In a bid to enhance oversight and combat illicit financial activities, Hong Kong’s government has unveiled plans to impose comprehensive regulations on over-the-counter (OTC) cryptocurrency trading. The proposed measures, outlined in a recent consultation paper, signify a significant shift in the regulatory landscape of the region’s burgeoning crypto market.

The consultation, which will extend for two months until April 12, seeks to subject OTC crypto trading to the provisions of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO), with implementation slated for June 2023. OTC transactions, characterized by direct dealings between parties without the involvement of centralized exchanges, have hitherto operated outside the purview of stringent regulatory frameworks.

Under the proposed regulations, only spot trades of virtual assets for fiat currency will fall under the OTC category, while peer-to-peer transactions will remain exempt. This distinction aims to streamline oversight without stifling innovation or impeding legitimate trading activities. Notably, the government estimates approximately 200 physical OTC crypto shops, including ATMs, and 250 digital platforms facilitating such transactions in Hong Kong.

To obtain a license from the Commissioner of Customs and Excise (CCE), OTC traders will be required to adhere to stringent compliance measures akin to those governing traditional virtual asset service providers (VASPs). Mandatory requirements include the establishment of a local management office, provision of correspondence addresses, and maintenance of records at designated local facilities.

Furthermore, licensed OTC traders must ensure that virtual assets are transferred exclusively between registered wallets and client accounts, with clients mandated to furnish proof of wallet ownership or control. Notably, trading of virtual assets not listed on authorized VATPs or stablecoins issued by unlicensed entities will be strictly prohibited, aligning with the government’s commitment to safeguard investor interests and preserve market integrity.

Licensees would be permitted to transfer virtual assets only from their registered wallets to a client’s wallet, with clients required to furnish proof of ownership and/or control of their wallets. Additionally, OTC traders would be prohibited from trading virtual assets not listed on retail VATPs or stablecoins issued by entities not licensed by the Hong Kong Monetary Authority (HKMA).

In a related development, the Hong Kong government’s financial services department has set a deadline for unlicensed virtual asset service provider (VASP) applications. Entities not approved by the specified date must cease operations by May 31, reinforcing the government’s commitment to creating a well-regulated virtual asset ecosystem.

In a related development, the Hong Kong government’s financial services department has set a deadline for unlicensed VASP applications, signaling a crackdown on unauthorized operators. Entities failing to secure regulatory approval must cease operations by May 31, underscoring the authorities’ resolve to uphold regulatory compliance and protect stakeholders from potential risks associated with unregulated crypto activities.

The proposed regulatory overhaul reflects Hong Kong’s proactive stance towards fostering a transparent and resilient crypto ecosystem while mitigating inherent risks posed by illicit financial activities. By subjecting OTC crypto trading to robust regulatory scrutiny, the government aims to instill investor confidence, bolster market integrity, and reinforce Hong Kong’s reputation as a leading financial hub in the digital age.

As stakeholders await further developments, the proposed regulations are poised to reshape the dynamics of Hong Kong’s crypto landscape, paving the way for sustainable growth, responsible innovation, and enhanced regulatory compliance in the evolving digital economy.