Hong Kong has announced significant regulatory measures to curb suspicious over-the-counter (OTC) crypto trading activities. This development is part of the city’s broader efforts to enhance its financial security framework and maintain its reputation as a safe and regulated market for digital asset transactions. With approximately 450 shops, ATMs, and online platforms offering OTC crypto services identified across Hong Kong, the authorities have expressed concerns over the potential misuse of these services for illicit activities.
These concerns are not unfounded, as data from Chainalysis indicates that Hong Kong facilitated a substantial $64 billion in digital asset transactions in the year ending June. The volume of transactions underscores OTC outlets’ critical role in the city’s crypto ecosystem. However, it also highlights the potential risks associated with unregulated crypto trading, including the circumvention of foreign transfer restrictions by Chinese nationals and facilitating fraudulent schemes targeting unsuspecting investors.
Hong Kong aims to curb illicit crypto trades
In response to these challenges, Hong Kong’s regulators are strengthening their oversight by introducing a comprehensive licensing framework under the customs department’s purview. This new regime will require crypto OTC providers to adopt stringent customer record-keeping practices and increase staffing levels to ensure enhanced oversight. The move is anticipated to increase operational expenses for OTC service providers, signaling a shift towards a more tightly regulated crypto trading environment.
Furthermore, the city is encouraging the development of a cohort of regulated crypto exchanges as a more secure alternative for accessing digital assets. These exchanges are faced with a deadline of February 29 to either secure or apply for a permit under the regulations introduced by the Securities & Futures Commission in mid-2023.
This approach aims to streamline the sector and reduce its attractiveness as an entry point for illicit activities, according to Chengyi Ong, APAC policy head at Chainalysis. Ong also emphasized the importance of providers effectively enhancing risk management measures to combat financial crimes and cybersecurity threats.
Consultation process and industry response
The Financial Services and the Treasury Bureau of Hong Kong have initiated a consultation process until April 12 to gather industry feedback on the proposed OTC regulations. The consultation addresses critical objectives, including curbing money laundering, preventing terrorism financing, and deterring fraudulent activities. Service providers already under the rigorous oversight of regulatory bodies such as the Securities & Futures Commission (SFC) or the Hong Kong Monetary Authority will be exempt from the new provisions.
The customs department, tasked with overseeing the implementation of these regulations, has been chosen due to its extensive experience in regulatory enforcement. The forthcoming rulebook is designed to instill essential controls and maximize investor protection, a spokesperson for the Financial Services and the Treasury Bureau highlighted.
One of the prominent OTC players in Hong Kong, One Satoshi, has already been adhering to anti-money laundering and know-your-customer protocols. However, Roger Li, the co-founder of One Satoshi, voiced concerns over the potential impact of the new regulatory requirements on compliance staffing and record-keeping obligations. These changes could significantly escalate operational costs for OTC firms, leaving them to decide between ceasing crypto operations or seeking licensure under the new regime.
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