Hong Kong’s financial regulator weighs new licensing rules for OTC crypto firms

Hong Kong’s financial regulator is considering a new licensing regime for cryptocurrency over-the-counter (OTC) trading services.

According to a South China Morning Post report citing unnamed sources, the Securities and Futures Commission (SFC) is looking for input from industry participants on the potential introduction of a new regulatory framework to oversee the crypto OTC trading market.

Under the new framework, the SFC intends to work with the Customs and Excise Department (C&ED) to supervise and issue licenses for companies providing OTC crypto trading services. OTC allows users to buy and sell cryptocurrencies privately outside of public exchanges.

Initially, the C&ED was supposed to be the sole watchdog in this domain per a February proposal, however, that has since been put on hold. 

At the moment, the SFC is in discussions with related market players to gather feedback on implementing the new regime, with an SFC representative commenting:

To foster the sustainable and responsible development of the virtual assets industry in Hong Kong, the SFC works closely with the government and other regulators in developing a robust, clear, and consistent regulatory environment in Hong Kong.

However, the report added the discussions are still in the early stages and are subject to change.

Hong Kong’s push to become a crypto hub

The new licensing scheme is a part of Hong Kong’s efforts to establish itself as a global hub for cryptocurrencies, attracting investors and businesses to its digital assets market.

Over the past years, the special administrative region has been keen on enhancing its regulatory framework while strengthening oversight and compliance standards.

One such effort was the introduction of a similar licensing scheme for crypto exchanges. On June 1, 2024, Hong Kong ended the non-contravention period for virtual asset service provider (VASP) licenses.

Platforms operating without a “deemed to be licensed” status granted by the SFC were considered illegal from there on. 

Only two platforms in Hong Kong hold full VASP licenses: Hash Blockchain and OSL Digital Securities.

Several others, including Crypto.com, Bullish, HKbitEX, PantherTrade, Accumulus, DFX Labs, Bixin.com, EX.IO, YAX, WhaleFin, and Matrixport HK, are still awaiting full approval from the SFC.

Cautious approach to regulations

However, as previously reported by Invezz, some of these license applications may be at risk of being revoked.

The SFC found that some entities under the “deemed to be licensed” status had shortcomings, particularly in managing security. 

The regulator flagged these issues during on-site inspections, which were conducted to verify compliance with the necessary regulatory requirements.

Allegedly, some applicants did not properly manage cybersecurity risks, and some relied heavily on a limited number of individuals to oversee client assets.

While the regulator did not name specific exchanges, it warned that platforms failing to address these “critical deficiencies” could lose their deemed-to-be-licensed status or see their applications revoked.

In that case, regulations require the affected platform to submit a plan detailing how they intend to wind up their operations.

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