Scattered throughout Hong Kong, numerous small establishments offer conversion services between cryptocurrency and cash, often without extensive inquiries. This situation reflects the city’s historical openness to financial dealings, but it faces potential changes due to impending regulatory measures, reported Bloomberg.
It’s estimated that around 450 entities, including shops, ATMs, and online platforms in Hong Kong, provide these conversion services. These entities play a significant role in the over-the-counter (OTC) cryptocurrency transactions, which represented a major portion of the $64 billion in digital asset movements through the city in the year leading up to June, as per Chainalysis.
Concerns have arisen regarding some of these crypto service providers, as they’re believed to assist in activities that are not permitted, such as enabling Chinese nationals to exceed foreign-transfer restrictions or aiding in fraudulent schemes targeting investors. In response, Hong Kong is set to implement a new licensing system overseen by the customs department. This system will mandate OTC crypto service providers to maintain detailed customer records and enhance their oversight to prevent misconduct, potentially increasing their operational costs.
Additionally, Hong Kong aims to establish a regulated environment for cryptocurrency exchanges as an alternative to OTC transactions for accessing digital assets. These exchanges are required to secure or apply for a permit by February 29, adhering to guidelines introduced by the Securities & Futures Commission in the previous year.
According to Chengyi Ong, APAC policy head at Chainalysis, the upcoming OTC regulations will likely result in a consolidation of platforms and decrease their use for entering the cryptocurrency market. Providers will need to enhance their management of various risks, including criminal activities and cybersecurity threats.
The Financial Services and the Treasury Bureau initiated a public consultation this month on the OTC regulations, which will continue until April 12. The aim is to combat money laundering, terrorism financing, and fraud. These regulations will not affect service providers like digital asset exchanges already under the strict oversight of the SFC or the Hong Kong Monetary Authority.
Incorporating the customs department into the regulatory framework alongside other agencies has raised concerns about a piecemeal approach to regulation, according to Jason Chan, a partner at the law firm Howse Williams. However, a spokesperson for the Financial Services and the Treasury Bureau defended the choice of the customs department as the overseeing authority, citing its experience and the comprehensive protection the new regulations will offer to investors.
The new regulations may increase operational costs for OTC businesses. For instance, One Satoshi, an OTC company, primarily caters to retail investors with transactions often below HK$10,000 ($1,278). The co-founder, Roger Li, mentioned that while they already perform anti-money laundering and customer identification checks, the new rules regarding compliance and record-keeping will escalate expenses. OTC firms may have to cease crypto operations or seek the new license, with further guidance anticipated.
Hong Kong’s strategy to become a hub for digital assets began in late 2022, aiming to maintain its innovative edge amidst concerns over Beijing’s increasing influence. The SFC introduced regulations for crypto exchanges last June, encouraging license applications while emphasizing investor protection due to the sector’s volatility and history of fraud.
Currently, two digital asset exchanges have received authorization, with 19 others applying for permits. The city is also considering allowing exchange-traded funds investing in crypto and is developing regulations for stablecoins.
Experts believe integrating OTC transactions into the regulatory framework will legitimize Hong Kong’s market further. However, the city faces competition from places like Singapore and Dubai in attracting digital asset businesses. The effectiveness of Hong Kong’s regulatory efforts and the overall viability of crypto and blockchain technology remain subjects of debate. Recent incidents, such as the collapse of the unlicensed JPEX crypto platform causing significant losses, underscore the sector’s risks.
Regulating the crypto industry in Hong Kong presents challenges due to the global nature of crypto platforms and the difficulty in monitoring peer-to-peer trading.
“The decentralized nature of crypto makes the industry very hard to regulate. There are numerous crypto exchanges and apps based offshore that users can easily access without oversight from the government.”
Carlton Lai, head of blockchain research at Daiwa Capital Markets
