Hong Kong Introduces Rules to Foil Suspicious OTC Crypto Trades

As Hong Kong proceeds ahead with the ambition to become the crypto hub in Asia, the regulators are taking swift measures to foil any suspicious crypto trading activities happening over-the-counter (OTC).

Hong Kong’s Crypto Shops Face Closure Amid Crackdown

Official estimates reveal approximately 450 shops, ATMs, and online platforms across Hong Kong offering such services. These outlets play a significant role in facilitating over-the-counter (OTC) crypto trades, constituting a substantial portion of the $64 billion in digital asset transactions flowing through the city in the year ending June, as per Chainalysis data.

Concerns have arisen regarding the potential involvement of some crypto shops in illicit activities. This includes aiding Chinese nationals in circumventing foreign transfer restrictions and facilitating fraudulent schemes targeting investors.

In response, Hong Kong authorities are devising a licensing framework under the customs department. This framework will mandate crypto OTC providers to implement customer record-keeping practices and bolster staff numbers for enhanced oversight, thereby signaling an imminent increase in operational expenses.

Furthermore, Hong Kong aims to foster a cohort of tightly regulated crypto exchanges as a viable alternative to the OTC market for accessing digital assets. These exchanges face a deadline of February 29 to either secure or apply for a permit under regulations introduced by the Securities & Futures Commission in mid-2023.

Regulatory Overhaul for Crypto OTC Market

In a bid to bolster oversight and combat illicit activities, Hong Kong is planning to implement stringent regulations governing over-the-counter (OTC) crypto service providers. According to Chengyi Ong, APAC policy head at Chainalysis, the proposed framework is likely to streamline the sector, potentially reducing its utilization as entry points into the crypto sphere. Ong emphasized the necessity for providers to enhance risk management measures, particularly in combating financial crimes and cybersecurity threats.

The Financial Services and the Treasury Bureau of Hong Kong initiated a consultation process, slated to run until April 12, to gather feedback on the proposed OTC regulations. The primary objectives of the regulatory overhaul include curbing money laundering, preventing terrorism financing, and deterring fraudulent activities. Notably, the provisions will exempt service providers already subjected to rigorous oversight by regulatory bodies such as the Securities & Futures Commission (SFC) or the Hong Kong Monetary Authority.

A spokesperson for the Financial Services and the Treasury Bureau said that the customs department is suitable for overseeing crypto OTC service providers, citing its extensive experience in regulatory enforcement. The planned rulebook aims to instill essential controls and ensure maximum investor protection, the spokesperson added.

Among the prominent OTC players in Hong Kong is One Satoshi, which operates a network of stores facilitating crypto transactions. Roger Li, co-founder of One Satoshi, noted that while the company already adheres to anti-money laundering and know-your-customer protocols, the forthcoming regulatory requirements pertaining to compliance staffing and record-keeping obligations could escalate operational costs. Li expressed uncertainty regarding the impact on OTC firms, indicating that they may either cease crypto operations or seek licensure under the new regime, pending further guidance.

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Bhushan is a FinTech enthusiast and holds a good flair in understanding financial markets. His interest in economics and finance draw his attention towards the new emerging Blockchain Technology and Cryptocurrency markets. He is continuously in a learning process and keeps himself motivated by sharing his acquired knowledge. In free time he reads thriller fictions novels and sometimes explore his culinary skills.

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