Hong Kong Introduces Rules to Prevent Suspicious OTC Crypto Trading
As Hong Kong moves forward with its ambition to become the crypto hub in Asia, regulators are taking swift action to crack down on suspicious crypto trading activities taking place over-the-counter (OTC).
Hong Kong’s Crypto Shops Face Closure Amid Crackdown
Official estimates reveal around 450 shops, ATMs and online platforms offering such services across Hong Kong. These outlets play a key role in facilitating over-the-counter (OTC) crypto trading and account for a significant portion of the $64 billion in digital asset transactions that flowed through the city in the year ending June, according to Chainalytics data.
Concerns have been raised about the potential for some crypto shops to be involved in illegal activities. This includes helping Chinese citizens bypass foreign transfer restrictions and facilitating fraud schemes targeting investors.
In response, Hong Kong authorities are designing a licensing framework under the customs department. This framework will oblige crypto OTC providers to implement customer record keeping practices and increase headcount for better oversight, thus signaling an imminent increase in operational expenses.
Additionally, Hong Kong aims to create a group of tightly regulated crypto exchanges as a viable alternative to the OTC market for accessing digital assets. These exchanges face a Feb. 29 deadline to obtain or apply for a permit under regulations the Securities and Futures Commission put into effect in mid-2023.
Regulatory Overhaul for Crypto OTC Market
In a bid to promote surveillance and combat illegal activities, Hong Kong plans to implement strict regulations governing over-the-counter (OTC) crypto service providers. According to Chengyi Ong, head of APAC policy at Chainalytics, the proposed framework is expected to streamline the industry and potentially reduce its use as entry points into the crypto space. Ong emphasizes the need for providers to improve risk management measures, especially in combating financial crimes and cybersecurity threats.
Hong Kong’s Financial Services and Treasury Bureau has launched a consultation process scheduled to last until April 12 to gather feedback on the proposed OTC regulations. The key objectives of the regulatory overhaul include preventing money laundering, preventing the financing of terrorism and deterring fraudulent activity. In particular, the commissions will exempt service providers that are currently subject to strict supervision by regulators such as the Securities and Futures Commission (SFC) or the Hong Kong Monetary Authority.
A spokesperson for the Bureau of Financial Services and Treasury said the customs department is well-suited to supervise crypto OTC service providers, citing its extensive experience in regulatory enforcement. The planned rulebook aims to instill basic controls and ensure maximum investor protection, the spokesman added.
Prominent OTC players in Hong Kong include One Satoshi, which operates a network of stores that facilitate crypto transactions. Roger Li, co-founder of One Satoshi, noted that although the company currently adheres to anti-money laundering and know-your-customer protocols, future regulatory requirements regarding compliance staff and record-keeping obligations could increase operational costs. Li expressed uncertainty regarding the impact this will have on OTC firms, stating that they may either cease crypto operations or seek licenses under the new regime, pending further guidance.
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Bhushan is a FinTech enthusiast and has a good ability to understand financial markets. His interest in economics and finance draws his attention to the emerging Blockchain Technology and Cryptocurrency markets. He is in a constant learning process and motivates himself by sharing the knowledge he has acquired. In her spare time, she reads thriller novels and sometimes explores her culinary skills.
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