, custody of cryptocurrencies, and related investment advice have been brought under supervision.
Specifically, under the PSA, centralized cryptocurrency exchanges in Singapore primarily engage in Account Issuance Service (Type A), Cross-border Money Transfer Service (Type C), and Digital Payment Token Service (Type F), requiring them to apply for either a Standard Payment Institution (SPI) license or a Major Payment Institution (MPI) license based on transaction volume. It should be noted that licensed exchanges are currently restricted to spot trading only and are prohibited from conducting derivatives trading or securities-related token businesses. These limitations significantly impact the revenue potential of centralized exchanges operating in Singapore. Furthermore, under the Guide to Digital Token Offerings, fundraising via cryptocurrencies falls under securities regulations.
3.2 Tax Policy in Singapore
Singapore’s tax system is relatively simple. The main taxes relevant to centralized cryptocurrency exchanges are Corporate Income Tax (CIT) and Goods and Services Tax (GST).
3.2.1 Corporate Income Tax
Singapore applies a territorial principle to corporate income tax: income derived in Singapore or received in Singapore from abroad is subject to CIT unless otherwise specified. Since centralized cryptocurrency exchanges operate globally, income sourced from various countries constitutes taxable income.
The standard CIT rate in Singapore is 17%. For normal taxable income, the first 10,000 SGD enjoys a 75% tax exemption; the portion from 10,001 to 200,000 SGD receives a 50% exemption; remaining income is taxed at 17%. However, interest income is taxed at 15%. Notably, Singapore offers a “Headquarters Programme,” which benefits companies registered or established in Singapore that provide regional or global headquarters services. Qualifying enterprises may enjoy tax exemptions or preferential rates of 5% or 10%. For centralized exchanges aiming to expand into Asian markets, registering a regional headquarters in Singapore could offer significant tax advantages.
A key feature of Singapore’s corporate tax system is the non-taxation of capital gains. Generally, a Singapore-registered exchange selling held cryptocurrencies does not incur corporate income tax. However, lending income remains within the scope of CIT. Regarding ICO proceeds, if the issued token qualifies as a security token, the income resembles IPO proceeds and is considered capital gain, thus exempt from taxation. Conversely, dividend-like income derived from holding security tokens remains taxable. Importantly, exchanges must demonstrate that their intent in holding cryptocurrencies is investment rather than trade to qualify for capital gains exemption. Given that ICOs or cryptocurrency sales are typically not core revenue sources for centralized exchanges, this tax exemption offers limited direct benefit.
3.2.2 Goods and Services Tax
GST applies to taxpayers who are registered or required to register for GST. Cryptocurrencies are treated as goods, while financial services such as lending are considered taxable supplies. The scope of GST includes (1) taxable goods produced and taxable services provided in the course of business; and (2) goods imported into Singapore. Therefore, exchange revenues—including trading fees, listing fees, lending income, advertising and sponsorship income, and cryptocurrency trading gains—are generally subject to GST.
Additionally, according to IRAS's 2019 e-Tax Guide: GST: Digital Payment Tokens, transactions involving payment tokens are exempt from GST. The standard GST rate has gradually increased from 7% to 9%. Compared to similar taxes in other countries, 9% is relatively low. Combined with the exemption for payment token transactions, GST imposes minimal actual tax burden on centralized exchanges and end taxpayers.
3.3 Other Tax Considerations
Beyond domestic tax rules, given that centralized exchanges operate globally and may establish permanent establishments in multiple jurisdictions, weak foreign tax credit provisions could result in excessive tax burdens. As of early 2024, Singapore has signed bilateral tax treaties with over 80 countries or regions, helping Singapore-registered exchanges avoid double taxation and reduce overall tax liability. However, no such treaty exists between Singapore and the United States.
4. Regulatory and Tax Policies in Hong Kong for Centralized Cryptocurrency Exchanges
4.1 Regulatory Framework in Hong Kong
The Securities and Futures Commission (SFC) is the primary regulator for cryptocurrencies in Hong Kong, with coordination from the Hong Kong Monetary Authority and the Insurance Authority. In Hong Kong, cryptocurrencies are classified into three categories: security tokens, utility tokens, and virtual commodities. Different levels of regulation apply accordingly. Clear regulatory requirements exist for security tokens, as outlined in documents such as the Statement on Regulatory Framework for Managers of Portfolios Investing in Virtual Assets, the Position Paper on Regulation of Virtual Asset Trading Platforms, and the Consultation Conclusions on Proposed Regulatory Standards for Virtual Asset Trading Platform Operators licensed by the SFC. Regulations concerning stablecoins and other cryptocurrencies have also improved following the release of the Conclusion of Discussion Paper on Crypto-assets and Stablecoins. However, prior to the official promulgation of stablecoin regulations, exchanges are prohibited from offering retail trading services for stablecoins, and algorithmic stablecoins are not recognized—posing significant challenges to the stablecoin operations of exchanges registered in Hong Kong.
Overall, Hong Kong emphasizes investor protection, and its regulation of centralized exchanges is becoming increasingly stringent. Before June 2023, Hong Kong operated a voluntary licensing regime, meaning exchanges dealing solely in non-security tokens did not require a license. However, with increasing retail participation and the proliferation of non-security tokens, Hong Kong implemented a mandatory licensing regime starting June 2023: all virtual asset trading platforms operating in Hong Kong or marketing to Hong Kong investors must obtain an SFC license and be subject to oversight.
Currently, centralized exchanges may need to obtain three types of licenses: under the Securities and Futures Ordinance, trading in security tokens requires Type 1 (Dealing in Securities) and Type 7 (Providing Automated Trading Services) licenses; under the Anti-Money Laundering Ordinance, trading in non-security tokens requires a VASP (Virtual Asset Service Provider) license. Nevertheless, security-linked virtual assets remain the primary trading category for centralized exchanges in Hong Kong. Moreover, per the Consultation Conclusions, exchanges must conduct due diligence for each individual token listing and cannot grant blanket exemptions by token type, ensuring sufficient liquidity for listed cryptocurrencies.
4.2 Tax Policy in Hong Kong
4.2.1 Profits Tax (Income Tax)
Hong Kong’s profits tax system is characterized by the territorial source concept: tax residency status is not decisive; instead, whether profits arise from Hong Kong determines tax liability. Profits sourced outside Hong Kong are not subject to profits tax. For globally operating centralized exchanges choosing to register in Hong Kong, income derived from offshore operations may theoretically qualify for offshore income exemption. In practice, however, proving that revenue originates overseas and defending such claims against inquiries from Hong Kong authorities introduces case-by-case uncertainty.
Regarding the tax base, taxable profits are calculated as net profits (or losses) after deducting allowable expenses and costs—consistent with general corporate income tax principles. Another distinctive feature of Hong Kong’s tax system is the non-taxation of capital gains, except when asset disposals are deemed part of a trading activity. This further helps exchanges holding cryptocurrencies reduce their tax burden. On tax rates, since April 2018, the first HKD 2 million of assessable profits for corporations is taxed at 8.25%, with profits exceeding that threshold taxed at 16.5%. This two-tiered structure supports the growth and development of small and medium-sized exchanges.
Specifically, according to the revised Inland Revenue Department Practice Note No. 39 (DIPN 39): Profits Tax – Digital Economy, E-commerce and Digital Assets (March 2020), profits arising from ICOs conducted in Hong Kong are subject to profits tax. Under the “six badges of trade” test, digital assets—including cryptocurrencies—acquired via ICOs or trading platforms and held for long-term investment (“capital”) yield tax-exempt gains. Conversely, profits from trading activities are taxable. DIPN 39 explicitly states that cryptocurrencies obtained through commercial transactions—including airdrops and forks—are treated as business income and subject to profits tax. Given the revenue mix of centralized exchanges, the benefit of exempting capital gains like dividends and interest is limited. The primary tax advantage lies in the territorial source principle.
4.2.2 Other Tax Aspects
Hong Kong’s tax system is relatively simple. Profits tax is the main tax obligation for centralized exchanges. Additionally, Hong Kong does not impose value-added tax (VAT), which helps lower the overall tax burden in certain scenarios.
Regarding tax treaties, Hong Kong has entered into around 40 double taxation avoidance agreements or arrangements with jurisdictions worldwide. However, notably, the United States is not among them.
5. Conclusion and Recommendations
In terms of regulatory systems, Singapore maintains a stricter and more mature framework compared to Hong Kong, which, despite introducing successive regulatory measures, still focuses predominantly on security tokens and has room for improvement. These differing regulatory intensities and emphases present distinct challenges: exchanges in Singapore face tighter controls and restricted business models, whereas those in Hong Kong encounter higher barriers to licensing and elevated due diligence costs.
On tax policy, both Singapore and Hong Kong do not tax capital gains, though this provides limited direct benefit to centralized exchanges. Their corporate tax rates and deductible expense standards are similar. The key difference lies in Singapore’s territorial taxation principle versus Hong Kong’s territorial source principle. While the latter may appear more favorable, its application requires careful assessment and substantiation, making it unwise to overestimate the practical tax benefits. Meanwhile, Singapore has far more comprehensive tax treaties than Hong Kong, offering stronger protection against double taxation. Conversely, Hong Kong’s absence of VAT gives it an edge over Singapore, especially when exchanges might bear indirect tax liabilities.
In summary, both Hong Kong and Singapore offer unique characteristics in regulation and distinct advantages in taxation. As major financial centers and strategic market gateways, centralized cryptocurrency exchanges should evaluate their own business models and compliance capabilities carefully when choosing a jurisdiction for registration.
Join TechFlow official community to stay tuned
Telegram:https://t.me/TechFlowDaily
X (Twitter):https://x.com/TechFlowPost
X (Twitter) EN:https://x.com/BlockFlow_News
TaxDAO
