Hong Kong is considering changes to its cryptocurrency regulatory framework, including over-the-counter (OTC) virtual asset trading services.
The Securities and Futures Commission (SFC) could play a greater role in supervising the sector, working alongside the Customs and Excise Department (C&ED), according to a recent report by the South China Morning Post.
Hong Crypto OTC to be regulated
The proposed changes would notably depart from the current system, in which the C&ED primarily handles OTC services. As a reminder, OTC services facilitate direct, private cryptocurrency transactions between large parties, bypassing the need for a public exchange.
The South China Morning Post reported that the SFC’s potential involvement in regulating OTC services would align it with its broader responsibilities in financial markets, potentially providing more clarity for the crypto industry.
Citing unnamed sources familiar with the discussions, the report further reveals that the SFC consulted industry players on the new licensing regime.
Collaboration between the SFC and the C&ED would be a key element of these regulatory developments, addressing concerns about the separation of responsibilities between the two entities.
In addition to OTC trading services, the SFC is also exploring the introduction of a licensing regime for cryptocurrency custody services, a critical part of the market infrastructure.
Why the regulation of over-the-counter drugs?
Hong Kong’s approach to cryptocurrency regulation comes after significant financial losses and growing concerns about fraud in the sector.
According to the report, the collapse of JPEX, in particular, has prompted authorities to take a closer look at the role of over-the-counter services, which have become “the primary means of channeling retail investor funds” into illicit systems.
The report also highlights that these services often operate through “physical stores”, many of which are linked to fraudulent activities, highlighting the need for “stricter monitoring”.
In response to the growing risks, an SFC representative noted:
To promote the sustainable and responsible development of the virtual asset industry in Hong Kong, the SFC works closely with the Government and other regulators to develop a strong, clear and consistent regulatory environment in Hong Kong.
However, despite the considerable rationale for regulating the OTC cryptocurrency sector in the region, the report mentions that individuals are still concerned about how the regulation will work, noting:
Some industry players have complained that placing all OTC shops under the purview of the C&ED, which regulates money changers, creates confusion given that the SFC regulates other areas of cryptocurrency investment.
Regardless, the Financial Services and the Treasury Bureau (FSTB), which initially sought public input on the OTC regulation during a two-month consultation period, noted that the proposal received “general support from respondents.”
Furthermore, although the full results of the consultation have not yet been published, the FTB revealed that the office is currently reviewing the design of the regulatory framework based on the feedback provided.
Featured image created with DALL-E, chart by TradingView
